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  • Powell testifies as fed funds futures turn negative again
  • U.S. consumer confidence expected to rebound higher
  • U.S. home prices expected to remain strong
  • US-China tensions remain high after Hong Kong law is approved

Powell testifies as fed funds futures turn negative again
 — Fed Chair Powell and Treasury Secretary Mnuchin will testify today before the House Financial Services Committee regarding the government’s efforts to address the economic debacle caused by the pandemic.

The Fed yesterday afternoon released the text of Mr. Powell’s speech that he will read today before moving on to Q&A.  The release of Mr. Powell’s speech yesterday had little market impact.

Mr. Powell will say today that the U.S. economy has entered a recovery stage “sooner than expected.”  However, he also warns that, “While the bounceback in economic activity is welcome, it also presents new challenges–notably, the need to keep the virus in check.”

He will also imply that a full recovery cannot be expected until there is an effective and widely available vaccine.  He says, “Output and employment remain far below their pre-pandemic levels.  The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.  A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”

Meanwhile, the Fed announced on Monday that the last of its nine emergency specialty lending programs is now open for business.  The Fed said that the Primary Corporate Credit Facility is ready to buy primary corporate bonds.  The Fed said that the pricing will be specific to the corporate issuer and will be affected by credit quality and market conditions.

The Fed on Sunday released a list of the securities it has purchased under its Secondary Market Corporate Credit Facility.  The Fed, as of last Tuesday, had purchased $8.71 billion of ETFs and corporate bonds.  Bloomberg reported Monday that the Fed in just two months has become the third-largest holder of the $54 billion iShares iBoxx Investment Grade Corporate Bond ETF (LQD), the second-largest holder of the $29 billion Vanguard Short-Term Corporate Bond ETF (VCSH), and the fifth-largest holder of the $36 billion Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

The Fed started out buying corporate bond ETFs but is now moving towards buying individual corporate bonds that are listed in a custom index of some 800 issuers that the Fed developed along with its Wall Street advisors.  The Fed’s custom index is much broader than the corporate bond ETFs and will therefore allow the Fed to provide support to a much wider range of corporations than if it stuck to buying just ETFs.

The resurgence of the coronavirus pandemic in the U.S. in recent days has caused market expectations for the funds rate to turn slightly negative again.  Specifically, the federal funds futures contracts from late-2021 through early-2022 have turned slightly negative by up to -3 bp.

Previously, those futures contracts were trading at or above 0.00% as the market finally succumbed to the insistence by Fed Chair Powell and his fellow Fed officials that the Fed would never adopt negative interest rates.  Still, the Fed could conceivably be forced into negative interest rates (as have the ECB and BOJ) if the U.S. economy should suddenly take a sharp turn for the worse.

U.S. consumer confidence expected to rebound higher — The consensus is for today’s June Conference Board U.S.  consumer confidence index to show a +3.9 point increase to 90.5, adding to May’s +0.9 point increase to 86.6.  The index fell to a 6-year low of 85.7 in April before rebounding slightly higher by +0.9 point in May.  Expectations for an increase in today’s report are based in part on the already-released news that the University of Michigan’s U.S. consumer sentiment index in June rose by +6.6 points to 78.9.

U.S. consumer sentiment is getting a boost from the reopening of the U.S. economy and the impressive performance of the stock market.  However, consumers remain nervous about the future with the pandemic in the U.S. at new highs and with millions of Americans still unemployed.

U.S. home prices expected to remain strong — The consensus is for today’s Apr S&P CoreLogic composite-20 home price index to show a solid gain of +0.5% m/m and +3.9% y/y, matching March’s report.

The U.S. housing market during the pandemic has so far held up remarkably well, in part because there appears to be a surge by people buying bigger homes so they can work from home, or who want to move away from multi-family residences.  However, the tight housing market is likely to end in coming months as foreclosed homes start to hit the market.

US-China tensions remain high after Hong Kong law is approved — China’s legislature early Tuesday approved the Hong Kong security law, which could spark new U.S. sanctions talk.  President Trump has already announced the U.S. plans to withdraw Hong Kong’s special trade status, but there have been few details thus far.  US Commerce Secretary Wilbur Ross late Monday announced measures to make it more difficult for Hong Kong to import sensitive technology from the U.S.

U.S. Secretary of State Pompeo last Friday said the U.S. will impose visa restrictions on Chinese Communist Party officials involved with tightening restrictions on Hong Kong, although he did not name those officials or provide further details.  China returned the favor on Monday by saying that it would slap visa restrictions on Americans who interfere in China’s affairs, although it didn’t announce any names either.

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