- Weekly U.S. market focus
- Yellen likely took herself out of the running for Fed Chair reappointment
- Treasury auctions 2-year and 5-year T-notes today
- U.S. stocks remain resilient
- T-note tone remains supportive
Weekly U.S. market focus — The U.S. markets this week will focus on (1) Friday’s Aug payroll report (expected +180,000), (2) the U.S. inflation outlook with Thursday’s July PCE deflator report expected to remain tepid (expected unchanged from June’s +1.4% y/y; core expected to ease to +1.4% y/y from June’s +1.5%), (3) a light earnings week with only 12 of the S&P 500 companies scheduled to report, (4) the reception for the Treasury’s sale of $88 billion of T-notes on Monday-Tuesday, and (5) fall-out from Hurricane Harvey in Texas for energy and ag prices.
President Trump this week will reportedly hit the road to stump for the Republicans’ tax reform plan. The Trump administration last week said that it will not release a detailed proposal in September as previously anticipated but will instead allow Congressional tax committees to develop the meat of the plan within the broad framework already announced by the White House and Republican leaders.
Congress remains on recess this week but the markets will remain focused on (1) whether a debt ceiling hike will be approved in time to avoid a Treasury default in October, and (2) whether Congress will approve 2018 spending authority to avoid a government shutdown on Oct 1. President Trump last week threw a monkey wrench into Congressional approval of a continuing spending resolution by Sep 30 by saying that he would force a government shutdown if he does not get spending authority for his Mexican border wall.
In overseas markets, the focus will be on (1) China’s manufacturing PMI reports on Thursday and Friday (expected -0.1 point), (2) Wednesday’s German July Aug CPI report (expected +1.7% y/y vs June’s +1.5%), (3) this week’s third round of Brexit talks that will focus on exit terms, and (4) anticipation of next Thursday’s ECB meeting that may produce a QE tapering announcement for 2018.
Yellen likely took herself out of the running for Fed Chair reappointment — Fed Chair Yellen in her speech last Friday at the Jackson Hole conference did not provide any hints about near-term monetary policy or make any comments about inflation. However, she did deliver a strong defense of the banking regulations that have been imposed since the financial crisis. She essentially put President Trump on notice that she would not preside over a wholesale roll-back of banking regulations, probably taking herself out of the running for reappointment as Fed Chair when her term expires in February. The market consensus by a fairly wide margin is that White House economic advisor Gary Cohn will be appointed as the next Fed Chair.
Regarding Fed policy, the market consensus is that the FOMC at its next meeting in three weeks on Sep 19-20 will announce a start date for its balance sheet normalization program, possibly starting on Oct 1. The odds for a Fed rate hike at that Sep 19-20 meeting are only 12%, according to the federal funds futures market. The odds for a rate hike by December are only 48%, just slightly above the lowest level reached yet of 44% early last week.
Treasury auctions 2-year and 5-year T-notes today — The Treasury today will sell $26 billion of 2-year T-notes and $34 billion of 5-year T-notes. The Treasury will then conclude this week’s $88 billion T-note package by selling $28 billion of 7-year T-notes on Tuesday. In when-issued trading last Friday afternoon, today’s 2-year T-note issue was trading at 1.35% and today’s 5-year T-note issue was trading at 1.75%.
The 12-auction averages for the 2-year are as follows: 2.77 bid cover ratio, $183 million in non-competitive bids, 4.5 bp tail to the median yield, 22.2 bp tail to the low yield, and 51% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks with indirect bidders taking only 47.3% of the last twelve 2-year T-note auctions, well below the average of 60.9% for all recent Treasury coupon auctions.
The 12-auction averages for the 5-year are as follows: 2.46 bid cover ratio, $46 million in non-competitive bids, 4.9 bp tail to the median yield, 12.9 bp tail to the low yield, and 38% taken at the high yield. The 5-year is moderately popular among foreign investors and central banks with indirect bidders taking 64.4% of the last twelve 5-year auctions, moderately above the average of 60.9% for all recent Treasury coupon auctions.
U.S. stocks remain resilient — The S&P 500 index last Monday fell to a 1-1/2 month low but then rebounded higher to close the week up +0.72%. U.S. stocks took a hit in the first half of August mainly because of White House political uncertainty tied to President Trump’s remarks on Charlottesville. However, the markets were relieved that White House economic advisor Gary Cohn and Treasury Secretary Mnuchin decided to stay in their jobs. The main risk for stocks now is the need for Congress to approve 2018 spending authority by Oct 1and a debt ceiling hike by early to mid-October. The recent modest correction in stock prices did little to relieve stretched valuations. The forward P/E still high at 18.70, just mildly below the 8-month high of 19.06 posted on July 25.
T-note tone remains supportive — The tone remains supportive for T-note prices due to (1) expectations of a Fed rate hike by December at only 48% due to tepid inflation, (2) the decline in the 10-year breakeven inflation expectations rate to a 5-week low of 1.76% last Friday, and (3) White House political uncertainty combined with the need for 2018 spending authority and a debt ceiling hike. However, the July-August T-note rally stalled last week as White House political uncertainty died down and the stock market recovered. That raised the question of whether there are catalysts to spark new highs in T-note prices.
