- Biden’s effort for a bipartisan pandemic aid bill faces a steep uphill battle
- Lagarde expected to acknowledge downside economic risks
- Unemployment claims expected to show continued weak U.S. labor market
- U.S. housing starts expected to remain strong
- 10-year TIPS auction
Biden’s effort for a bipartisan pandemic aid bill faces a steep uphill battle — The markets may become substantially less optimistic about a new pandemic rescue plan as the new Senate takes shape and as Republicans flex their filibuster muscles.
Senator Romney yesterday, arguably the most moderate Republican Senator, said, “We just passed a program with over $900 billion in it. I’m not looking for a new program in the immediate future.” Another moderate Republican Senator, Lisa Murkowski of Alaska, said she wasn’t opposed to a new bill, but “It’s going to require, I think, a fair amount of debate and consideration.”
Democratic Senator Manchin said yesterday that a bipartisan group of Senators might meet with Biden aides as soon as this weekend to discuss whether there is enough common ground to launch another bipartisan pandemic aid bill.
Meanwhile, Senate Minority Leader McConnell is trying to get the filibuster protected by including it in the power-sharing deal that he and Senate Majority Leader Schumer must reach to allow Senate committees to function with the tied 50-50 seat count. Incoming Democratic Senators Warnock, Ossoff, and Padilla were all sworn in yesterday, bring the vote count to 50-50, with VP Harris breaking the tie in favor of Democrats.
President Biden is likely to do what he can to first work with Senate Republicans to see if there is a chance of a bipartisan pandemic aid bill. If that effort fizzles out, however, then Democrats will be forced into Plan B, which is to pass as much of a pandemic aid bill as they can through the budget reconciliation process, which requires only a majority vote in the Senate.
Lagarde expected to acknowledge downside economic risks — The ECB at its meeting today is expected to leave its key policy levers unchanged. The ECB’s main refinancing rate has been at been at zero since 2016 and the ECB’s deposit rate has been at -0.50% since September 2019. The ECB is currently operating two QE programs, i.e., the Asset Purchase Program (APP) of 20 bln euros/mo, and the Pandemic Emergency Purchase Program (PEPP) totaling 1.85 trillion euros through March 2022.
While the ECB today is expected to leave its key policy levers unchanged, ECB President Lagarde in her press conference is expected to acknowledge the near-term downside risks to the economy from the pandemic surge and the new lock-downs across much of Europe. The market consensus is for Eurozone GDP to show a sharp decline of -2.4% q/q in Q4 and then show only a modest increase of +0.4% q/q in Q1. Eurozone GDP growth is then expected to improve to stronger figures of +2.2% q/q in Q2, +1.8% in Q3, and +1.1% in Q4.
Unemployment claims expected to show continued weak U.S. labor market — The consensus is for today’s weekly initial unemployment claims report to show a -30,000 decline to 935,000, giving back a small portion of last week’s +181,000 surge to 965,000. Today’s continuing claims report is expected to show a +29,000 increase to 5.300 million, adding to last week’s +199,000 increase to 5.271 million.
The recent rise in unemployment claims illustrates that more businesses are laying off workers as the pandemic worsens, causing increased pandemic restrictions and causing more people to stay at home. The December payroll report of -140,000 was particularly disappointing since it showed that the U.S. economy lost jobs for the first time since April.
U.S. housing starts expected to remain strong — The consensus is for today’s Dec housing starts report to show an increase of +0.8% to 1.560 million, adding to November’s +1.2% increase to 1.547 million. November’s housing starts level of 1.547 million was just mildly below the 14-year high of 1.617 million posted in January 2020. Excluding relative weakness in multi-family housing starts, the single-family housing starts figure in November rose to a 14-year high of 1.186 million units.
U.S. homebuilder confidence has dipped a bit in the past two months due to the pandemic surge. The NAHB housing market index in January fell -3 points to 83, adding to December’s -4 point decline. Still, the homebuilder confidence index remains very strong at only 7 points below November’s record high of 90 (data since 1985).
U.S. homebuilders remain very optimistic due to continued strong demand for new homes, tight supplies, and low mortgage rates. The supply of new homes on the market is extremely tight at 4.1 months, which well below the 5-year average of 5.5 months and just mildly above the record low of 3.5 months seen in August 2020. The current 30-year mortgage rate of 2.79% is just mildly above the recent record low of 2.65% posted in early-January.
10-year TIPS auction — The Treasury today will sell $15 billion of new-issue 10-year TIPS. The benchmark 10-year TIPS yield yesterday fell to a new 1-1/2 week low and closed the day at -1.06%.
The 12-auction averages for the 10-year TIPS are as follows: 2.47 bid cover ratio, $23 million in non-competitive bids, 6.7 bp tail to the median yield, 26.5 bp tail to the low yield, and 60% 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 have taken an average of 66.8% of the last twelve 10-year TIPS auctions, which is well above the median of 63.1% for all recent Treasury coupon auctions.
