Monday Musings: December 16, 2019

Dec 16, 2019

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Public Trust Credit Team

The Fed announced that the target range for the Federal Funds Rate will remain steady at 1.50% to 1.75% and presented its repurchase agreement (repo) plans

Last week, the Fed gathered for its final Federal Open Market Committee meeting of 2019. Due to the underlying strength of the labor market and inflation near the committee’s 2.00% objective, the Fed deemed its current monetary policy as appropriate to support the continued economic expansion. Additionally, the Fed’s Open Market Trading Desk released its schedule of repo operations from December 13, 2019 through January 14, 2020. Repo operations will be ramped up through the end of the year to help ensure that the supply of reserves remains plentiful and to help offset the risk of money market pressures. According to the announcement, the Fed will inject at least another $425 billion into the market to provide short-term funding. On a related note, a recent report by S&P Global Ratings highlighted that between January and October of 2019, new global bond issuance totaled $5.9 trillion, up 13.5% from the prior year. Every sector is up this year, led by international public finance with a 52.7% increase from 2018 ($689 billion). The research group is expecting overall bond issuances to finish the year at a solid 12.7% over the 2018 number but to increase at a much slower pace in 2020, by just over 4%.

Trade tensions alleviate as details surface around the "phase one" trade deal with China and the USMCA

After months of stalled negotiations, the U.S. and China agreed in principal to a “phase one” trade deal last Friday (December 13). Terms of the deal include the U.S. no longer proceeding with a 15% tariff on roughly $160 billion worth of Chinese goods that were originally scheduled to take effect on December 15, 2019. Details also indicate that the U.S. will cut the tariff rate in half that it imposed on $120 billion of Chinese goods originally scheduled on September 1 to 7.5%. However, the 25% tariff on $250 billion worth of Chinese goods will remain unchanged as the U.S. hopes to retain some negotiating leverage for a second phase of negotiations some time next year. In response to these concessions, China has agreed to increase its purchases of U.S. agricultural products by $32 billion over two years. The U.S. also reached an agreement with Mexico and Canada in the renegotiation of the North American Free Trade Agreement (NAFTA) last week. The new deal, formally titled the U.S.-Mexico-Canada Agreement (USMCA), dictates that automobiles must have 75% (up from 62.5%) of their components manufactured in North America to qualify for zero tariffs. The USMCA also requires Mexico to adopt legislation to make it easier for workers to unionize, with the aim of driving wage growth in Mexico to make it less attractive for companies to move manufacturing south of the U.S. border. Under the new agreement, Canada has also increased maximum quotas for a number of dairy products, a win for U.S. farmers as they now have greater access to the Canadian dairy market.

As the polls indicated, Boris Johnson and the Conservative party swept the U.K. general election and now seem poised to "get Brexit done"

The election gamble paid off for the Conservatives in Britain as the party won an 80-seat majority in the House of Commons, the largest majority since 1987. The results were helped by large swaths of traditional Labour voters jumping ship on the promise of public investment into their communities, prompting Jeremy Corbyn to resign as the leader of the Labour Party. With a firm majority in place, Johnson has said that he will take the U.K. out of the E.U. by January 31, 2020. The pound strengthened as the market priced in the likelihood of a more stable political picture in Britain, and observers now look to the next steps for the country post-Brexit, particularly as Mr. Johnson must negotiate trade deals with major partners including the E.U. and the U.S. Stability across the pond would be a welcome change after years of watching Brexit delays but some uncertainty remains. The Scottish National Party won a majority of seats in Scotland and has threatened to renew calls for independence by bringing a case for transfer of power as early as this week, and much of the flip in vote from Labour to Conservative hinges on Johnson following through on his promises of massive public and infrastructure investments. Between securing trade deals, a fight with Scotland, and the large government spending plan Johnson plans to pursue, there will still be plenty of post-Brexit gyrations for global markets to digest.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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