• The presidential impeachment inquiry has not yet had a notable impact on financial markets
  • Broad market performance in November suggested increased optimism that a U.S./China trade deal would get done before year-end
  • Recent comments from Fed leaders reiterated a more neutral bias regarding interest rate policy

The November mainstream news cycle was dominated by presidential impeachment proceedings in Washington, but financial markets were largely dismissive of any risks related to the matter. The S&P 500 closed the month up more than 3%, and Treasury yields were higher across the curve. U.S./China trade negotiations remain the greatest wild card for risk assets. While a phase one agreement between the two countries was not executed in November, the baseline expectation is that a deal will be reached soon. However, as we’ve learned on multiple occasions in 2019, particularly May and August, there’s certainly a mercurial element to these negotiations. A tweet from the president has led to multiple market corrections, and with much optimism again priced into financial markets, a postponement in a phase one trade deal until 2020 would likely spark another correction before year end.

One development that may complicate trade negotiations is the recent U.S. legislation backing protesters in Hong Kong. On November 27, President Trump signed the Hong Kong Human Rights and Democracy Act of 2019 into law, an overwhelmingly bipartisan bill passed by Congress as a way to combat China’s influence in Hong Kong’s affairs. The law effectively requires the State Department to conduct an annual review to ensure that Hong Kong’s “one country, two systems” agreement with China is upheld in order for Hong Kong to be afforded its special trade status with the United States. China was very critical of the bill throughout the legislative process, and once it became law, China’s foreign ministry condemned it and vowed to protect the country’s national security. According to Axios, a source close to the White House negotiating team said the president’s decision to sign the Hong Kong bill may delay any phase one trade agreement until the “year-end at the earliest.”  President Trump is expected to delay tariffs scheduled to begin December 15 as a gesture of good will, but recent reports suggest that China has been adamant that existing tariffs be lifted as a condition for any phase one deal. On November 29, Reuters reported that U.S. officials are considering new regulations that would further restrict American suppliers to Huawei, a measure that would almost certainly draw the ire of Chinese officials. Financial market liquidity is typically weakest in the last few weeks of the year, so any major headlines (positive or negative) could spark an exacerbated reaction in certain markets, depending on the timing.

Fed Update
The Fed made it very clear at the October 30 FOMC meeting that interest-rate policy would be on hold for the foreseeable future barring “a material reassessment of our outlook,” according to Fed Chair Jerome Powell. During a mid-November appearance before Congress, Powell reiterated this position while touting solid personal consumption and a relatively robust jobs market, including income growth. He also seemed to set a higher bar for the next rate hike with regards to inflation. He questioned current estimates of full employment, pointing specifically to the fact that a very low unemployment rate has yet to result in a pick-up in inflation readings that traditional economic theory would suggest. Powell did acknowledge growth in wages, while also noting that it hasn’t yet been significant enough to fuel growth in prices above the Fed’s target. Therefore, the market is forecasting a rate cut as a greater probability over the next 12 months, as evidenced by current readings on fed funds futures.

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