- Fed Chair Powell is expected to discuss Fed’s long-term framework policy review
- U.S. unemployment claims expected to improve
- U.S. Q2 GDP expected to be revised slightly stronger
- 7-year T-note auction to yield near 0.49%
Fed Chair Powell is expected to discuss Fed’s long-term framework policy review — Fed Chair Powell in his remarks today before the Fed’s virtual Jackson Hole policy conference is expected to present the findings of the Fed’s long-term policy framework review, which took 1-1/2 years to complete.
The outcome is expected to be a focus on the Fed’s +2.0% inflation target as a symmetrical goal, meaning the Fed may actively seek to have temporary periods of inflation above 2.0% so that inflation averages about +2.0%. Inflation has persistently fallen short of the Fed’s +2.0% target since it was set in 2012, leading market participants to behave as if the Fed’s target is more of a ceiling than a symmetrical target.
If the Fed explicitly adopts an inflation averaging target of +2.0%, then the result will be a more dovish Fed policy. In the future, the Fed may not even start raising interest rates until inflation is above 2.0%. That could mean it will be a long time until the Fed raises rates under the current circumstances, where the U.S. economy is not expected to regain its 1H-2020 GDP losses until 2022.
The federal funds rate futures market illustrates that the markets are not expecting a Fed rate hike for at least the next two years. The Eurodollar futures market, which has contracts that trade much farther out into the future, indicates that the market is not expecting a rate hike until sometime in 2023.
Fed Chair Powell today may also comment on how QE figures into its new policy framework. The Fed is currently pursuing an open-ended QE program of $120 billion per month. Since early this year when the pandemic started, the Fed has boosted its balance sheet by a total of $2.85 trillion (+69%), bringing the balance to its current level of $7.01 trillion. The Fed’s balance sheet now equals 32% of U.S. GDP, up from 19% of GDP early this year before the pandemic started.
U.S. unemployment claims expected to improve — Today’s weekly unemployment claims report is expected to show a continued, but slow, improvement in the U.S. labor market.
The consensus is for today’s initial claims report to show a -106,000 decline to 1.000 million, reversing part of last week’s +135,000 increase to 1.106 million. Continuing claims are expected to fall by -444,000 to 14.400 million, adding to last week’s -636,000 decline to 14.844 million.
Initial claims are still 889,000 higher than the pre-pandemic level seen at the end of February. Continuing claims are up by 13,145 million since the end of February, illustrating that more than 13 million people are still on the unemployment rolls due to the pandemic.
U.S. Q2 GDP expected to be revised slightly stronger — Today’s Q2 GDP is expected to be revised stronger to -32.5% (q/q annualized) from the last estimate of -32.9%. Today’s Q2 personal consumption report is expected to be left unrevised at -34.6% (q/q annualized).
U.S. GDP in the first half of 2020 fell by -1.3% q/q in Q1 (-5.0% q/q annualized) and -9.5% q/q (-32.9% q/q annualized) in Q2. That led to an overall peak-to-trough plunge of -10.8% in the first half of 2020.
That -10.8% drop in GDP seen in the first half of 2020 was more than twice the peak-to-trough decline of -4.0% seen during the Great Recession in 2007/09. However, it was less than half of the -26% decline seen during the Great Depression.
Looking ahead, the market is expecting a partial recovery of GDP in the second half of 2020. The consensus is for a rise of +20.1% q/q annualized (+4.7% q/q) in Q3 and +6.1% q/q annualized (+1.5% q/q) in Q4. However, the second-half recovery is not expected to be strong enough to overcome the drop in the first half, and the consensus is for GDP growth in calendar year 2020 to show an overall decline of -5.0%. The market is then expecting GDP to rise by +3.7% in 2021, still not fully offsetting the overall GDP plunge seen in 2020.
7-year T-note auction to yield near 0.49% — The Treasury today will sell $22 billion of 2-year floating-rate notes and $47 billion of 7-year T-notes, concluding this week’s massive $170 billion T-note package.
The $47 billion size of today’s 7-year auction is up by $3 billion from July’s auction size of $44 billion and is up by a total of $15 billion (+47%) from the $32 billion size that prevailed in 2019 before the Treasury was hit by pandemic expenses.
The benchmark 7-year T-note yield yesterday was trading at 0.49%, which is just mildly below the 1-3/4 month high of 0.53% posted in mid-August. Yields have been pushed higher by the drop in U.S. Covid infections, which is positive for the economy but hawkish for Fed policy. Still, the market is not expecting a Fed rate hike for at least the next two years.
The 12-auction averages for the 7-year are: 2.47 bid cover ratio, $7 mln in non-competitive bids, 5.2 bp tail to the median yield, 46.4 bp tail to the low yield, and 66% taken at the high yield. The 5-year typically sees average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.5% of the last twelve 7-year T-note auctions, which matches the median of 62.5% for all recent Treasury coupon auctions.
