Trump says he is “very, very close” to Fed chair announcement
House to vote Thursday on budget resolution
2-year T-note auction to yield near 1.58%
Nikkei index rallies to 21-year high on PM Abe’s election victory
Oct Markit U.S. PMIs expected to be mixed
Trump says he is “very, very close” to Fed chair announcement — President Trump on Monday told reporters that he is “very, very close” to announcing his new Fed chair. Mr. Trump in any case is expected to announce his decision by next Friday when he leaves for his Nov 3-14 Asian trip. Fed Governor Jerome Powell continues to have the lead in the betting odds, although there are reports that hawks in the Republican party are pushing Mr. Trump for the appointment of either John Taylor or former Fed Governor Kevin Warsh. The stock market is likely to react positively to either a Powell or Yellen appointment but negatively to a Taylor or Warsh appointment based on market perceptions of each candidate’s dove-hawk profile.
We suspect that Powell has the inside track for an appointment since he is more of a known quantity than Taylor or Warsh on keeping interest rates as low as possible and yet he is also flexible on implementing some banking deregulation. While there are hawkish elements of the Republican party pushing for a Taylor or Warsh appointment, Mr. Trump has called himself a “low interest rate person.” Since the Vice Chair position is also open, Mr. Trump could keep more people happy by appointing Powell as Chair and Taylor as Vice Chair, or vice versa.
As of late Monday afternoon, the betting odds at PredictIt.org were 62% for Powell, 15% for Yellen, 15% for Taylor, 12% for Warsh, and 6% for Cohn.
House to vote Thursday on budget resolution — The House on Thursday plans to approve the same 2018 budget resolution that was passed by the Senate last Thursday. In order to make quicker progress on tax reform, Republican leaders have reportedly convinced House conservatives to go along with the Senate’s version of the budget resolution even though it does not contain the mandatory spending cuts they seek. In any case, the budget resolution is non-binding and has no purpose other than to get the reconciliation process going so that a tax reform bill can be passed by a majority vote in the Senate, thus preventing a filibuster by Senate Democrats.
Republican leaders are still expressing optimism that they can get a tax reform deal completed by year-end even though the plan is still in a rudimentary form. We continue to expect that Republicans will eventually pass a watered-down tax cut plan by early 2018 simply because there is now an existential need to get some type of tax cut plan passed.
The betting odds for a corporate tax cut by year-end in 2017 have improved mildly to 27% from last week’s record low of 15% after the Senate was able to pass a budget resolution. However, the low 24% odds still indicate that there is little optimism about a deal this year, although the odds for a deal by 2018 are much better.
2-year T-note auction to yield near 1.58% — The Treasury today will sell $26 billion of 2-year T-notes. The Treasury will then continue this week’s $103 billion T-note package by selling $15 billion of 2-year floating-rate notes and $34 billion of 5-year T-notes on Wednesday and $28 billion of 7-year T-notes on Thursday.
Today’s 2-year T-note issue was trading at 1.58% in when-issued trading late Monday afternoon. That translates to an inflation-adjusted yield of 0.08% against the current 2-year breakeven inflation expectations rate of 1.50%.
The 2-year T-note yield has risen sharply by +32 bp since early-Sep to post a new 9-year high of 1.58% on Monday. The 2-year yield has been pushed higher mainly by the Fed’s hawkish tone in which it insists it will proceed with another rate hike in December and three rate hikes in 2018. It remains to be seen whether the 9-year high in the 2-year yield will draw bargain hunters to today’s auction, or whether the bearish sentiment will instead scare investors away.
The 12-auction averages for the 2-year are as follows: 2.79 bid cover ratio, 4.5 bp tail to the median yield, 22.7 bp tail to the low yield, and 40% taken at the high yield. The 2-year T-note is the least popular coupon security by far among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of only 48% of the last twelve 2-year T-note auctions, which is well below the average of 61.1% for all recent Treasury coupon auctions.
Nikkei index rallies to 21-year high on PM Abe’s election victory — The Japanese financial markets were pleased with Prime Minister Abe’s decisive victory in Sunday’s national election. The LDP retained its two-thirds super-majority in parliament. The Nikkei index on Monday soared to a new 21-year high and closed the day up +1.11%. The Nikkei has soared by 12% in the past 6 weeks mainly on anticipation of an Abe victory and the continuation of Abenomics with its primary plank of an extraordinarily-easy monetary policy. Meanwhile, USD/JPY on Monday initially rallied to a 3-1/2 month high due to yen weakness on the prospect for “QE-forever.” However, USD/JPY then fell back and closed the day slightly lower. The 10-year JGB yield on Monday fell by -0.6 bp to 0.069%.
Oct Markit U.S. PMIs expected to be mixed — The market consensus is for today’s Oct Markit U.S. manufacturing PMI to show a +0.4 point increase to 53.5, adding to Sep’s +0.3 point increase to 53.1. Meanwhile, the consensus is for today’s Oct Markit U.S. services PMI to show a small -0.1 point decline to 55.2, adding to Sep’s -0.7 decline to 55.3. U.S. business confidence in general remains strong due to the record highs in the stock market, the firm U.S. economy, the weak dollar, and hopes for tax cuts.