Middle East tensions
There was a notable risk-off move in global markets on Tuesday following Iran missiles fired at two US military bases and Iran’s announcement that it would no longer abide by the 2015 nuclear deal: the S&P 500 was down by -1.7%, 10-year UST rallied by 10bps towards 1.70%, Brent reached a high at 71.75, Gold broke 1,600 and the Japanese Yen rallied to 107.65. Sentiment rebounded quickly as there were no US casualties, Iranian Foreign Minister Mohammad Javad Zarif tweeted that the government “does not seek escalation or war”, and Trump also tweeted that “All is well!”. Separately, Iran admitted that its military accidentally shot down an Ukrainian jetliner last week, which led to protests around the country - some violent.
The Chinese trade delegation, led by Vice Premier Liu, is set to travel to the US from Jan. 13 to 16 for the signing of the phase one agreement. So far, both parties have announced that China would increase its purchases of US farm goods and other products, further open its financial sector, pledge not to devalue the Chinese yuan to help the country’s exporters and better protect American intellectual property. In exchange, the Trump administration cancelled new tariffs on roughly $156bn of Chinese imports that were set to take effect Dec. 15. It also agreed to cut in half the existing 15% tariff rate on roughly $120bn of Chinese goods imposed on September. The US Treasury Department is proposing to revive bi-annual talks on the economic relationship between the two countries, which President Trump had stopped at the start of his presidency.
US Economic data
The Friday non-farm payrolls for December came in at +145k, below consensus for +160k and after a strong November revised down to +256k. Unemployment rate stayed the same at 3.5%, and earnings were slightly lower than expected at 2.9% y-o-y (vs. estimates at 3.1% and prior 3.1%) and 0.1% m-o-m (vs. estimates at 0.3% and prior 0.2%). Fed Vice-Chairman Richard Clarida said that “policy is in a good place” and will respond to “material changes”. He also said that “global disinflationary forces are powerful” and that policy must take that into account.
Global Economic data
Business activity in the Euro Zone firmed slightly more than expected in December, as gains in the service sector partially offset another decline in manufacturing. The PMI inched up to 50.9 from 50.6 in November. In Germany, the November manufacturing orders fell by -1.3% m-o-m and exports declined by -2.3% m-o-m. Industrial production rebounded by +1.1% in November after two months of decline. In China, the consumer price inflation (CPI) in December came in at 4.5% y-o-y, below the consensus expectations of 4.7%. Food inflation slowed, reflecting the first decline in seven months.