Long-Standing Hurdles About to be Resolved?

Some of the long-standing hurdles for the markets --Brexit and US/China negotiations -- potentially will be resolved this week.   Stock-market friendly outcomes are possible.  The question is whether the pickup in US economic growth now occurring will override the impact of negative outcomes.  My guess is that it will, so any market pullback on the news could be short-lived and a buying opportunity.

UK Elections and Brexit
The outcome of Thursday's UK elections will determine whether an orderly Brexit will proceed.  The latter at this point would seem to be likely, since polls show Boris Johnson in the lead.  In contrast, if the election outcome suggests otherwise, any negative impact on the UK or Euro area economies will probably be met eventually by BoE and ECB policy easing.  So, the market's knee-jerk negative reaction could reverse.

US/China Negotiations
This week should see one of three outcomes -- /1/ a Phase 1 agreement, /2/ Postponement of the December 15 tariffs and continuation of talks, or /3/ a breakdown with both sides saying further talks will await the outcome of next year's Presidential election.  The December 15 tariffs would go into effect.

The market reactions would be:

First Outcome --  Stocks would jump and Treasuries sell off sharply.

Second Outcome -- Stocks might sell off on the announcement, but then quickly resume the rally.

Third Outcome -- Stocks would sell off sharply and Treasuries rally moderately.

The Treasury market move will be partly a reaction to the stock market and partly to the implications for inflation.  Regarding the latter, note that a paring of US tariffs as part of a Phase 1 agreement would likely weaken the dollar.  This would lift import prices and possibly more than offset the direct decline in the prices of tariff-targeted goods.  Similarly, the imposition of new tariffs on December 15 should boost the dollar, which will hold down import prices.

The stock market should interpret an outcome in terms of the impact on US and global economic growth.  The third outcome would be viewed as the most likely to drag down growth.  Even in this case, the recession risks may very well be downplayed by Street economists, given the improving momentum in the US economy and the potential of a Fed easing if economic activity slows sharply.  So, a knee-jerk drop in stocks will be probably be short-lived.

FOMC Meeting
This meeting will probably be a non-event.  The FOMC Statement should underscore the Fed's desire to keep policy steady for the foreseeable future.  At the same time, either the Statement or Powell's post-meeting press conference will likely continue to suggest policy is now pro-growth as inflation remains below target and that officials remain focused on "global developments."  Note that the outcomes of the UK elections and most likely US/China negotiations will not be known at the time of the meeting.

Key US Economic Data
The November Retail Sales and CPI Reports are expected to show a solid consumer and benign inflation.  Consensus looks for +0.4% m/m Ex Auto Retail Sales and +0.2% Core CPI  (with a steady 2.3% y/y).  While Thanksgiving was late this year, there was a lot of retail discounting ahead of the holiday, which might have resulted in earlier-than-usual shopping.  This could "fool" seasonal adjustment.  So, the risk is for the prints to come in lower than consensus for the Core CPI and higher than consensus for Ex Auto Retail Sales.  

The Atlanta Fed model's estimate of Q419 Real GDP Growth is now up to 2.0%.  This is still likely too low relative to the Total Hours Worked data.  An upward revision on strong prints this week would not be a surprise when the model's estimate is updated on Friday.