- Alaska’s Senate seat is called for Republicans, meaning Democrat’s last hope is the two Georgia run-offs on Jan 5
- U.S. core CPI expected steady
- U.S. unemployment claims expected to show continued improvement in U.S. labor market
- 30-year T-bond auction to yield near 1.74%
Alaska’s Senate seat is called for Republicans, meaning Democrat’s last hope is the two Georgia run-offs on Jan 5 — The North Carolina and Alaska Senate seats this week were both called for Republicans, meaning that the Senate count is now 50 Republicans versus 48 Democrats.
The only way that Democrats can now gain control of the Senate is by winning both Senate seats in the two Georgia run-off elections on January 5. The Senate count would then be 50-50, with Vice President-Elect Harris breaking the tie in favor of the Democrats.
The betting odds for a double win by the Democratic Senate candidates in Georgia, and thus Democratic control of the Senate, are low at 21%, according to PredictIt.org. The general thinking among political pundits is that the two progressive Democratic candidates face an uphill battle in traditionally-red Georgia, particularly since Republicans usually have much better turnout than Democrats in special elections. However, the Georgia Senate run-offs are the Alamo for the Democrats for this election cycle. Democrats at a national level are expected to throw everything they have at the two run-off elections.
In the unlikely event that Democrats take both of the Georgia Senate seats, then the markets would have to reverse their current working assumption that there will be divided government over at least the next two years. If Democrats gain control of Washington, then they will be able to proceed with much of their agenda regarding stimulus bills, clean energy/infrastructure spending, and tax hikes.
However, those bills would be hamstrung by having to fit into the budget reconciliation process, which allows bills to pass by a majority vote and avoid the 60-vote barrier that is necessary to overcome a filibuster. That is because Democratic West Virginia Senator Manchin earlier this week said he would not vote to do away with the filibuster if Democrats get to 50-50 in the Senate. That would mean that Senate Republicans would have the ability to filibuster any Democratic bill that doesn’t qualify for the budget reconciliation process, thus limiting the sweep of Democratic legislation.
U.S. core CPI expected steady — The consensus is for today’s Oct CPI to ease slightly to +1.3% y/y from Sep’s +1.4%. However, the Oct core CPI is expected to be unchanged from Sep’s +1.7% y/y.
The core CPI has so far rebounded up to the +1.7% level seen in Aug-Sep from May’s 10-year low of +1.2% y/y, but remains well below the pre-pandemic level of +2.4% seen in February.
Inflation is expected to remain subdued for at least for the next year as the global economy struggles to emerge from the pandemic. Meanwhile, the current low level of inflation is dovish for Fed policy since the Fed has adopted its average-inflation policy where the Fed says it will not raise interest rates until inflation is on its way above the +2% inflation target.
Inflation expectations also remain subdued, although at the upper end of the recent range. The 10-year breakeven inflation expectations rate this week has risen sharply by +10 bp to 1.75% due to the positive vaccine news, which boosted crude oil prices and expectations for stronger economic growth next year. The current breakeven rate of 1.75% is near the early-September 10-month high of 1.82% but remains comfortably below the Fed’s +2.0% inflation target.
U.S. unemployment claims expected to show continued improvement in U.S. labor market — The consensus is for today’s weekly initial unemployment claims report to show a -17,000 decline to 734,000, adding to last week’s -7,000 decline to 751,000. Meanwhile, continuing claims are expected to fall -385,000 to 6.900 million, adding to last week’s -538,000 decline to 7.285 million.
Unemployment claims have fallen steadily in the past several months but are still well above pre-pandemic levels, illustrating that the U.S. labor market still has a long way to go before fully recovering the pandemic losses. Initial claims are still 534,000 above February’s pre-pandemic levels, while continuing claims are still 5.6 million above the pre-pandemic level.
30-year T-bond auction to yield near 1.74% — The Treasury today will sell $27 billion of new 30-year T-bonds, thus concluding this week’s $122 billion quarterly refunding operation. The $27 billion size of today’s 30-year bond auction is up by $1 billion from August’s $26 billion auction and is up by a total of $8 billion from the $19 billion size that prevailed in 2019 and early 2020 before the U.S. budget deficit exploded due to pandemic expenses.
Today’s 30-year bond issue was most recently quoted at 1.74% in when-issued trading. The 30-year bond yield is just slightly below Monday’s 5-month high of 1.77%, which was posted after the positive Pfizer vaccine news led to ideas that the U.S. economy might be able to start returning to normal by mid-2021.
The 12-auction averages for the 30-year are as follows: 2.35 bid cover ratio, $6 million in non-competitive bids, 5.9 bp tail to the median yield, 74.4 bp tail to the low yield, and 39% 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 63.9% of the last twelve 30-year bond auctions, which nearly matches the median of 63.8% for all recent Treasury coupon auctions.
