- Powell says QE tapering isn’t happening for “some time”
- U.S. Q4 GDP expected to show modest increase
- Unemployment claims expected to show continued labor market stagnation
- 7-year T-note auction to yield near 0.71%
Powell says QE tapering isn’t happening for “some time” — The outcome of yesterday’s FOMC meeting was fully in line with market expectations, and the interest rate markets showed little net change on the results.
The T-note market was satisfied with Fed Chair Powell’s attempt to assuage the recent concern about QE tapering. He said it would take “some time” to achieve the threshold for considering a tapering of its QE program, suggesting that any such consideration is months away. He also said, “The whole focus on [QE] exit is premature.”
Bloomberg’s recent survey found that only about one-quarter of respondents expect the Fed to begin tapering by the fourth quarter of this year. The remaining three-quarters of respondents said they do not expect QE tapering until 2022 or later.
The FOMC yesterday said there has been a moderating pace of recovery in the economic data since its last meeting in December. However, the Fed said the weakness was mostly limited to the sectors of the economy most vulnerable to the pandemic. That suggests that the Fed believes the overall economic outlook should be able to improve significantly once the pandemic is brought under control.
In his press conference, Mr. Powell refused to be drawn into commenting on the GameStop frenzy, saying, “I don’t want to comment on a particular company or day’s market activity or things like that. It’s just not something really that I would typically comment on.” Mr. Powell would only say that the financial-stability vulnerabilities are “moderate.”
Other government officials, however, did take an interest in the extraordinary volatility surrounding heavily-shorted stocks. White House Press Secretary Jen Psaki said that the Biden economic team, including Treasury Secretary Yellen, was watching the market volatility. Also, the SEC released a statement saying that it is “actively monitoring” volatility in the stock market as part of its “mission to protect investors and maintain fair, orderly, and efficient markets.”
The surge in heavily-shorted stocks such as GameStop caused by retail buying led to broad stock market losses yesterday on concern that hedge funds would be forced to sell some of their long stock holdings to cover their losses and margin calls on short positions.
Separately, Mr. Powell yesterday seemed to suggest that the recent strength in the stock market is mainly due to fiscal stimulus and hopes for a return to economic normalcy, as opposed to monetary policy. He said, “If you look at what’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy. The connection between low interest rates and asset values is probably something that’s not as tight as people think.”
Mr. Powell’s comment suggested that the Fed does not believe it is responsible for the lofty stock market levels, which would imply that the Fed also feels no responsibility for curbing the stock market gains.
If he had desired, Mr. Powell yesterday could have easily caused a significant amount of air to come out of the stock market by suggesting that QE tapering might not be far away. However, Mr. Powell instead took the road of trying to keep long-term yields low in an attempt to give the economy a chance to get back on its feet. Compared with its longer-term interest rate and economic goals, a lofty stock market seems to be collateral damage that the Fed is willing to tolerate.
U.S. Q4 GDP expected to show modest increase — The consensus is for today’s Q4 GDP report to show an increase of +4.2% q/q annualized, which is equivalent to a q/q rise of +1.0%. The recovery in the economy slowed in Q4 due to the pandemic surge. The economy should get a boost in early 2021 from the $900 billion pandemic bill that Congress passed in late 2020, which contained $600 stimulus checks and PPP money for small businesses.
Today’s expected +1.0% q/q GDP rise in Q4 would add only modestly to Q3’s rise of +7.5% q/q and would not fully reverse the overall -10.1% plunge seen in the first half of 2020. According to the current market consensus, U.S. GDP will not surpass the Q4-2019 peak until the third quarter of this year. On a calendar year basis, the consensus is for GDP growth of +4.1% in 2021 after the expected -3.5% decline in 2020.
Unemployment claims expected to show continued labor market stagnation — The consensus is for today’s weekly initial unemployment claims report to show a -25,000 decline to 875,000, adding to last week’s -26,000 decline. Meanwhile, continuing claims are expected to move in the wrong direction by rising +34,000 to 5.088 million, retracing part of last week’s -127,000 decline.
The U.S. labor market has been backsliding in the past two months. Initial unemployment claims are currently at 900,000, which is 189,000 above the 10-month low of 711,000 posted in November. In addition, payroll jobs in December unexpectedly fell by -140,000.
7-year T-note auction to yield near 0.71% — The Treasury today will sell $62 billion of 7-year T-notes, wrapping up this week’s $211 billion T-note auction package. The benchmark 7-year T-note yield yesterday fell to a new 3-week low and closed the day down -1 bp at 0.71%. The 12-auction averages for the 7-year are as follows: 2.46 bid cover ratio, $6 million in non-competitive bids, 5.2 bp tail to the median yield, 42.2 bp tail to the low yield, 48% taken at the high yield, and 63.1% taken by indirect bidders (exactly matching the median for all recent Treasury coupon auctions).
