January 14, 2020

There are a lot of interesting opinions about what Iran might do next in the wake of the assassination of General Qassem Soleimani. However, the article I liked the best came from Hoover Institute historian, Victor Davis Hanson (“Iranian Analytics,” National Review Online, January 3), who concluded that Iran miscalculated after President Trump called off a retaliatory strike after a U.S. drone was shot down.

Iran Graphic Image

Specifically, Hanson explained that Iran may have thought that President Trump’s previous restraint was permanent, and that the House impeachment process meant that he had lost his political viability. I especially like how Hanson said that Iran cannot decide if President Trump is a “Twitter Tiger” or “a provocative and dangerous bull in the Middle East ‘china shop.’”  Hanson added that President Trump is a nationalist-populist isolationist who strongly believes in “Do not tread on me.”

In conclusion, Hanson said that “a weaker Iran foolishly positioned itself into the role of aggressor.”

President Trump did his best to try to defuse the Iranian situation with a press conference on Wednesday after Iranian missiles were fired into Iraq Tuesday night, with no U.S. service members harmed. The U.S. military viewed this as an Iranian show of force, not an imminent threat. President Trump was critical of Iran’s “destructive and destabilizing behavior,” but wanted to pursue a diplomatic solution and called for a “deal with Iran that makes the world a more peaceful and safer place.”  The President chose to impose additional economic sanctions on Iran but appeared to “stand down” on any imminent military response.

On Thursday, the House passed a “War Powers Resolution” to limit President Trump’s military actions to respond to Iran for 30 days, unless further Congressional authorization was granted. The President would argue, however, that Congress has no authority over the Commander in Chief to protect the nation.

Regardless as to how that power struggle plays out, from the market’s perspective, after Iran’s relatively harmless missile response on Tuesday, the financial markets seem to be dismissing Iran’s response, since it appears that it was merely a “show of force.” Stocks recovered strongly on Wednesday when relative peace returned to the region. In the meantime, gold is now trading at its highest level since April 2013 and Treasury bond yields may remain low for a while due to a global flight to safety in U.S. Treasury bonds.

The December Jobs Report Wraps up a Record Employment Decade

The Labor Department reported on Friday that 145,000 net new payroll jobs were created in December, and the unemployment rate remains at a 50-year low of 3.5%. Average hourly earnings rose 0.1% to $28.32 per hour and rose 2.9% for all of 2019. In November, average hourly earnings were running at a 3.1% annual pace, so the deceleration in December may be attributable to temporary seasonal workers.

Overall, the nation gained about 19 million net jobs in the last decade, or an average 158,750 per month:

United States Employment Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That means 2019 marked the tenth straight year of net job gains with no sign of high inflation, so the Philips Curve (i.e., rising inflation caused by low unemployment rates) that the Fed used to follow under former Fed Chairman Janet Yellen, is officially dead. Thanks to productivity gains, global competition and low energy prices, inflation is expected to remain tame for the foreseeable future, which is great for continued low interest rates, which in turn fuels stock buybacks and a healthy real estate market.

Speaking of jobs, on Wednesday, ADP reported that 202,000 private payroll jobs were created in December, which was substantially higher than economists’ consensus expectations. Small businesses (under 50 employees) created 69,000 jobs, while medium-sized businesses (50 to 499 employees) created 88,000 jobs, and large businesses (500+ employees) created 45,000 jobs, so hiring was evenly based!  The construction sector added 29,000 jobs, and that may help a weak manufacturing sector to improve.

In other economic news, the Institute of Supply Management (ISM) on Tuesday reported that its non-manufacturing (service) index rose to 55 in December, up from 53.9 in November, reaching its highest level in four months, which bodes well for GDP growth. Eleven of the 17 industries that ISM surveyed reported expansion in December, which came as a bit of a surprise, since typically far more than 11 industries are prospering when the ISM service index is this far above 50, which signals an expansion.

The U.S. trade deficit looks like it will post its first annual decline since 2013. On Tuesday, the Commerce Department announced that the trade deficit plunged 8.2% to $43.1 billion in November, the smallest monthly trade deficit in over three years (since October 2016). A smaller trade deficit with China and surging energy exports were largely responsible for the big decline in trade deficit.

Specifically, exports rose 0.7% in November to $208.6 billion, while imports declined 1% to $251.7 billion. The trade deficit with China has declined by $61.3 billion to $319.8 billion in the first 11 months of 2019, compared to the same period in 2018. Also interesting is that crude oil imports (for refining) are running at the slowest pace in 28 years. Overall, a smaller trade deficit will help to boost GDP growth.

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