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  • U.S. mid-term elections could kick off fireworks in Washington
  • Xi dampens US/Chinese trade deal hopes
  • JOLTS expected to remain strong despite expectations for a modest decline
  • 10-year T-note auction to yield near 3.20%
  • Italian bonds remain calm even as showdown approaches

U.S. mid-term elections could kick off fireworks in Washington -- The uncertainty surrounding the outcome of today's U.S. mid-term election is high since the turnout is set to be huge and that makes it even more difficult than usual for pollsters to determine which voters will actually show up at the polls.  Nevertheless, the consensus is that the Democrats will take control of the House and the Republicans will keep control of the Senate.

If the Democrats win the House, then they will take over control of the Committees in January and they will be able to launch investigations of President Trump and the White House, likely leading to even more conflict in Washington.  On another note, if the Democrats win the House, then Republicans next year will not be able to pass any legislation such as new tax cuts or an Obamacare repeal through the reconciliation process, which eliminates the possibility of a Senate filibuster by the minority Democrats.  Republicans used the reconciliation process to pass the massive Jan 1 tax cuts with just simple Republican majorities of the House and Senate.

There has been some talk about an infrastructure bill during the lameduck session or in 2019 if the Democrats win the House and are interested in a bipartisan infrastructure bill.  However, Congressional Republicans have shown little interest in an infrastructure bill during the first two years of President Trump's term.  If Republicans keep control of the Senate, then Senate Majority Leader McConnell may not be any more interested in a big infrastructure bill than he was before the election, especially now that the budget deficit is at such a massive level.

After today's election, there may be some fireworks regarding the Mueller investigation.  There is speculation that President Trump may fire one or more top Justice Department officials after the election, which would have implications for control of the Mueller investigation.  In addition, the Mueller team could be ready right after the election to announce indictments of top Trump team members or release findings to Congress regarding its investigation of collusion and obstruction of justice.

Regardless of the outcome of today's election, Congress in coming weeks and months will have two important issues to address that are of major interest to the markets.  First, Congress needs to roll over the continuing resolution (CR) that expires on December 7, or else there will be a partial shutdown of the federal government.  President Trump may use that CR to go to the mat over his demand for border wall funding.

Second, Congress must approve a debt ceiling hike in 2019 in order to avoid a Treasury default.  The current debt ceiling suspension expires on March 1, 2019.  However, the Bipartisan Policy Center estimates that the Treasury will be able to use its usual emergency measures to avoid a default until summer or autumn 2019.

Xi dampens US/Chinese trade deal hopes -- The global markets on Monday became less optimistic about a trade deal when Presidents Trump and Xi meet on the sidelines of the Nov 30/Dec 1 G-20 meeting in Buenos Aires.  Chinese President Xi gave a major speech on Monday at the opening of a key Chinese business conference and he did not mention any breakthroughs or concessions on US/Chinese trade relations.  In fact, he seemed to take a swipe at the Trump administration by denouncing the "law of the jungle" and "beggar-thy-neighbor" trade policies.

JOLTS expected to remain strong despite expectations for a modest decline -- The market consensus is for today's Sep JOLTS job openings report to show a decline of -51,000 to 7.085 million, reversing most of Aug's +59,000 increase to a record high of 7.136 million.  The record high in job openings in August was another indicator of the strength of the U.S. labor market and was a positive indicator for payroll growth through autumn.

10-year T-note auction to yield near 3.20% -- The Treasury today will sell $27 billion of 10-year T-notes.  The Treasury will then conclude this week's record-sized $83 billion quarterly refunding operation by selling $19 billion of 30-year T-bonds on Wednesday.  

The benchmark 10-year T-note yield yesterday closed slightly lower at 3.20%, which was only 6 bp below the early-Oct 7-1/2 year high of 3.26%.  The 10-year T-note yield remains elevated due to the strong U.S. economy and expectations for continued Fed tightening over the next year.  On the more helpful side, the 10-year breakeven inflation expectations rate has eased by -14 bp to 2.07% from the late-May 3-3/4 year high of 2.21% mainly because of the sharp -18% sell-off seen in Dec WTI crude oil prices over the past month.

The 12-auction averages for the 10-year are:  2.51 bid cover ratio, $21 mln in non-competitive bids, 4.6 bp tail to the median yield, 19.4 bp tail to the low yield, and 44% taken at the high yield.  The 10-year is of average popularity among foreign investors and central banks with indirect bidders taking an average of 63.1% of the last twelve 10-year T-note auctions, exactly matching the median of 63.1% for all recent Treasury coupon auctions.


Italian bonds remain calm even as showdown approaches -- The 10-year Italian bond yield on Monday remained calm and closed just slightly above last Friday's 1-month low of 3.32%, which was -37 bp below the mid-Oct 4-3/4 year high of 3.69%.  Euro-area finance ministers at their meeting on Monday called for Italy to comply with the European Commission's demand for a smaller 2019 budget deficit.  Italy has until Nov 13 to offer a new budget and the European Commission will then have three weeks to formally determine whether Italy is violating the EU budget rules.



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