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  • Sterling sees support from low expectations for hard Brexit on March 29
  • Fed’s Beige Book finds strong labor market but higher risks
  • Redfin reports big U.S. home sales drop while U.S. government housing data is postponed
  • 10-year TIPS yield is near a 4-month low

 

Sterling sees support from low expectations for hard Brexit on March 29 — Prime Minister May on Wednesday narrowly won the no confidence vote in Parliament, ensuring that her government will survive at least until the next no confidence vote, whenever that might come.

Ms. May said she will now open talks with the Labour Party and other opposition parties to see if there is a new Brexit plan that could pass the Parliament.  However, Ms. May cannot not go too far in appeasing the softer-Brexit preference of the Labour Party because the hard-Brexit wing of her own party might decide to vote against her in any new no-confidence vote, reckoning they would be better off taking their chances with a new election than allowing Ms. May to lead them down the path of a soft Brexit.

Ms. May in any case must present a Plan B to Parliament within three days.  It seems likely that her Plan B will look suspiciously similar to her Plan A.

Ms. May continues to claim there will not be a delay in the March 29 Brexit date.  However, her request for a delay seems inevitable since there simply isn’t enough time for the UK and EU to try to come up with a new Brexit plan or for the UK to prepare for a hard Brexit.  It seems unlikely that Ms. May would allow the UK to crash out of the EU on March 29 since a clear majority of the UK parliament does not want a hard Brexit on March 29, nor does the EU.  The betting probability for a hard Brexit on March 29 is very low at about 10%, illustrating that the consensus is that there will either be a Brexit separation agreement by March 29 (very unlikely) or a delay of the deadline (very likely).

Sterling (GBPUSD) on Wednesday closed mildly higher by +0.2% on relief that Ms. May won the no-confidence vote and that the UK did not plunge into political chaos with a new general election.  However, the rally was small since there was already a strong market consensus that Ms. May would win the no-confidence vote.  Sterling remains in generally favorable shape near a 2-month high since the market is not expecting the UK to crash out of the EU on March 29 and instead expects at least another few months of haggling.

Fed’s Beige Book finds strong labor market but higher risks — Yesterday’s Fed’s Beige Book report, which surveyed the U.S. economy through January 7, found that the majority of the country saw modest or moderate growth, little changed from the last report.  The report also found that the U.S. labor market remains very strong with businesses having difficulty finding new employees at all skill levels.

The report said that the economic outlook remained generally positive, but that “many districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.”  The survey contained virtually no information about how the partial U.S. government shutdown is affecting the economy, even though the shutdown was 14 days old as of the end of the survey period.

Redfin reports big U.S. home sales drop while U.S. government housing data is postponed — The Dec housing starts report will not be released today due to the government shutdown.  The market had been expecting Dec housing starts to show a small -0.5% point decline to 1.250 million units, falling back after Nov’s +3.2% increase to 1.256 million.

Due to the lack of housing market data from the U.S. government, the market is paying closer attention to non-government housing data.  Redfin on Wednesday reported that U.S. home sales fell sharply by -11% in December.  Redfin said that U.S. home prices inched up by +1.2% m/m, which was the smallest monthly rise in over six years.

Home sales in late 2018 were clearly hurt by rising mortgage rates, which peaked at an 8-year high of 4.94% in November.  However, there is some hope that some buyers may be drawn back into the market early this year due to the recent drop in mortgage rates because of reduced expectations for Fed tightening and reduced inflation expectations.  The 30-year mortgage rate since November has fallen sharply by -49 bp to the current 9-month low of 4.45%.

 

10-year TIPS yield is near a 4-month low — The Treasury today will sell $13 billion of 10-year TIPS.  Today’s auction will be a new issue as opposed to a reopening of a prior issue.  The Treasury follows a pattern of selling a new 10-year TIPS in January and July and then conducting two reopenings of each issue in March-May and Sep-Nov.  

The 10-year TIPS yield has fallen by -28 bp to the current level of 0.89% from November’s 8-year high of 1.17% and is currently near a 4-month low.  The 10-year TIPS yield has fallen in the past two months due to (1) concern about global economic growth, and (2) increased safe-haven demand tied to the volatile stock market and the strained political climate with the U.S. government shutdown.

The 12-auction averages for the 10-year TIPS are as follows:  2.42 bid cover ratio, $21 million in non-competitive bids to mostly retail investors, 5.5 bp tail to the median yield, 11.6 bp tail to the low yield, and 54% taken at the high yield.  The 10-year TIPS is the second most popular security behind the 30-year TIPS among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of 68.1% of the last twelve 10-year TIPS auctions, which is well above the median of 62.8% for all recent Treasury coupon auctions.

 

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