- T-note yields drop sharply as market now fully prices in a Fed rate cut for this year
- U.S. housing starts expected to edge higher on lower mortgage rates
- U.S. home prices expected to continue to rise
- March U.S. consumer confidence expected to add to Feb’s recovery
- Brexit indicative votes now expected Wednesday
T-note yields drop sharply as market now fully prices in a Fed rate cut for this year — The 10-year T-note yield on Tuesday fell to a new 14-month low of 2.375% and closed the day down -4.1 bp at 2.398%. The 10-year T-note yield has now plunged by -21 bp just since last week’s FOMC meeting in which the Fed zeroed-out its rate forecast for 2019 and announced an earlier-than-expected end of its balance sheet reduction plan. In addition to the dovish Fed, the 10-year T-note yield has fallen after last Friday’s weak European and U.S. PMI reports and the increased talk about a recession with the inversion of the U.S. yield curve.
The 3-month/10-year Treasury yield curve spread on Monday fell farther into negative territory to -4.4 bp, representing the most inverted spread since 2007. By contrast, the 2s10s spread (10-year yield minus the 2-year yield) rose by +3.5 bp on Monday to 15.7 bp from last Friday’s 3-month low of 12.2 bp (which in turn was just 1.3 bp above last Dec’s 12-year low of 10.9 bp). The 2s10s spread rose due to Monday’s sharp -7.5 bp decline in the 2-year yield, which outpaced the -4.1 bp decline in the 10-year yield.
The market’s view of Fed policy turned even more dovish on Monday as the Dec 2019 federal funds futures contract (on a yield basis) fell sharply by another -9 bp to 2.14%, reflecting 100% expectations for a -25 bp rate cut by year-end. The Dec 2020 fed funds contract fell by -11.5 bp to 1.795%, reflecting expectations for a total of 2.4 rate cuts by the end of 2020.
U.S. housing starts expected to edge higher on lower mortgage rates — The consensus is for today’s Feb housing starts report to show a -1.4% decline to 1.213 million, giving back a small part of Jan’s +18.6% surge to 1.230 million. Housing starts in December plunged by -14.0% to a 3-3/4 year low of 1.037 million units but then more than regained that loss with an +18.6% increase in November.
The housing sector in early 2018 is rebounding higher as consumer sentiment improved due to the upward rebound in stocks and due to the sharp drop in mortgage rates. Feb existing home sales rose by +11.8% in February to a 1-year high of 5.51%. The 30-year mortgage rate last week fell to a 14-month low of 4.28%, which was down by -66 bp from the 8-year high of 4.94% posted just several months ago in November 2018.
U.S. home prices expected to continue to rise — The market is expecting today’s U.S. home price reports to both show continued increases. Specifically, the consensus is for today’s Jan FHFA house price index to show an increase of +0.4% m/m (after Dec’s +0.3%) and the S&P CoreLogic composite-20 home price index to show an increase of +0.3% m/m and +3.8% y/y (after Dec’s +0.2% m/m and +4.2% y/y).
U.S. home prices showed strength in late 2018 despite the sharp stock market correction and weak home sales. On a year-on-year basis, the FHFA index in December showed an increase of +5.6% y/y and the Composite-20 index showed an increase of +4.2% y/y. U.S. home prices are expected to see continued gains in early 2019 due to the +11.8% rise in Feb home sales and the sharp -66 bp drop in the 30-year mortgage rate seen in the past four months to last week’s 14-month low of 4.28%.
March U.S. consumer confidence expected to add to Feb’s recovery — Today’s March Conference Board U.S. consumer confidence index is expected to show an increase of +1.1 points to 132.5, adding to Feb’s sharp +9.7 increase to 131.4. Before Feb’s upward rebound, the index fell sharply from last October’s 18-year high of 137.90 to January’s 1-1/2 year low of 121.7.
The sharp Oct-Jan drop in consumer confidence was due to the steep sell-off seen in the U.S. stock market in late 2018 and the slowing global and U.S. economies. However, U.S. consumer confidence started recovering in February thanks to the (1) upward rebound in the U.S. stock market in Q1, (2) continued strength in the labor market, (3) the Fed’s dovish shift to a neutral policy, and (4) the sharp drop in interest rates including mortgage rates.
2-year T-note auction — The Treasury today will sell $40 billion of 2-year T-notes. The Treasury will then continue this week’s $131 billion T-note package by selling $18 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 2-year T-note yield on Monday fell sharply by -7.5 bp to a new 1-year low of 2.24%. The 12-auction averages for the 2-year are: 2.67 bid cover ratio, $362 million in non-competitive bids, 3.0 bp tail to the median yield, 25.4 bp tail to the low yield, 48% taken at the high yield, and 44.3% taken by indirect bidders (far below the median of 61.3% for all recent Treasury coupon auctions).
Brexit indicative votes now expected Wednesday — The UK Parliament on Monday night voted to allow a series of non-binding indicative votes on Wednesday considering a range of Brexit Plan B options such as a second public vote, staying in the EU’s customs union, or canceling Brexit altogether. Prime Minister May on Monday indicated that she will delay a third vote on her Brexit separation plan since the plan does not yet have enough support to pass. The European Commission yesterday issued a statement warning that a no-deal Brexit is “increasingly likely.”
If a Brexit separation agreement is approved by the new deadline of April 12, then the deadline would be extended until May 22 to give Parliament time to pass the enabling legislation. If Parliament does not approve a Brexit separation agreement by April 12, however, then the UK faces either a no-deal ejection from the EU on April 12 or the need to request what will likely be a long Brexit deadline extension.
