Markets rise after US-China trade-war truce

Dow shot up 287, advancers over decliners 5-2 & NAZ went up 110.  The MLP index vaulted 6+ to the 252s & the REIT index was up 3  to the 357s.  Junk bond funds remained higher on the day & Treasuries were purchased.  Oil shot up 2+ to go over 53 on expected production cuts (more below) & gold rose 10 to 1236.

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Top White House economic advisor Larry Kudlow said Pres Trump & Chinese Pres Xi Jinping had “good chemistry” during the Sat night 2 hour dinner meeting where instant progress was made.  “President Xi and Vice Premier Liu He said to us their commitments will begin immediately,” he said.  The meeting, which took place on the sidelines of the G20 summit in Buenos Aires, resulted in a range of “Chinese commitments,” including a 90-day trade truce that would resolve top trade issues ranging from forced technology transfers, intellectual property protection, non-tariff barriers, cyber theft & agriculture practices.  Kudlow said “we won’t cover everything” in 90 days but many  items that are being negotiated on will be seen “pretty fast.”  “These are private sector purchases where tariff rates will be lowered and also non-tariff barriers will be lowered with respect to American ownership, for example, with respect to technology transfers, with respect to IP,” he said.  “Those things should kick in soon—we should see palpable changes on the Chinese side immediately to quote Mr. Liu He.”  The US says that the Chinese will be buying more agriculture products in the interim, however if the US & China fail to reach an agreement an additional 25% tariff  Opens a New Window. on $200B worth of goods would be implemented on Jan 1 2019.  Kudlow added that if China opens its markets, the US will increase exports “substantially.”  The US & China are the world's 2 largest economies & have been battling over trade practices for months.

China trade commitments will begin 'immediately': Larry Kudlow

Spending on US construction projects fell 0.1% in Oct, the 3rd consecutive monthly decline, as weakness in home building & non-residential construction offset a rebound in gov projects.  The Oct decline matched a similar 0.1% drop in Sep & followed a 0.4% fall in Aug, the Commerce Dept reported.  Construction has been weak since peaking in May with declines in 4 of the 5 months since that time, reflecting in large part the challenging facing home builders.  Home builders have struggled all year with rising costs for lumber, land & workers.  Mortgage rates are also rising, reflecting in part rate hikes by the Federal Reserve, which has boosted its benchmark rate 3 times this year & is expected to hike rates for a 4th time later this month.  In Oct, home building fell 0.5%, while non-residential construction retreated 0.3% as declines in construction of medical facilities & shopping centers offset a gain in office construction.  Gov spending was up 0.8% in Oct, a rebound that reflected gains in both state & local projects & federal spending.  The National Association for Business Economics released a new economic outlook today in which its forecasting panel downgraded estimates for home construction for this year & next year.  It projects that builders will start construction on 1.26M homes in 2018, down from their forecast in Oct for 1.28M housing starts this year.  The revised forecast would still be a 5% increase from the 1.2M housing starts in 2017.  For 2019, the forecast expects starts will rise to 1.3M units, a reduction of 50K units from NABE's Oct survey.  The 3 straight declines in construction spending left total spending at a seasonally adjusted annual rate of $1.31T in Oct, 1.2% below the peak hit in May.

US construction spending down 0.1% in October

Oil prices surged higher after the US & China agreed to a 90-day truce in a trade dispute & Canada's Alberta province ordered a production cut, while exporter group OPEC looked set to reduce supply.  US light sweet crude oil ended the session up $2.02 (4%) higher at $52.95.  Brent crude was up $1.66 (2.8%) at $61.12.  Both benchmarks surged by more than 5% earlier in the session.  China & the US agreed not to impose additional trade tariffs for at least 90 days while they hold talks to resolve existing disputes.  Within OPEC, Qatar said today it would leave the producer club in Jan.  Qatar's oil production is only around 600K bpd, but it is the world's biggest exporter of liquefied natural gas (LNG).  The Gulf state has also been at loggerheads with its much bigger neighbor Saudi Arabia, the de facto OPEC leader.  Outside OPEC, Russian oil output stood at 11.37M bpd in Nov, down from a post-Soviet record of 11.41M bpd it reached in Oct, Energy Ministry data showed on yesterday.  Russian Pres Vladimir Putin said on Sat he had no concrete figures on possible oil output cuts, though his country would continue its contribution to reducing global production.  Meanwhile, oil producers in the US continue to churn out record amounts of oil, with crude output at an unprecedented level of more than 11.5M bpd.  With drilling activity still high, most analysts expect US oil production to rise further in 2019.

Oil up 4 pct on trade truce, expected supply cuts

Federal Reserve vice chairman Randal Quarles said the Fed's increasing "data dependence" does not mean it will react to every rise or fall in economic statistics or markets, but only to "significant changes in direction."  After a week in which markets have swung in their interpretation of where the Fed is heading, Quarles appeared to anchor the Fed's move towards slowly but steadily continuing to raise interest rates.  "We should be data dependent but not reacting to every wavering of the needle across the dial...We have described in all the communications tools a path that is pretty clear," Quarles said.  "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction."  That path currently has the Fed raising rates later this month & throughout 2019, an interpretation some investors have called into question given the recent focus of policymakers on weakening global growth & other recent data.  Stock markets in particular rose dramatically last week after construing remarks by Fed chair Jerome Powell to mean that the central bank may be nearer than thought to pausing the cycle of rate increases it began in late 2015.  But Quarles, repeating what has become a theme of the Powell Fed, emphasized that discussion of a possible stopping point puts too much emphasis around the concept of the "neutral" rate of interest, a notion he feels is not useful as a precise guide to appropriate policy as economic conditions become more normal.  It cannot be precise, may be changing over time, & "its utility as the central organizing thought around how you are conducting monetary policy becomes less," Quarles said.  His comments, after weeks in which markets have both dropped dramatically & climbed based on perceptions of where rates are in comparison to "neutral," are part of Powell's so far choppy effort to downplay the concept -- discounting its usefulness but continuing to refer to where policy stands in relation to it.

Fed's Quarles: Fed watching data but will not react to 'every wavering'

The Dow was led higher by trade related stocks, such as Boeing (BA), Apple (AAPL), Caterpillar (CAT) & Nike (NKE).  There was a midday selloff but late day buying recovered some of those losses  The Dow chart below looks better after the rally in the week.  In addition for bragging rights, the above data on oil production for Nov shows the US was #1 last month (barely).

Dow Jones Industrials