Prior week summary
The majority of the U.S. equity indices ended lower for the week after geopolitical tensions in the Middle East and weak economic data domestically soured investor sentiment at the start of the new year. While economic data releases for the week were light, the results were largely negative. After the Conference Board Consumer Confidence Index fell below analyst expectations early in the week, the ISM Manufacturing Index missed consensus estimates on Friday, posting its lowest reading in a decade and indicating that the manufacturing sector is in contraction territory for the fifth consecutive month. In trade news, President Trump announced that the U.S. and China have set January 15 as the signing date for the phase-one trade deal and said that he would travel to China “at a later date” to start negotiations on the second phase of the deal.
Early in the week, the Trump administration launched a series of airstrikes on five bases used by Iranian-backed militia in response to a rocket attack the week prior that killed a U.S. contractor. Tensions continued to rise throughout the week as Iraqi militiamen stormed the U.S. Embassy complex in Baghdad and Washington blamed Iran for organizing the attack. On Thursday evening, President Trump authorized a strike on a convoy in Baghdad that killed Iran’s top military commander, Qasem Soleimani, and quickly drew the ire of Iran who vowed “severe retaliation” in response to the strike. The rise in tensions sent equities and yields tumbling on Friday with the 10-year Treasury yield ending the week at 1.789%, just under nine basis points lower than where it ended the week prior. Over the weekend, the Iraqi Parliament voted to expel U.S. forces in Iraq in response to the recent escalation in the region with the Prime Minister of Iraq saying that the expulsion of U.S. forces was necessary, “for the sake of our national sovereignty.” Speaking to reporters on Air Force One after the vote in Iraq, President Trump indicated that he has no desire to leave the country and threatened sanctions on Iraq saying, “If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame,” and added, “We have a very extraordinarily expensive airbase that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it.”
The look forward
Market participants are gearing up for the first full week of the new year and looking forward to updated figures on the ISM Non-Manufacturing Index, factory orders, durable goods orders, and the December non-farm payroll report, among others.
Market implied policy path (Overnight indexed swap rates)
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