- Powell today will say economic outlook remains “highly uncertain” and he will likely call for more fiscal support
- House expected to vote as soon as today on CR without the farm aid demanded by President Trump
- U.S. home sales expected to post new 13-year high
- 2-year T-note auction to yield near 0.14%Â
Powell today will say economic outlook remains “highly uncertain” and he will likely call for more fiscal support — Fed Chair Powell and Treasury Secretary Mnuchin today will testify before the House Financial Services Committee to deliver their required quarterly report on the CARES Act that provided $2 trillion in pandemic aid.
Powell-Mnuchin will give a repeat performance on Thursday on the same topic before the Senate Banking Committee. Also, Mr. Powell on Wednesday will appear before the House select committee on the Covid pandemic to discuss the Fed’s response to the pandemic.
The Fed late Monday released the text of the comments that Mr. Powell will deliver today. According to that text, Mr. Powell will say, “Many economic indicators show marked improvement. Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.”
Mr. Powell is expected to call for more fiscal support to support the economic recovery, which is slowing as previous fiscal support measures fade. Consumers spent their pandemic checks a long time ago, and PPP money for small businesses also ran out a long time ago. The $600 per week unemployment bonus expired at the end of July and President Trump’s promise for a $300 per week bonus has been applied in a spotty manner at the state level and is due to run out of funding soon in any case.
Yet there appears to be little chance that Republicans and Democrats will resume the negotiations on a new stimulus bill, which have been deadlocked since early August. Any breakthrough in the negotiations seems even less likely now that Democrats and Republicans are locked in a vitriolic verbal war over replacing Justice Ginsburg.
Mr. Powell today seems unlikely to deliver any fresh news on monetary policy. The FOMC last week already effectively said that rates would remain near zero for the next three years. Also, Mr. Powell in his recent virtual Jackson Hole conference announced the Fed’s decision to adopt average inflation targeting where the Fed is now actively pursuing an above-2% inflation rate.
House expected to vote as soon as today on CR without the farm aid demanded by President Trump — The House yesterday released a continuing resolution (CR) to fund the government through Dec 11, and could vote on that CR as soon as today. However, the House version of the CR doesn’t contain President Trump’s demand for an additional $30 billion of farm aid, which sets up the possibility of a government shutdown on Oct 1.
Yet the odds seem to favor a resolution of the CR disagreement since no one wants to be blamed for a government shutdown just before the November 3 election. The White House late yesterday suggested that the farm aid might not be necessary in the CR and could be dealt with in other legislation. Also, Democrats may allow the $30 billion in farm aid to go through if they get something in return, such as a previous proposal for $2 billion in food assistance for children.
Speaker Pelosi said the House would proceed with the CR and would not use the threat of a government shutdown as a lever for the replacement of Justice Ginsburg on the Supreme Court. Congress must pass the CR by next Wed or there will be a government shutdown next Thu (Oct 1).
U.S. home sales expected to post new 13-year high — The consensus is for today’s Aug existing home sales report to show a +2.4% increase to 6.00 million, adding to July’s increase of +24.7% to 5.86 million. July’s home sales level of 5.86 million was a 13-year high and any increase today would represent a new 13-year high.
U.S. home sales are surging because many people are buying larger homes so they can work from home. Also, many people are buying homes to escape from urban areas or from multi-family units.
The low level of mortgage rates is also encouraging home purchases. The 30-year mortgage rate last week of 2.87% was only 1 bp above the previous week’s record low of 2.86%.
2-year T-note auction to yield near 0.14% — The Treasury today will sell $52 billion of 2-year T-notes. The size of today’s auction is up by $2 billion from Aug’s auction size of $50 billion and by a total of $12 billion from the $40 billion size that prevailed in 2019 and early 2020 before the budget deficit exploded due to pandemic expenses.
The Treasury will then continue this week’s $177 billion T-note package by selling $22 billion of floating-rate notes and $53 billion of 5-year T-notes on Wednesday, and $50 billion of 7-year T-notes on Thursday.
Today’s 2-year T-note issue was trading at 0.14% in when-issued trading late yesterday afternoon, which is near the middle of the very narrow 5 bp range of 0.11% to 0.16% seen since July 1.
The 12-auction averages for the 2-year are as follows: 2.59 bid cover ratio, 3.3 bp tail to the median yield, 26.8 bp tail to the low yield, and 30% taken at the high yield. The 2-year is the second-least popular coupon security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 51.7% of the last twelve 2-year T-note auctions, which is well below the median of 63.6% seen for all recent Treasury coupon auctions.
