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  • Weekly market focus
  • Mnuchin tries to provide reassurance that President Trump won’t try to fire Fed Chair Powell
  • U.S. government shutdown may last into January
  • 2-year T-note at a 3-1/2 month low ahead of today’s auction
 

Weekly market focus — The U.S. markets this week will focus on (1) the ongoing U.S. government shutdown that will last at least until the Senate reconvenes on Thursday and possibly into January, (2) Fed policy as the market continues to fret about the Fed’s hawkish stance and the possibility of a policy mistake with too much tightening in 2019, (3) a new controversy after Bloomberg late Friday reported that President Trump has told aides that he would like to fire Fed Chair Powell, (4) whether oil prices can stabilize after last week’s -11.42% plunge and last Friday’s new 1-1/2 year nearest-futures low, and (5) this week’s sale of $131 billion of T-notes.

The markets today will close early for Christmas Eve.  The NYSE today will close at 1 PM ET and CME equity futures will close at 1:15 PM ET.  Meanwhile, CME interest rate, foreign exchange, grain and livestock futures will close early at 1PM ET.  All U.S. markets are closed on Tuesday for the Christmas holiday.

In Asia, the markets are taking the lead from Chinese stocks where the Shanghai Composite index last Friday fell to a new 2-month low and is just mildly above October’s 4-year low.  The Chinese markets last week were disappointed that President Xi in his major address on Tuesday did not announce any new stimulus initiatives.  The markets were a little more encouraged by the outcome of last week’s Economic Work Conference where top Chinese officials promised “significant” cuts to taxes and fees but seemed to indicate that there will not be any interest rate cuts since they said that monetary policy will strike an “appropriate” balance between tightening and loosening.

 

 

 

 

 

Mnuchin tries to provide reassurance that President Trump won’t try to fire Fed Chair Powell — The markets this week have a new worry after Bloomberg late last Friday reported that President Trump has repeatedly discussed firing Fed Chair Powell.  The U.S. stock market could see very steep losses if political interference were to reach into the heart of the Fed and wreck the whole concept of Fed independence.

The White House over the weekend tried to beat back the reports.  Treasury Secretary Mnuchin quoted Mr. Trump as saying, “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.”  Incoming White House chief staff Mulvaney on Sunday said that he had spoken to Mr. Mnuchin who said that Mr. Trump “now realizes he does not have the ability” to fire a Fed chairman.  A Fed governor can only be fired for cause, but it unclear whether President Trump could simply appoint a new Fed Chair and replace Mr. Powell, thus taking away his chairmanship but leaving him in place as a Fed governor.

After last week’s stock market plunge, the Treasury said on Sunday said that Treasury Secretary Mnuchin talked with big-bank CEOs over the weekend and confirmed that “they have ample liquidity for lending to consumers, business markets, and all other market operations.   Mr. Mnuchin today will convene a call with the President’s Working Group on financial markets with representatives from the Fed, the SEC, and the CFTC.

U.S. government shutdown may last into January — About one-quarter of the U.S. government has been shut down since last Friday at midnight when the continuing resolution expired.  Congress went home for the Christmas holidays and the Senate is not due to reconvene until Thursday.  Thursday is the first day that a vote could be held to reopen the government.

However, Senate Majority Leader McConnell said he will not hold any votes until there is a 3-way deal that has been agreed to by the White House, Congress, and Senate.  The key negotiations are between the White House and Senate minority leader Schumer since some Democratic votes are necessary to get a spending bill passed in the Senate.

White House Budget Director Mulvaney on Sunday said that the Trump administration and Senate Democrats are far apart in their negotiations and that the shutdown could last into January.  Democrats will take over the House on January 3 when the new term begins.  Democrats are refusing to provide the $5 billion in wall funding that President Trump is demanding and Mr. Trump apparently does not want to give any concessions that the Democrats might take in return for $5 billion in wall funding such as a DACA fix or other immigration concessions.

The U.S. stock market last week reacted negatively to the government shutdown mainly because it represents a preview of the political strife that will prevail next year once Democrats take over the House on January 3.  Even worse for the markets, Congress and the White House will need to pass a debt ceiling hike by next summer to avoid a Treasury default.  The debt ceiling suspension expires on March 1 and the Bipartisan Policy Center estimates that the Treasury could hit its X-date as soon as mid-summer.

2-year T-note at a 3-1/2 month low ahead of today’s auction — The Treasury today will sell $40 billion of 2-year T-notes to kick off this week’s $131 billion T-note package.  The benchmark 2-year T-note yield last Friday closed at a 3-1/2 month low of 2.64%, down by 33 bp from November’s 10-1/2 year high of 2.97%.  The 12-auction averages for the 2-year are as follows:  2.76 bid cover ratio, $345 million in non-competitive bids to mostly retail investors, 3.2 bp tail to the median yield, 26.9 bp tail to the low yield, and 58% taken at the high yield.  The 2-year is the least popular security among foreign investors with indirect bidders taking an average of only 44.9% of the last twelve 2-year T-note auctions, well below the median of 63.0% for all recent Treasury coupon auctions.

 

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