- Fed’s Beige Book expected to show some improvement
- T-note prices remain stable for a third session
- Senate today begins consideration of $1.9 trillion pandemic aid bill
- ADP report expected to improve
- ISM services index expected to edge lower
Fed’s Beige Book expected to show some improvement — The Fed today will release its Beige Book survey of the regional U.S. economies. The Fed’s last Beige Book report, released on January 13, started by saying, “Most Federal Reserve Districts reported that economic activity increased modestly since the previous Beige Book period, although conditions remained varied.”
Regarding consumer spending, the report said, “Reports on consumer spending were mixed. Some Districts noted declines in retail sales and demand for leisure and hospitality services, largely owing to the recent surge in COVID-19 cases and stricter containment measures.”
The U.S. Covid pandemic peaked in mid-January, right around the time the last Beige Book was released. Therefore, the new Beige Book should show some improvement due to the sharp drop in the pandemic infection rates since mid-January and the slow easing of restrictions.
The markets have been raising near-term GDP forecasts due to the sharp improvement in the pandemic and the large fiscal stimulus measures. The consensus is now for U.S. GDP to show strong increases of +3.5% in Q1, +5.6% in Q2, +6.2% in Q3, and +4.3% in Q4, leading to an overall 2021 increase of 5.0%. That would be enough to overcome the decline of -3.9% seen in 2020.
T-note prices remain stable for a third session — T-note prices yesterday remained stable for a third session, following last Thursday’s extraordinary upward spike in the 10-year T-note yield to a 1-year high of 1.61%. The T-note yield yesterday closed at 1.41%, which was 20 bp below last Thursday’s 1-year high of 1.61%
The markets were slightly encouraged yesterday that a Fed official finally expressed some concern about last week’s surge in T-note yields. Fed Governor Brainard yesterday said, “I am paying close attention to market developments. Some of those moves last week, and the speed of the moves, caught my eye.” She said she would be concerned if she saw disorderly conditions or a persistent tightening of financial conditions.
Ms. Brainard yesterday also said, “the economy remains far from our goals in terms of both employment and inflation, and it will take some time” before the Fed begins tapering bond buying. Also, San Francisco Fed President Daly said the Fed needs to be “patient” in its new policy strategy going forward and support the economy by “avoiding preemptively tightening monetary policy.”
Meanwhile, ECB officials yesterday continued their effort to talk down European bond yields. ECB Vice President Guindos said that if the ECB concludes that the recent rise in bond yields has had a negative impact on financing conditions, officials are “totally open” to recalibrating the asset-purchase program including the Pandemic Emergency Purchase Program (PEPP) envelope.
Also, ECB Executive Board member Panetta said, “We already see undesirable contagion from rising U.S. yields into the Eurozone yield curve, which is unwelcome and must be resisted.” He added the ECB “should not hesitate” to increase the pace of its bond-buying if needed.
Senate today begins consideration of $1.9 trillion pandemic aid bill — The Senate today is expected to begin debate on President Biden’s $1.9 trillion pandemic aid bill. Senate Democratic leaders hope to get the bill passed by Friday. That would give the House time next week to approve any changes that the Senate makes to the bill, thus achieving final passage by the self-imposed deadline of March 14 when some unemployment benefits expire.
The pandemic aid bill became much easier for Senate Democrats to pass after the Senate parliamentarian recently ruled that the hike in the minimum wage to $15 per hour did not meet the budget reconciliation rules and could not be included in the bill. There are at least two Democ ratic Senators who said they would not support a hike in the minimum wage all the way to $15 per hour. Senate Democratic leaders have already effectively decided that the minimum wage will not be in the Senate version of the pandemic aid bill.
There is still some opposition from moderate Democratic Senators such as West Virginia Senator Manchin to some elements of the bill, such as the $400 per week unemployment benefit. Manchin and New Hampshire Senator Shaheen are arguing for a $300 per week benefit. Other Democratic Senators have some wish lists for the bill as well.
While some Democratic Senators are pushing for changes in the bill during the debate, they are unlikely to vote against the bill in the end. The failure of the bill in Congress would represent a political disaster for President Biden and Congressional Democrats, who have been betting big on the pandemic aid bill.
ADP report expected to improve — The consensus is for today’s Feb ADP employment report to show an increase of +200,000, which would be a bit stronger than Jan’s report of +174,000. ADP jobs have risen by +10.1 million from last April’s pandemic trough, but would have to rise by another +9.6 million to match last February’s pre-pandemic high.
ISM services index expected to edge lower — The consensus is for today’s Feb ISM services index to show a -0.1 decline to 58.6, falling back slightly after January’s +1.0 point increase to 58.7. Monday’s Feb U.S. ISM manufacturing index showed a strong +2.1 point increase to 60.8, which was potentially a hopeful sign for today’s services index.
