Prior week summary
The major U.S. equities began the new year on solid footing, marching higher during the first full week of the year and pushing through previous all-time highs, as tensions between the U.S. and Iran appeared to ease and solid domestic economic data buoyed investor sentiment. Market participants received a boost early in the week when two service sector gauges reported better-than-expected results. The ISM Non-Manufacturing Index posted a December reading of 55.0, above the 53.9 level seen in November, and the rival IHS Markit PMI reported its strongest level in five months. Friday’s release of the nonfarm payroll report showed a slowing hiring pace as the U.S. economy added 145,000 jobs in December, below both analyst expectations and the revised November estimate of 256,000 job additions. The December release capped an end to another strong year of hiring in the U.S. with the U.S. economy adding an average of 176,000 jobs per month and just over 2.1 million jobs for the year. In trade developments, China confirmed that Vice Premier Liu He will travel to Washington next week to sign the 86-page phase-one trade deal on January 15. Speaking to reporters on Friday, Director of the National Economic Council, Larry Kudlow, indicated that the path forward on a phase-two deal is unclear and dependent upon the success of the phase-one deal saying, “Phase two’s going to depend a lot on how phase one goes,” and noted that implementation of the phase-one deal “will make it easier to get to phase two and beyond.”
Tensions between the U.S. and Iran reached a tipping point on Tuesday evening when Iran bombed two U.S. bases in Iraq in response to a U.S. strike that killed the top Iranian military commander, Qasem Soleimani, the week prior. Immediately after the strikes, Iranian Foreign Minister, Javad Zarif, took to Twitter to send a message to the Trump administration saying, “We do not seek escalation or war, but will defend ourselves against any aggression.” Tensions appeared to ease throughout the remainder of the week as the threat of immediate military confrontation seemed to subside. Only hours after the Iranian missile strikes began, a Ukraine International Airlines plane crashed outside the Iranian capital of Tehran killing all 176 passengers on board. Iran initially blamed the crash on mechanical failures but admitted to accidentally shooting the plane down after evidence from western intelligence agencies began to mount. Protests broke out in Iran over the weekend in response to the downing of the airline and President Trump has indicated that he stands with the protestors saying, “We are following your protests closely, and are inspired by your courage.”
The look forward
Market participants are gearing up for a busy week of economic data as the Consumer Price Index, Producer Price Index, retail sales, housing starts, building permits, and industrial production figures are all set for release. A host of Federal Reserve officials hold speaking engagements throughout the week.
Market implied policy path (Overnight indexed swap rates)
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