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Beyond the Numbers

Lingering Uncertainty About Trade Deal May Weigh On Wall Street
12/12/2019 9:10 AM

The major U.S. index futures are pointing to a modestly lower opening on Thursday following the uptick seen in the previous session.

Lingering uncertainty about a U.S.-China trade deal may weigh on the markets after a report from Reuters said President Donald Trump is expected to meet with top trade advisers today to discuss current plans to raise tariffs on $160 billion worth of Chinese goods on December 15th.

Reuters said officials circulated talking points ahead of the meeting downplaying the repercussions the new tariffs would have on the U.S. economy.

Three sources familiar with the plans told Reuters the senior trade advisers are expected to present divergent views during the high-stakes meeting, with the final decision up to Trump.

Reports earlier this week suggested the U.S. would likely delay imposing the new tariffs to avoid agitating China amid an ongoing negotiations toward a phase one trade deal.

Negative sentiment may also be generated in reaction to a report from the Labor Department showing first-time claims for U.S. unemployment benefits jumped by much more than expected in the week ended December 7th.

Stocks showed a lack of direction throughout much of the trading session on Wednesday but saw a positive reaction to the Federal Reserve's latest monetary policy announcement. Buying interest remained somewhat subdued, however, limiting the upside for the major averages.

The major averages managed to end the session modestly higher. The Dow crept up 29.58 points or 0.1 percent to 27,911.30, the Nasdaq climbed 37.87 points or 0.4 percent to 8,654.05 and the S&P 500 rose 9.11 point or 0.3 percent to 3,141.63.

The higher close on Wall Street came after the Federal Reserve announced its decision to leave interest rates unchanged after three straight rate cuts.

The decision was widely anticipated, although the Fed's economic projections provided along with the announcement also showed a majority of meeting participants now expect interest rates to remain on hold throughout 2020.

Fed Chairman Jerome Powell suggested during his post-meeting press conference that he would not consider raising rates until inflation picks up significantly.

"In order to move rates up, I would want to see inflation that's persistent and that's significant," Powell said. "A significant move up in inflation that's also persistent before raising rates to address inflation concerns. That's my view."

However, Powell noted his comments do reflect "official forward guidance," adding, "It happens to be my view that that's what it would take to want to move interest rates up in order to deal with inflation."

The Fed downwardly revised its forecast for core consumer price growth in 2019 to 1.6 percent from 1.8 percent, while the inflation estimates for the next three years were unchanged.

In its accompanying statement, the Fed said the current stance of monetary policy is appropriate to support a sustained economic expansion, strong labor market conditions, and inflation near its symmetric 2 percent objective.

The central bank maintained its assessment of the economy, reiterating that recent data indicates the labor market remains strong and that economic activity has been rising at a moderate rate.

The Fed also once again noted that while household spending has been rising at a strong pace, business fixed investment and exports remain weak.

The FOMC noted it will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path for rates.

The vote to leave interest rates was unanimous, as Kansas City Fed President Esther George and Boston Fed President Eric Rosengren joined in after voting against the past three rate cuts.

In U.S. economic news, a report released by the Labor Department showed consumer prices in the U.S. increased by slightly more than anticipated in the month of November.

The Labor Department said its consumer price index rose by 0.3 percent in November after climbing by 0.4 percent in October. Economists had expected prices to edge up by 0.2 percent.

Excluding food and energy prices, core consumer prices crept up by 0.2 percent in November, matching the uptick seen in the previous month as well as economist estimates.

Consumer prices in November were up by 2.1 percent compared to the same month a year ago, reflecting a notable acceleration from the 1.8 percent increase in October. The annual rate of core price growth was unchanged at 2.3 percent.

"A rise in energy prices pushed headline CPI inflation up to a one-year high last month, but the stability of core inflation suggests that underlying price pressures remain subdued," said Andrew Hunter, Senior U.S. Economist at Capital Economics.

He added, "In that environment, we expect the Fed to remain on the side-lines for a lot longer than today's FOMC meeting."

Gold stocks moved sharply higher over the course of the trading session, driving the NYSE Arca Gold Bugs Index up by 2.7 percent. With the surge, the index ended the session at its best closing level in well over two months.

Significant strength was also visible among semiconductor stocks, as reflected by the 2.2 percent jump by the Philadelphia Semiconductor Index.

Semiconductor equipment maker Photronics (PLAB) led the sector higher after reporting fiscal fourth quarter earnings that met estimates and providing upbeat fiscal first quarter guidance.

Oil service and housing stocks also saw some strength on the day, while biotechnology and commercial real estate stocks moved to the downside.

Commodity, Currency Markets

Crude oil futures are rising $0.36 to $64.08 a barrel after sliding $0.48 to $58.76 a barrel on Wednesday. Meanwhile, after climbing $6.90 to $1,475 an ounce in the previous session, gold futures are jumping $12.40 to $1,487.40 an ounce.

On the currency front, the U.S. dollar is trading at 108.58 yen compared to the 108.56 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1139 compared to yesterday’s $1.1130.

Asia

Asian stocks ended mixed on Thursday as investors exercised caution ahead of a U.S.-China tariff deadline and the closely watched British election, with polls predicting a narrow Conservative win.

Chinese shares ended lower to snap a five-day winning streak ahead of Trump's tariff decision. The benchmark Shanghai Composite Index dropped 8.72 points, or 0.3 percent, to 2,915.70. Meanwhile, Hong Kong's Hang Seng Index jumped 348.71 points, or 1.3 percent, to 26,994.14.

Japanese shares ended roughly flat as a deadline for an additional round of U.S. tariffs on Chinese imports loomed and machinery orders data disappointed. The Nikkei 225 Index edged up 32.95 points, or 0.1 percent, to 23,424.81, while the broader Topix closed 0.1 percent lower at 1,712.83.

The total value of core machinery orders in Japan was down a seasonally adjusted 6.0 percent sequentially in October, the Cabinet Office said. That missed forecasts for an increase of 0.7 percent following the 2.9 percent decline in September.

On a yearly basis, core machine orders sank 6.1 percent - again missing expectations for a drop of 1.9 percent following the 5.1 percent jump in the previous month.

Uncertainties over the global outlook continue to warrant attention and the Bank of Japan is cautious about future developments, BoJ deputy governor Masayoshi Amamiya told business leaders in Okayama.

Semiconductor firms followed their U.S. peers higher after the Philadelphia Semiconductor Index rose more than 2 percent on Wednesday. Advantest, Sumco and Tokyo Electron soared 3-5 percent.

Otsuka Kagu jumped nearly 31 percent on reports that electrical appliance store chain Yamada Denki Co. will buy a majority stake in the troubled furniture store chain operator.

Australian markets fell notably, dragged down by financials. The benchmark S&P/ASX 200 Index dropped 43.80 points, or 0.7 percent, to 6,708.80, while the broader All Ordinaries Index ended down 42.40 points, or 0.6 percent, at 6,810.80.

Westpac Banking Corp declined 1.2 percent as its board faced intense scrutiny over the money laundering and child exploitation scandal at a marathon annual general meeting. The other three banks fell between 0.7 percent and 1.3 percent.

Energy stocks finished broadly lower after a surprise climb in U.S. crude inventories hit oil prices. Oil and gas explorer FAR slumped 24 percent after it completed a A$146 million placement to fund development of a Senegal oil field project.

On the other hand, Lynas Corp soared 9.7 percent after Reuters reported that the U.S. Army plans to make its first financial investment into commercial-scale rare earths production since World War Two.

Seoul stocks rose for a fifth straight session, helped by massive foreign buying after the Federal Reserve signaled it would stay on hold through 2020.

The benchmark Kospi jumped 31.73 points, or 1.5 percent, to 2,137.35, with tech stocks Samsung Electronics and SK Hynix surging around 3 percent.

Europe

European stocks have turned mixed on Thursday as British voters head to the polls in the country's third general election since 2015.

Polling began at 7 am U.K. time and will end at 10 pm. The latest opinion polls indicated that the race has tightened significantly.

Meanwhile, the European Central Bank left its key interest rates, asset purchases and forward guidance unchanged on Thursday, in the first policy session chaired by the new chief Christine Lagarde.

The Governing Council decided to hold the refi rate unchanged at a record low 0 percent, the deposit rate at -0.50 percent and the marginal lending rate at 0.25 percent. The move was in line with economists' expectations.

Earlier today, Switzerland's central bank maintained its negative interest rates and expressed willingness to intervene in the currency market as required.

While the U.K.’s FTSE 100 Index has risen by 0.4 percent, the German DAX Index and the French CAC 40 Index are both down by 0.1 percent.

Shares of LÓreal and Prada have risen after the companies signed a long-term license agreement to create, develop and distribute luxury beauty products for the Prada brand.

WPP has also advanced. The advertising group said it reached a non-discretionary agreement with Goldman Sachs International regarding the purchase of WPP's ordinary shares.

Infrastructure group Balfour Beatty has jumped after issuing a solid trading update covering the period to December 11, 2019.

Ocado Group shares have also climbed. Ocado Retail, a joint venture between Ocado Group and Marks & Spencer Group, reported that its retail revenue for the 13 weeks to December 1, 2019 rose 10.8 percent.

On the other hand, Metro AG shares have dropped after the wholesaler reported a 4 percent decrease in EBITDA for the 2018/19 fiscal year.

Anheuser-Busch InBev has also fallen after Australia's competition regulator raised concerns over the brewer's proposed sale of its Australian operations.

U.S. Economic Reports

First-time claims for U.S. unemployment benefits jumped by much more than expected in the week ended December 7th, according to a report released by the Labor Department on Thursday.

The report said initial jobless claims surged up to 252,000, an increase of 49,000 from the previous week's unrevised level of 203,000. Economists had expected jobless claims to edge up to 213,000.

With the much bigger than expected increase, jobless claims reached their highest level since hitting 257,000 in September of 2017.

A separate Labor Department report showed U.S. producer prices came in unchanged in the month of November, as higher prices for goods offset lower prices for services.

The Labor Department said its producer price index for final demand was flat in November after climbing by 0.4 percent in October. Economists had expected prices to rise by 0.2 percent.

Excluding increases in food and energy prices, core producer prices dipped by 0.2 percent in November after rising by 0.3 percent in October. Core prices had been expected to inch up by 0.2 percent.

At 1 pm ET, the Treasury Department is scheduled to announce the results of its auction of $16 billion worth of thirty-year bonds.

Stocks In Focus

Shares of Lululemon (LULU) are seeing pre-market weakness after the yogawear maker reported better than expected fiscal third quarter earnings but provided disappointing fiscal fourth quarter guidance.

Men’s Wearhouse parent Tailored Brands (TLRD) may also see initial weakness after reporting fiscal third quarter results that beat but estimates but forecasting a wider than expected fiscal fourth quarter loss.

On the other hand, shares of General Electric (GE) may see initial strength after UBS upgraded its rating on the conglomerate’s stock to Buy from Hold.
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