- Unemployment claims report will be watched to see if recovery is stalling
- 30-year T-bond auction to yield near 1.40%
- U.S. budget deficit surges to record high
Unemployment claims report will be watched to see if recovery is stalling — The markets will be closely watching today’s unemployments claims data to see whether the recent gains in the U.S. labor market are starting to slow down. There was a surge in rehiring in recent weeks, but that could slow due to the worsening of the pandemic in many states, some of which have been forced to slow or even roll back their economic reopenings.
The consensus is for today’s weekly initial unemployment claims report to show a -52,000 decline to 1.375 million, adding to last week’s -55,000 decline to 1.427 million. Meanwhile, continuing claims are expected to fall sharply by -540,000 to 18.75 million following last week’s rise of +59,000 to 19.29 million.
The unemployment claims data continues to churn. Many employees are being called back to work. However, other people are being laid off for a second time as states roll back their economic reopenings. Also, some employees are being laid off for the first time as PPP money runs out or as businesses simply run out of cash and give up.
Although the continuing claims series has fallen from its peak, there are still 17.6 million more people on the unemployment rolls than there were before the pandemic. That represents 11% of pre-pandemic U.S. workforce (as defined by the household survey).
Atlanta Fed President Bostic on Wednesday delivered downbeat comments on the economy for the second consecutive day, saying that the U.S. recovery seems to be leveling off. He said, “The energy in terms of reopening for businesses and for just general activity is starting to level off. This is something we are definitely going to watch extremely closely.”
30-year T-bond auction to yield near 1.40% — The Treasury today will conclude this week’s $94 billion coupon package by selling $19 billion of 30-year T-bonds. Today’s auction will be the second and final reopening of the 1-1/4% 30-year T-bond of May 2050 that the Treasury first sold in May.
Today’s 30-year T-bond issue was trading at 1.40% in when-issued trading late yesterday afternoon. The 30-year T-bond yield is trading near the middle of its narrow 3-month range between 1.12% (on April 21) and 1.76% (on June 5).
There was strong demand for yesterday’s 10-year T-note auction, which should bode well for today’s 30-year auction. Yesterday’s 10-year T-note auction saw a strong bid-cover ratio of 2.62, well above its 12-auction average of 2.45. Also, there was strong demand for foreign buyers with indirect bidders taking 63.4% of the auction, above the 12-auction average of 60.0%.
Bullish factors for 30-year T-bond prices include (1) the worsening pandemic statistics and fears that the recovery is leveling off, (2) the Fed’s peg of short-term rates near zero, (3) the tepid inflation outlook, (4) safe-haven demand, and (5) investors’ reach for the higher yield available on the 30-year T-bond relative to shorter-term Treasury securities. Bearish factors include (1) continued hopes for a strong economic recovery, particularly if an effective vaccine becomes widely available, and (2) the Treasury’s massive debt sales to fund pandemic expenses and the federal government’s regular deficit spending.
The 12-auction averages for the 30-year are as follows: 2.32 bid cover ratio, $7 million in non-competitive bids, 6.1 bp tail to the median yield, 78.1 bp tail to the low yield, and 43% taken at the high yield. The 30-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.7% of the last twelve 30-year T-bond auctions, exactly matching the median of 61.7% for all recent Treasury coupon auctions.
U.S. budget deficit surges to record high — The federal budget deficit in June hit a record high of $863 billion, which was more than 100 times the $8 billion deficit in June 2019, according to the CBO.
The June report brought the deficit for the first nine months of the 2020 fiscal year (ending in Sep 2020) to $2.7 trillion. The deficit for the 2020 fiscal year as a whole is on track to hit $3.8 trillion, which would be more than double the current record of $1.4 trillion that was set in 2009 at the height of the Great Recession. Moreover, Congress is considering another pandemic stimulus package that could cost another $1 trillion.
The national debt has now risen by $3.1 trillion (+13%) just since February to post a record high of $26.4 trillion. The national debt has risen by $6.5 trillion (33%) since President Trump took office in January 2017. The national debt has more than tripled since 2006 due to chronic overspending, tax cuts, and bailout expenses.
The only good news about the national debt is that the debt ceiling isn’t causing political strife or threats of a Treasury default at present. Congress suspended the debt ceiling until July 2021, which will be six months into the new presidential term. However, the debt ceiling could be a serious problem again in autumn 2021 when the U.S. Treasury will once again face the threat of a sovereign debt default if political posturing prevents a timely debt ceiling hike.
