- FOMC stays dovish but disappoints some
- Negotiations slow on spending and pandemic aid bills
- U.S. unemployment claims expected to resume improvement
- U.S. housing starts expected to level off
FOMC stays dovish but disappoints some — The FOMC on Thursday promised to keep its QE program intact for a long while, but the T-note market was nevertheless a bit disappointed that the FOMC did not indicate an inclination to boost QE in response to the pandemic surge or shift some of its QE buying towards the longer end of the Treasury curve.
The Fed provided a very vague hint on how long its QE program might last by saying that it intends to continue its $120 billion QE program “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” That was a bit more descriptive than the Fed’s former language that it would continue its program “in coming months.”
The 10-year T-note yield initially rose by about 3 bp to the 0.945% level on disappointment that the Fed would not be buying more longer-term Treasury notes. However, the T-note yield then fell back and closed the day up +0.8 bp at 0.916% after the market decided that the overall tone of the FOMC meeting was sufficiently dovish.
The federal funds futures curve and the Eurodollar futures curve both closed the day unchanged, indicating that the FOMC meeting produced no change in market expectations for the future path of Fed interest rates. The new Fed-dot plot was virtually unchanged, with the same median expectation for no rate changes for at least the next three years.
The federal funds futures curve is flat as far out as it trades, i.e., late 2022, indicating expectations for no rate hike at least through late 2022. The Eurodollar futures curve, which trades much farther out into the future, indicates that the market is not expecting the first rate hike until mid-2023. The market is then expecting a fairly steady rise of about one 25 bp rate hike per year, leading to an overall +150 bp rate hike by 2029.
Some market participants yesterday were hoping that Fed Chair Powell would show some willingness to boost its QE program because of the renewed economic damage being caused by the pandemic surge. However, the Fed is undoubtedly hoping that it can hold on with its current policy for the next few months until the pandemic starts to ease in spring due to seasonal relief and the beneficial effects from an increasing number of people receiving vaccines.
The market is generally expecting weak U.S. GDP in the first half of 2021. However, the economy should start to improve substantially in the second half of 2021 as the pandemic dies out and as things return to normal in 2022. There could be an economic boom in 2022 as people start spending money again and splurge on travel and leisure activities after two years of pandemic pain.
The possibility of an economic boom in 2022 brings up the possibility that the Fed could be forced into starting rate hikes sooner than the market currently expects.
Negotiations slow on spending and pandemic aid bills — Political leaders are still expecting to reach an omnibus spending bill and a pandemic aid bill before leaving for their holiday break. However, there were a myriad of issues to address on Wednesday, and progress slowed to a crawl. Congress may need to work into the weekend and possibly early next week to finalize the bills and complete the votes. That would necessitate a short continuing resolution to prevent a government shutdown after the current CR expires on Friday.
Senate Majority Leader McConnell on Wednesday told his caucus to be prepared to stay in Washington through this weekend to complete the bills.
The focus is now on a $900 billion pandemic aid bill that would contain the key elements, such as unemployment benefits and PPP funding, and also contain a stimulus check of around $600-700 for people earning less than a certain amount of money. It appears that both Republicans and Democrats have given up on the idea of getting a Covid liability shield and state-local government aid and will leave that debate until early 2021.
U.S. unemployment claims expected to resume improvement — The consensus is for today’s weekly unemployment claims report to show declines, which would show the labor market is again moving in the right direction. Last week’s claims report indicated a weaker labor market due to the large +137,000 rise in initial claims and +230,000 rise in continuing claims.
The consensus is for today’s initial claims report to fall -38,000 to 815,000, reversing part of last week’s +137,000 rise to 853,000. Meanwhile, continuing claims are expected to fall -57,000 to 5.700 million, reversing part of last week’s +230,000 rise to 5.757 million. The U.S. labor market is still in poor shape, with initial claims 636,000 higher than February’s pre-pandemic level and with continuing claims 4.1 million above the pre-pandemic level.
U.S. housing starts expected to level off — The consensus is for today’s Nov housing starts to show a small +0.3% increase to 1.535 million, leveling off after strong increases of +6.3% in September and +4.9% in November. The series is in strong shape since an increase of only +5.7% would be necessary to match’s January’s 14-year high of 1.617 million. Housing starts have improved sharply in recent months as builders try to meet strong demand from people leaving the city or who need a larger home. However, the pandemic surge caused the Dec NAHB housing index yesterday to fall by -4 points to 86 from Nov’s record high of 90 (data since 1985), indicating slightly less optimism among U.S. homebuilders.
