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  • FOMC minutes expected to be uneventful
  • Kudlow says China trade deal is not under threat
  • New 20-year T-bond auction helps Treasury to fund pandemic expenses at low yields
  • GBP could be in for rough sledding since Brexit is looking grim


FOMC minutes expected to be uneventful
 — Today’s minutes from the April 28-29 FOMC meeting are not expected to provide much fresh information for the markets.  The FOMC at that meeting left its policy unchanged and also left unchanged most of the key language in its post-meeting statement.  The FOMC did not provide any new interest rate guidance or set any parameters on its unlimited QE program.

The markets are not expecting any policy changes at the next FOMC meeting in three weeks on June 9-10.  The FOMC at that meeting will provide a new set of macroeconomic forecasts.  However, the FOMC may decide to drop its Fed-dot forecasts for the funds rate considering the current uncertainty.  The federal funds futures market shows that the markets are not expecting any change in the Fed’s fund rate target for at least the next three years.

Kudlow says China trade deal is not under threat — White House economic advisor Kudlow late Tuesday afternoon said that the US/China trade deal is “absolutely not” under threat even though “China’s made a lot of mistakes regarding the virus.”  The markets remain on the alert for the possibility that President Trump might threaten China with new tariffs or threaten to cancel the phase-one trade deal as punishment for China’s actions on the coronavirus pandemic.

As part of the US/China pandemic tensions, Mr. Trump has so far halted the move of $50 billion of U.S. pension money into tracking an MSCI emerging market index that includes Chinese stocks.  The Trump administration last Friday also clamped down further on the ability of global chip companies to sell chips to Huawei.  As retaliation for the U.S. move on Huawei, China has suggested it may put some U.S. companies such as Apple on its “unreliable entities” list, implying investigations and restrictions on those companies.

New 20-year T-bond auction helps Treasury to fund pandemic expenses at low yields — The Treasury today will sell $20 billion of 20-year T-bonds in its first sale of 20-year T-bonds since 1986.  Today’s 20-year T-bond was trading at 1.19% in when-issued trading late yesterday afternoon, representing a hefty 50 bp yield pickup over the benchmark 10-year T-note yield of 0.69%.  The 20-year is trading 22 bp below the benchmark 30-year T-bond yield of 1.41%.

Today’s 20-year T-bond auction is expected to see solid demand, although there could be some volatility due to uncertainty about where its yield should be trading and exactly what investor groups will show up for the new security.  The Treasury was finally pushed over the edge into reviving the 20-year T-bond after the pandemic caused yields to crater and the Treasury’s funding requirements to soar.  The Treasury can therefore kill two birds with one stone by using the 20-year T-bond to lock in low interest rates for 20 years while adding another vehicle to help fund its massive borrowing requirement.

The Treasury two weeks ago said that it will have to sell a net $3 trillion worth of Treasury securities just in Q2 in order to cover the massive budget deficit.  The Treasury said it expects to sell another $677 billion of net new debt in Q3.  The expected $3 trillion surge in the national debt in Q2 would push the national debt from the current level of $25 trillion up to a new record high of $28 trillion by the end of September.  The new debt level would be up by about $8 trillion (+40%) since President Trump took office due to the combination of long-term and chronic overspending, the 2018 tax cuts, and now the pandemic debacle.

GBP could be in for rough sledding since Brexit is looking grim — The Brexit situation is looking grim as the UK and EU are on different planets about what they want in a final deal.  The UK yesterday released the text of its proposed post-Brexit tariff regime.

The UK is trying to get a Canadian-style free trade agreement and no obligation to comply with any EU rules or regulations.  The EU, by contrast, is saying that the UK will only get a Canadian-style free trade agreement if they agree to comply with many EU regulations and open their waters to EU fishing, among other requirements.  The EU is afraid of allowing a “Singapore on Thames” on their door step that has carte blanche to compete against EU companies without following the rules and regulations that EU companies must follow.

There is only one more round of EU/UK trade talks before a high-level political meeting in June to consider the status of the talks.  The UK has a deadline of June to request an extension of the transition beyond the end of 2020.  However, Prime Minister Johnson has insisted the UK will not request an extension if there is no trade deal, in which case the UK would leave the EU’s single market at the end of 2020 and revert to default WTO tariffs.

GBP/USD remains generally weak due to the end-2020 Brexit risks and the fact that the UK has been hit hard by the coronavirus pandemic.  GBP/USD is likely to be in for continued rough sledding in coming weeks as the UK and EU insist on their highly divergent positions and as acrimony grows between UK and EU officials.

In normal times, the markets would be more worried about the lack of progress on Brexit.  However, due to the massive problems caused by the pandemic, Brexit has fallen towards the bottom of the list of the market’s worries.  Also, the markets know that the two sides are still posturing and will engage in many more months of brinkmanship before likely reaching a deal at the last minute.

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