- Stimulus bill talks remain dead but airline relief is possible
- FOMC minutes fuel talk that the Fed may rely more on QE for stimulus after the election
- U.S. unemployment claims expected to continue to decline even as U.S. labor market remains in very bad shape
- 30-year T-bond auction to yield near 1.59%
Stimulus bill talks remain dead but airline relief is possible — The U.S. stock market on Wednesday found support after President Trump late Tuesday called for Democrats to support a $160 billion stimulus bill that would support airlines and small businesses and deliver a new $1200 stimulus check to many Americans. That announcement came after Mr. Trump received heavily political flak for announcing earlier in the day that he had ended stimulus talks with Democrats.
House Speaker Pelosi on Wednesday sounded open to an airline relief bill. She noted on a phone call with Treasury Secretary Mnuchin on Wednesday that the House already has a $28 billion airline relief bill ready at the committee level but that Republicans last Friday blocked the bill from moving forward. The Republican Senate also has an airline relief bill ready at the committee level that would provide relief using unused aid from previous bills. Airline stocks on Wednesday rallied sharply with United Airlines up +4.29% and American Airlines up +4.30%.
However, the talks on an overall pandemic bill still appear to be dead, at least until after the election. White House chief of staff Meadows on Wednesday morning told reporters that, “The stimulus negotiations are off.” White House economic advisor Kudlow on Wednesday also suggested that the stimulus talks are dead when he said, “We’ve only got four weeks to the election, and we have a justice of the Supreme Court to get passed. It’s too close to the election — not enough time to get stuff done at this stage in the game. What the president was saying is, ‘We’re too far apart for a gigantic bill.'”
Yet the stock market on Wednesday rallied by +1.74%, more than overcoming Tuesday’s -1.40% sell-off. Since the chances are very low for a major stimulus bill before the election, the stock market seems to be looking beyond the election to ideas that Democrats might pass a big stimulus bill, if the betting odds pan out and Democrats take full control of Washington.
FOMC minutes fuel talk that the Fed may rely more on QE for stimulus after the election — Yesterday’s minutes from the Sep 15-16 FOMC meeting were largely in line with market expectations, but fueled some talk that the Fed might turn to QE for more stimulus support after the election. The FOMC said it did not discuss QE in detail at the Sep 15-16 meeting, but that “some participants also noted that in future meetings it would be appropriate to further assess and communicate how the committee’s asset-purchase program could best support” the Fed’s dual-mandate objectives.
The FOMC minutes followed a Bloomberg news story on Wednesday highlighting a paper by a top Fed economist, who argued that much more QE is needed to offset the zero bound on interest rates. Michael Kiley, a senior Fed economist and deputy director of the Fed’s financial stability division, argued in his paper that the fact that interest rates are already near zero means that the Fed needs to rely much more heavily on QE. He argues that about $6.5 trillion of bond purchases are required to offset the fact that interest rates cannot be cut in an effective way below zero, which implies that another $3.5 trillion of QE is needed to add to the $3 trillion in purchases already made.
While no Fed officials have yet voiced support for expanding the Fed’s current $120 billion per month QE program, there continues to be strong speculation that the FOMC as soon as its next meeting on Nov 4-5 may start considering whether to shift the maturity of its purchases more towards the longer end of the yield curve to ensure that long-term yields remain low.
The idea of the Fed trying to cap long-term yields has become increasingly topical in the past week, with the 10-year T-note yield on Wednesday rising to a 4-month high of 0.79%. Treasury yields have been rising since last Tuesday’s Trump-Biden debate when the betting odds turned more strongly in favor of Democrats sweeping Washington in the coming election. The market’s thinking is that a Democratic sweep could produce a big fiscal stimulus bill in early 2021, thus boosting the economy and putting upward pressure on interest rates.
U.S. unemployment claims expected to continue to decline even as U.S. labor market remains in very bad shape — The consensus is for today’s weekly initial unemployment claims report to show a -17,000 decline to 820,000, adding to last week’s -36,000 decline to 837,000. Meanwhile, continuing claims are expected to fall by -367,000 to 11.400 million, adding to last week’s -980,000 to 11.767 million.
While unemployment claims are expected to decline today, the U.S. labor market remains in very bad shape. There are still 620,000 more people filing initial unemployment claims each week than before the pandemic. Moreover, there are currently 10.1 million more people on the unemployment rolls than there were before the pandemic.
30-year T-bond auction to yield near 1.59% — The Treasury today will conclude this week’s $110 billion auction package by selling $23 billion of 10-year T-notes in the second and final reopening of the 1-3/8% 30-year T-bond of Aug 2050. The benchmark 30-year bond yield yesterday closed the day at 1.59%, just below Tuesday’s 4-month high of 1.61%. The 12-auction averages for the 30-year are as follows: 2.35 bid cover ratio, $6 million in non-competitive bids, 5.8 bp tail to the median yield, 76.5 bp tail to the low yield, 43% taken at the high yield, and 63.6% taken by indirect bidders (equaling the median of 63.6% for all recent coupon auctions).