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U.S. JOLTS job openings expected to show continued labor market strength
3-year T-note auction to yield near 2.08%
Real shorter-term Treasury yields have turned positive thanks to Fed rate hikes
President Trump is reportedly close to making his Fed Vice Chair appointment

U.S. JOLTS job openings expected to show continued labor market strength -- The market consensus is for today's Nov JOLTS job openings report to show a small increase of +29,000 to 6.025 million, recovering part of October's sharp -181,000 decline to 5.996 million. Despite November's decline, the JOLTS series is in strong shape and is only moderately below the record high of 6.177 million jobs posted in September. The large number of available jobs is a favorable leading indicator for the payroll report since many job openings will turn into actual job hires once the hiring process is complete.

Market optimism about the labor market was taken down a notch by last Friday's weak payroll report of +148,000, which was well below expectations of +190,000. However, the weak payroll report may have just been some pay-back after strong post-hurricane reports in Oct (+211,00) and Nov (+252,000). Job hiring, in any case, is likely to pick up in January since the sharp business tax cuts will put companies in a substantially better cash position starting in January, which should encourage some companies to expand operations and hire more employees.

3-year T-note auction to yield near 2.08% -- The Treasury today will sell $24 billion in 3-year T-notes. The Treasury will then continue this week's $56 billion coupon package by selling $20 billion of 10-year T-notes on Wednesday and $12 billion of 30-year bonds on Thursday. This week's 10-year and 30-year auctions will be the second and final reopenings of the securities first sold in November.

Today's 3-year T-note issue was trading at 2.08% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.20% against the current 3-year breakeven inflation expectations rate of 1.78%.

The 12-auction averages for the 3-year are as follows: 2.86 bid cover ratio, $58 million in non-competitive bids to mostly retail investors, 4.9 bp tail to the median yield, 24.5 bp tail to the low yield, and 53% taken at the high yield. The 3-year is the second least popular security among foreign investors and central banks behind the 2-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of only 54.9% of the last twelve 3-year T-note auctions, which is well below the average of 62.9% for all recent coupon auctions.

Real shorter-term Treasury yields have turned positive thanks to Fed rate hikes -- The 3-year T-note yield was trading near 1.50% in mid-2017, which left it close to 3-year inflation expectations at the time and thus left the real 3-year T-note yield near zero. That meant that buyers of the 3-year T-note yield in mid-2017 could expect to earn nothing on an inflation-adjusted basis, assuming that actual inflation over that 3-year period matches inflation expectations.

However, the 3-year T-note yield since mid-2017 has moved sharply higher by about 50 bp to the current level of 2.08%, leaving the security with a positive 0.20% real yield against inflation expectations. That positive real 3-year T-note yield of 0.20% exists even though inflation expectations have moved higher by about 30 bp since 2017.

The rise in the 3-year T-note since mid-2017 has been driven mainly by the Fed's three 25 bp rate hikes in 2017, which took the funds rate target from 0.50-0.75% at the beginning of 2017 to 1.25-1.50% at present. The fact that the 3-year T-note yield is now trading at a positive inflation-adjusted yield makes it a much more attractive security for investors. However, the 3-year yield likely has at least another 50 bp to rise since the Fed in 2018 is likely to tighten by another 75 bp.

President Trump is reportedly close to making his Fed Vice Chair appointment -- President Trump is "very close" to making his Fed Vice Chair appointment, according to a Bloomberg News report on Monday citing a White House official. The report also said that Pimco managing director Richard Clairda is out of the running. The two main contenders for the Vice Chair position are economist Lawrence Lindsey and former Pimco CEO Mohamed El-Erian, according to most press reports.

We suspect that Mr. Lindsey may have the inside track for the Vice Chair job because he is an experienced academic economist with a PhD in economics from Harvard. The Trump administration may be looking to beef up the academic qualifications of the top Fed officials considering that Fed Chair appointee Jerome Powell is a lawyer and banker by trade and does not have a PhD in economics. In addition, Mr. Lindsey has experience at the Fed since he was a Fed Governor during 1991-1997.

Aside from the Fed Vice Chair position, President Trump needs to make two more appointments for Fed Governors, one to fill an open seat and one to fill Ms. Yellen's Governor seat when she leaves the Fed in February.

The Senate must soon vote to confirm Jerome Powell as the new Fed Chair since there is less than a month to go before Ms. Yellen's term expires on February 3. The Senate also needs to confirm President Trump's appointment of Marvin Goodfriend as a Fed Governor.

Separately, former Fed Chair Bernanke on Monday predicted that the Powell Fed over the next 12-18 months will study alternative regimes for monetary policy including a new inflation target. The Fed in any case must decide whether it will follow a floor or corridor-type monetary policy in coming years since that will determine how far the Fed will let its balance sheet drop. The Fed's balance sheet reduction program at present has no ending date or final dollar value. The Fed at some point will have to decide when it will stop reducing its balance sheet.



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