- House expected to pass USMCA today
- Senate expected to approve 2020 spending bills
- BOE expected to leave policy unchanged today but a rate-cut may be necessary in late 2020
- U.S. existing home sales expected to remain strong
- U.S. leading indicators expected to remain weak
- U.S. current account deficit expected to narrow mildlyÂ
- 5-year TIPS auction
House expected to pass USMCA today — The House today is expected to vote to approve the USMCA. Senate Majority Leader McConnell has said that the Senate will then take up the USMCA after President Trump’s trial in January. The Senate is expected to pass the USMCA even though there is grumbling among some Republicans about some of the provisions required by House Democrats as their price for passing the bill.
The markets will be pleased if Congress in early 2020 gives its final approval to the USMCA since that would remove a large amount of uncertainty about US-Mexico-Canada trade relations. Final approval of the USMCA should also lead to a new round of business investment since businesses would then have some long-term certainty about the terms of their cross-border supply chains.
Senate expected to approve 2020 spending bills — The Senate today, or by tomorrow at the latest, is expected to give its final approval to the spending bills that are necessary to fund the U.S. government for the remainder of the 2020 fiscal year (through Sep 2020). The House passed those bills on Tuesday.
White House advisor Kellyanne Conway on Tuesday said that President Trump “is poised to sign” the spending bills. Washington must approve the spending bills by Friday’s expiration of the current continuing resolution, or there will be a U.S. government shutdown starting on Saturday. The odds of a Saturday shutdown appear to be near zero unless there is a last-minute poison pill that pops up.
BOE expected to leave policy unchanged today but a rate-cut may be necessary in late 2020 — The market is unanimously expecting the Bank of England at its meeting today to leave interest rates unchanged with the base rate at 0.75%, where it has been since August 2018.
The near-term UK economic outlook has improved somewhat since Prime Minister Johnson next month is expected to be able to easily push his Brexit withdrawal agreement through Parliament with the new majority he won in last week’s election. Passage of the Brexit withdrawal agreement by the January 31 deadline will usher in a smooth transition period in 2020 during which the UK will continue to operate under the EU single market.
However, Prime Minister Johnson this week upset the markets when he changed his Brexit withdrawal agreement to prevent an extension of the transition period beyond the current ending date of December 31, 2020. That means that the UK is subject to the threat of a no-deal Brexit at the end of 2020 if the UK and EU cannot reach a trade agreement by then.
UK business investment is now likely to continue to suffer due to the possibility of a no-deal Brexit at the end of 2020, leading to another difficult economic year for the UK. The consensus is for UK GDP to dip to +1.0% in 2020 from +1.3% this year and +1.4% last year. Due to expectations for Mr. Johnson’s brinkmanship in 2020, the markets are currently discounting a 60% chance of a -25 bp BOE rate cut by the end of 2020.
GBP/USD on Wednesday closed -0.40% lower, adding to Tuesday’s sharp drop of -1.51%. GBP/USD spiked to a 1-1/2 year high after last Thursday’s Conservative Party landslide victory in the general election. However, GBP/USD has more than given up last week’s gains after PM Johnson on Tuesday created the end-2020 no-deal Brexit risk.
U.S. existing home sales expected to remain strong — Today’s Nov existing home sales report is expected to show a small decline of -0.4% to 5.44 million, giving back a little of Oct’s +1.9% increase to 5.46 million. However, existing home sales are currently up +9% year-to-date and are only 3% below the 12-year high posted in Nov 2017.
Existing home sales this year have been boosted mainly by the sharp drop in mortgage rates. The 30-year mortgage rate is currently at 3.73%, which is down by a massive -121 bp from last November’s 8-3/4 year high of 4.94% and is only +24 bp above Sep’s 3-1/4 year low of 3.49%.
U.S. leading indicators expected to remain weak — Today’s Nov leading indicators index is expected to show a small increase of +0.1%, breaking the 3-month string of declines. The LEI remains in weak shape and fell to a 3-1/2 year low of +0.3% y/y in Sep-Oct, barely holding above zero.
U.S. current account deficit expected to narrow mildly — The consensus is for today’s Q3 current account deficit to narrow to a 5-quarter low of -$122.0 billion from Q2’s -$128.2 billion, leaving the deficit just mildly wider than the 8-quarter average of =$121.9. The U.S. current account deficit continues to be buffeted by the conflicting forces of U.S. tariffs and retaliatory tariffs.
5-year TIPS auction — The Treasury today will sell $15 billion of 5-year TIPS in a reopening of last month’s 1/8% 5-year TIPS of Nov 2024. The benchmark 5-year TIPS late yesterday closed at 0.04%, which is at the lower end of the narrow range seen in the past several months. The 12-auction averages for the 5-year TIPS are: 2.59 bid cover ratio, $45 million in non-competitive bids, 5.0 bp tail to the median yield, 14.0 bp tail to the low yield, and 48% taken at the high yield. The 5-year TIPS is the third most popular security among foreign investors and central banks behind the 30-year TIPS and 10-year TIPS. Indirect bidders have taken an average of 69.6% of the last twelve 5-year TIPS auctions, well above the median of 60.8% for all recent Treasury coupon auctions
