- U.S. stocks fall on plethora of concerns
- 10-year T-note yield rises to 9-1/2 month high on mention of QE tapering
- JOLTS job openings expected to fall
U.S. stocks fall on plethora of concerns — The U.S. stock market on Monday fell fairly sharply on a plethora of concerns that included (1) a continued rise in 10-year T-note yields, (2) weakness in U.S. tech giants on concern about political retaliation after they restricted President Trump’s social media reach, (3) reduced speculative zeal after Bitcoin on Monday plunged by -11%, which was sparked in part by a warning from UK regulators that investors in cryptocurrencies risk losing their entire investment, (4) political uncertainty as the House on Wednesday is expected to impeach President Trump for the second time, (5) Monday’s -1.08% sell-off in China’s Shanghai Composite index on U.S.-Chinese tensions, and (6) concern about the near-term U.S. economic impact of the recent pandemic surge after last Friday’s weak payroll report of -140,000.
There is substantial U.S. political uncertainty after last week’s storming of the Capitol and ahead of next Wednesday’s Inauguration of President-Elect Biden. The FBI on Monday issued a warning to all 50 state capitals about plans for armed protests. Key areas of Washington DC are on lockdown ahead of next Wednesday’s Inauguration Day when a heavy National Guard presence is expected.
The House on Wednesday is expected to hold an impeachment vote for President Trump. If Mr. Trump is impeached again, Speaker Pelosi has not said when she might send the referral to the Senate. House Majority Leader Hoyer said he favors sending the impeachment referral to the Senate immediately, but Democratic Whip Clyburn said he favors waiting 100 days to give President-Elect Biden time to get his cabinet confirmed and launch his most important legislative initiatives.
Meanwhile, Mr. Biden said that he plans to announce his stimulus plan this Thursday. Mr. Biden has said his stimulus proposal will involve “trillions” of dollars, but the final result might be much less because he has to keep moderate Democrats on board, such as Democratic Senator Manchin.
In addition, Senate Democrats apparently won’t have the votes to do away with the filibuster, which means they will have to use the budget reconciliation process to pass the stimulus bill. There are certain types of stimulus measures such as aid to states and cities that might not qualify for inclusion in a stimulus bill that is passed with the budget reconciliation process. Some Wall Street banks are predicting that the new stimulus bill might end up being only $500 billion to $1 trillion, less than Mr. Biden’s comment about “trillions.”
10-year T-note yield rises to 9-1/2 month high on mention of QE tapering — The 10-year T-note yield on Monday extended last week’s upward spike, closing the day +3 bp at a 9-1/2 month high of 1.146%.
The most recent surge in the 10-year T-note yield began last week after it became clear that Democrats won both of the Georgia Senate seat run-off elections, thus giving Democrats control of the Senate and Washington as a whole. Democrats are expected to pass a new stimulus package within a matter of weeks, which will need to be fully financed by new Treasury debt. The national debt has already soared by $4.3 trillion (+18.3%) from February’s pre-pandemic level to the current record high of $27.7 trillion.
The 10-year T-note yield has also risen sharply since November due to the sharp 40 bp rise in inflation expectations, which stems from (1) expectations for the U.S. economy to largely return to normal by late this year due to vaccines, and (2) expectations for more fiscal stimulus and a stronger U.S. economy after the Democrats last week won control of the Senate. The 10-year breakeven inflation expectations rate was trading as low as 1.70% as recently as November, but has since surged above the Fed’s 2.0% inflation target last week and is currently trading at 2.07%.
The T-note yield has also risen because Fed officials have shown no alarm about the quick rise in the 10-year T-note yield above the psychological level of 1.0%. Even worse, some Fed officials are starting to talk about tapering the $120 billion per month QE program, which would reduce the Fed’s support as the single largest buyer in the Treasury market.
Atlanta Fed Bank President Bostic on Monday said, “I’m open” to a potential QE tapering in late 2021. He said, “A lot of it will depend on how the virus and the vaccine distribution goes. But if it goes well — if we learn quickly — I think there is some good upside potential.”
Before the vaccines arrived, the markets had speculated about whether the Fed might try to cap the 10-year T-note yield at 1.00%. However, the markets are now starting to worry about when the Fed might start raising interest rates and start tapering its QE program due to ideas that the U.S. economy by late 2021 might be able to return to some semblance of normality. With their QE tapering comments, some Fed officials might also be trying to curb possible speculative excesses in certain stock sectors and in assets such as bitcoin.
The Treasury today will sell $38 billion of 10-year T-notes in the second and final reopening of the 5/8% 10-year T-note of November 2030 that the Treasury first sold in November. The Treasury tomorrow will sell $24 billion of reopened 30-year T-bonds.
JOLTS job openings expected to fall — The consensus is for today’s Nov JOLTS job openings report to show a decline of -252,000 to 6.400 million, more than reversing October’s +158,000 increase to 6.652 million. The markets are worried about a slump in the U.S. labor market due to the recent pandemic surge.
