- UK Parliament’s Brexit vote starts today
- Trump administration tries to keep market optimism alive for November US/China phase-one trade deal
- US. existing home sales expected to edge lower but remain in strong shape
- 2-year T-note auction to yield near 1.80%
UK Parliament’s Brexit vote starts today — UK Prime Minister Johnson is planning to try to push his Brexit withdrawal legislation through Parliament with votes beginning today and being completed on Thursday. If approved, the withdrawal bill would then go to the House of Lords for approval in time for the Oct 31 deadline.
The markets are relatively optimistic about the Brexit situation based on the recent strength in sterling. GBP/USD on Monday edged to a new 5-month high and extended the 2-week rally to a total of +6.7% although it fell back to close the day slightly lower by -0.2%.
Even if Mr. Johnson isn’t successful in getting his Brexit deal approved by Parliament by the deadline of Oct 31, there is little fear of a no-deal Brexit on Oct 31 because of Parliament’s demand for an extension if there is no deal. Mr. Johnson was already forced to request that extension this past weekend and the markets are waiting for the EU’s expected approval. The chances that Mr. Johnson would now try some desperate last-minute measure to force a no-deal Brexit on Oct 31 seems unlikely. Indeed, the betting odds for a no-deal Brexit on Oct 31 have now fallen to a new low of 9% (10/1), according to oddschecker.com.
The odds appear to be about 50-50 on whether Mr. Johnson will be able to get the UK Parliament to approve his Brexit deal in time for the UK to exit the EU by the deadline of Oct 31, which would lead to a smooth transition period through the end of 2020.
Mr. Johnson was forced to move straight to a vote today on the actual Brexit withdrawal implementation legislation. Mr. Johnson’s attempt to get Parliament on Monday to vote on the general principle of his plan was shot down by Speaker Bercow, who ruled that such a vote would be an improper repeat of Saturday’s vote to delay the bill. That was only a minor setback for Mr. Johnson since he has to get the actual implementation bill approved anyway.
Mr. Johnson has a decent chance of pushing his Brexit bill through Parliament, if only because the exhaustion level is so high and many MPs now just want to get Brexit over with and move on. Mr. Johnson lost Saturday’s vote on a Brexit delay by only 322/306. Some MPs voted for the delay, not because they opposed the Brexit deal on the merits, but because they wanted a delay to force an extension request. Thus, a vote on the Brexit deal itself will do better than Saturday’s 322/306 vote on the delay.
Aside from an up-or-down vote on Brexit, however, there is also the possibility of a curve-ball from the amendment process. For example, Parliament may balk at being forced to consider a vote on such a momentous bill as Brexit in just three days and may force a further delay of the Brexit vote, even past October 31 once an extension is assured. An outside possibility is that Parliament could vote to make Mr. Johnson’s Brexit deal subject to a public referendum, as desired by the Labour Party.
Trump administration tries to keep market optimism alive for November US/China phase-one trade deal — The Trump administration on Monday tried to reinforce market hopes for a phase one US/Chinese trade deal. President Trump on Monday suggested that US/Chinese trade negotiations are progressing, and he noted that China has begun buying U.S. ag products, although he said he wants even higher purchases. White House advisor Kudlow on Monday said that President Trump may decide to scrap the 15% tariff on $160 billion of Chinese goods planned for Dec 15 if the trade negotiations continue to go well.
There were also some positive comments from the Chinese side. Chinese Vice Premier Liu, the leader of China’s trade teams, said on Saturday that there had been “substantial progress” with the U.S. to lay the foundation for a trade deal. The two sides are trying to finalize a phase one trade deal in time for signing by Presidents Trump and Xi at the APEC Summit in Chile on Nov 16-17.
US. existing home sales expected to edge lower but remain in strong shape — The consensus is for today’s Sep existing home sales report to show a small decline of -0.7% to 5.45 million, giving back about half of Aug’s +1.3% rise to 5.49 million. U.S. home sales are in good shape and reached a 1-1/2 year high of 5.49 million in August, where the series was only 2.7% below the 12-1/2 year high of 5.64 million posted in Nov 2017.
U.S. home sales continue to see support from generally firm consumer confidence and from low mortgage rates. The current 30-year mortgage rate of 3.69% is only 20 bp above September’s 3-year low of 3.49%
2-year T-note auction to yield near 1.80% — The Treasury today will sell $40 billion of 2-year T-notes. The Treasury will then continue this week’s $133 billion T-note package by selling $20 billion of 2-year floating-rate notes and $41 billion of 5-year T-notes on Wednesday and $32 billion of 7-year T-notes on Thursday. The benchmark 2-year T-note on Monday extended the 2-week upmove to edge to a new 5-week high of 1.803% and close the day +4.6 bp at 1.799%. The higher yield may attract increased investor interest.
The 12-auction averages for the 2-year are as follows: 2.57 bid cover ratio, $256 million in non-competitive bids to mostly retail investors, 2.6 bp tail to the median yield, 24.7 bp tail to the low yield, and 33% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 48.4% of the last twelve 2-year T-note auctions, which is far below the median of 59.6% for all recent coupon auctions.
