- Fed Chair Powell stresses dovish policy but several members turn more hawkish in Fed dots
- Weekly unemployment claims report expected to show continued improvement in the U.S. labor marketÂ
- U.S. leading indicators expected to show continued improvement
- 10-year TIPS auction to yield near -0.67%
Fed Chair Powell stresses dovish policy but several members turn more hawkish in Fed dots — The outcome of the 2-day FOMC meeting that ended Wednesday was dovish for stocks and the short-end of the Treasury curve. The 2-year T-note yield fell by 2 bp on the results. The 10-year T-note yield showed little reaction to the FOMC results but closed the day up +2 bp at 1.64% after posting a new 13-month high of 1.69%. The S&P 500 index rallied by about +0.6% after the FOMC results and closed the day mildly higher by +0.29%.
Fed Chair Powell took pains to stress that the Fed continues to pursue a highly accommodative monetary policy. He repeated his comment that now is “not the time to start talking about tapering bond buying.” He repeated his recent statement that he would only worry about higher yields if the rise was “disorderly,” but he went no farther than his previous comments.
Regarding the Fed’s dot-plot, Mr. Powell said, “The strong bulk of the committee is not showing a rate increase during the forecast period” through 2023. However, the new dot-plot showed that there are now 4 FOMC members who are expecting a rate hike in 2022, up from one member in the December dot-plot. For 2023, there are now 7 members predicting higher rates, up from 5 members in the December dot-plot forecast. Moreover, 2 of those 7 members are very hawkish for 2023 and are predicting a +100 bp rate hike, while 3 of the members expect a +75 bp rate hike.
The Eurodollar futures curve on Wednesday turned slightly more dovish by 1-6 bp for the 2021-24 contracts, but 8-13 bp more hawkish for the 2027-29 contracts. The Eurodollar futures curve is fully discounting the Fed’s first +25 bp rate hike by late 2022, and is discounting an overall 275 bp rate hike to nearly 3.00% by late 2029.
Weekly unemployment claims report expected to show continued improvement in the U.S. labor market — Today’s weekly U.S. unemployment claims report is expected to show continued, slow progress for the U.S. labor market. The sharp drop in Covid infection rates in the past two months has boosted business activity, which should lead to improved hiring in the coming weeks.
The consensus is for today’s weekly initial unemployment claims report to fall by -12,000 to 700,000, adding to last week’s drop of -42,000 to 712,000. Continuing claims are expected to fall by -116,000 to 4.028 million, adding to last week’s -193,000 decline to 4,144 million.
However, there are still many more people on the unemployment rolls than before the pandemic. From February’s pre-pandemic levels, initial claims are still up by +495,000, and continuing claims are up by 2.4 million.
The labor market situation looks worse when focusing on payroll jobs as opposed to the number of people who are on the unemployment rolls. Payroll jobs have recovered by 12.9 million jobs from the pandemic trough in April 2020, but would need to recover by another 9.5 million jobs to match the record high seen in February 2020 before the pandemic emerged.
U.S. leading indicators expected to show continued improvement — The consensus is for today’s Feb U.S. leading indicators report to show an increase of +0.3% m/m, adding to January’s gain of +0.5% m/m.
The LEI has risen for the last nine consecutive months but was still down by -1.5% y/y in January. Still, the LEI should soon turn positive on a year-on-year basis due to the continued month-on-month improvement, combined with a plunge in the year-earlier base as the pandemic economy hit bottom in March-April 2020.
The consensus is for strong growth in the U.S. economy for the remainder this year as the pandemic ends and as recent fiscal stimulus kicks in. The U.S. government just passed a $1.9 trillion pandemic aid bill last Thursday, adding to the $900 billion aid bill that was signed into law in late December.
The consensus is for U.S. real GDP growth to improve to +4.5% in Q1-2021 from +4.1% in Q4-2020. The consensus is then for GDP growth to kick into high gear of +6.5% in Q2 and +6.4% in Q3, finally easing off to +4.5% in Q4. On a calendar year basis, GDP is expected to show strong growth of +5.6% in 2021, more than recovering from 2020’s -3.5% decline.
10-year TIPS auction to yield near -0.67% — The Treasury today will sell $13 billion of 10-year TIPS in the first of two reopenings of the 1/8% 10-year TIPS of January 2031, which the Treasury first sold in January. The $13 billion size of today’s TIPS reopening is up by $1 billion from the $12 billion sizes seen in the last six reopenings.
The benchmark 10-year TIPS yield closed yesterday at -0.67%, which is moderately below the late-Feb 9-month high of -0.54%. Real Treasury yields have been on the rise this year due to expectations for a full economic recovery as the pandemic fades.
The 12-auction averages for the 10-year TIPS are as follows: 2.49 bid cover ratio, $23 million in non-competitive bids, 6.7 bp tail to the median yield, 26.3 bp tail to the low yield, and 56% taken at the high yield. The 10-year TIPS is the third most popular security among foreign investors and central banks behind the 30-year TIPS and the 5-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 66.3% of the last nine 10-year TIPS auctions, which is well above the median of 61.6% for all recent Treasury coupon auctions.
