Risk-on pushes SPX to new record closing high and causes a sharp sell-off in T-notes
10-year T-note yield possibly sets near-term bottom
Cohn and Mnuchin meet today with Senate Republican leaders on tax reform
10-year T-note auction to yield near 2.14%
U.S. JOLTS job openings expected to decline but remain strong
Risk-on pushes SPX to new record closing high and causes a sharp sell-off in T-notes — The markets on Monday went into risk-on mode after Hurricane Irma caused less-than-expected damage in Florida and North Korea on Saturday refrained from launching another missile. The markets also became a bit less concerned about the North Korean situation as the UN approved a watered-down sanctions package, perhaps reducing the chances for a new North Korean provocation in response. The markets were also in a risk-on mood after Congress late last week approved a 3-month debt ceiling hike and continuing resolution, thus deferring the threats of a government shutdown and Treasury default.
The U.S. stock market was buoyant on Monday with the S&P 500 index closing up +1.08% at a new record-high close. Meanwhile, the dollar index on Monday recovered moderately from last Friday’s 2-3/4 year low and closed the day up +0.57% as the yen fell on reduced safe-haven demand. Dec T-note prices on Monday fell sharply by -16 ticks due in part to reduced safe-haven demand with the stock market rally and reduced concern about North Korea.
Oct WTI crude oil prices on Monday rallied sharply by 59 cents (+1.24%) to $48.07 mainly because of Saudi Arabia’s statement that it is open to extending the production-cut agreement when it expires in Q1-2018. In addition, Gulf refineries are coming back on line sooner than expected after the damage from Harvey, which is boosting crude oil demand.
10-year T-note yield possibly sets near-term bottom — The 10-year T-note yield on Monday closed sharpy higher by +8 bp at 2.13% and appeared to set at least a near-term bottom with last Friday’s 10-month low of 2.01%. The 10-year yield on Monday closed +12 bp above last Friday’s low.
The 10-year T-note yield rose sharply on Monday due to (1) reduced safe-haven demand with the stock market rally and lower North Korean tensions, (2) the smaller-than-expected economic hit on Florida from Hurricane Irma, which only sideswiped Miami, and (3) soft demand for Monday’s 3-year T-note auction and supply overhang ahead of today’s 10-year T-note auction.
Monday’s 3-year T-note auction saw a weak bid cover ratio (i.e., bids submitted divided by bids accepted) of 2.70, below the 12-auction average of 2.83. In addition, the low 46.2% amount of the auction taken by indirect bidders (vs the 12-auction average of 53.2%) indicated weak demand from foreign investors and central banks.
Another key factor behind Monday’s rise in the 10-year T-note yield was the +2.7 bp rise in the 10-year breakeven inflation expectations rate to 1.835%. Monday’s rise in the 10-year breakeven rate was caused mainly by the 1.24% rally in Oct WTI crude oil prices. However, the 10-year breakeven rate has now risen by +10 bp in the past two weeks and on Monday matched the 3-1/2 month high of 1.8373% posted on July 31. The rise in inflation expectations is putting a dent in the T-note market’s main bullish factor, which is the assumption that the inflation statistics will remain low and cause the Fed to refrain from a December rate hike.
Cohn and Mnuchin meet today with Senate Republican leaders on tax reform — White House economic advisor Cohn and Treasury Secretary Mnuchin are scheduled to meet today with Senate Majority Leader McConnell and members of the Senate Budget Committee to discuss a path forward on tax reform. Congressional committees have been given the responsibility of coming up with a detailed Republican tax reform plan.
However, the first order of business for Congress is to approve a 2018 budget resolution, which is needed as the vehicle for passing tax reform through the reconciliation process (thus avoiding a Senate Democratic filibuster). Republican leaders have their work cut out for them just agreeing on a 2018 budget resolution, even though the non-binding resolution has no real importance, because of concessions demanded by conservative Republicans.
10-year T-note auction to yield near 2.14% — The Treasury today will sell $20 billion of 10-year T-notes in the first reopening of the 2-1/4% 10-year T-note of August 2027. The Treasury will then conclude this week’s $56 billion coupon package by selling $12 billion of reopened 30-year bonds on Wednesday.
The benchmark 10-year T-note late Monday was trading at 2.14% in when-issued trading, which translates to an inflation-adjusted yield of 0.30% against the current 10-year breakeven rate of 1.84%. The 12-auction averages for the 10-year are as follow: 2.42 bid cover, $17 million in non-competitive bids, 5.4 bp tail to the median yield, 15.0 bp tail to the low yield, and 31% taken at the high yield. The 10-year is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.6% of the last twelve 10-year T-note auctions, which is moderately above the average of 60.9% for all recent Treasury coupon auctions.
U.S. JOLTS job openings expected to decline but remain strong — The market consensus is for today’s July JOLTS job openings report to show a decline of -188,000 to 5.975 million. However, that would retrace only part of June’s surge of +461,000 to a record high of 6.163 million and still leave the job openings series in very strong shape. The JOLTS job openings series is a leading indicator for the payroll report since many job openings eventually turn into job hiring once the hiring process is complete. Payroll growth has averaged a solid +185,000 over the last 3 months.