Markets look ahead to very strong U.S. GDP growth this year
U.S. initial unemployment claims expected to resume the decline
7-year T-note auction arrivesMarkets look ahead to very strong U.S. GDP growth this year — Today’s Q4 revision is not likely to have much market impact since Q4 is long past and the markets are looking ahead to the 2021 GDP figures. The consensus is for today’s Q4 GDP to be unrevised at +4.1% (q/q annualized). Also, Q4 personal consumption is expected to be unrevised at +2.4%.
Looking ahead, the consensus is for U.S. GDP to show extraordinary growth in 2021 as the economy recovers from the pandemic. The pandemic infection rates dropped sharply from mid-January through February, allowing some restrictions to be dropped. In addition, people are starting to feel more comfortable venturing out to spend money in shops and restaurants, and even to start traveling again.
The percentage of the U.S. population that has some degree of immunity to Covid is now above 50%, taking into account people who have had at least one vaccination dose and people who have recovered from the disease and have some antibodies. According to the Bloomberg vaccine tracker, 40% of the U.S. population has had at least one vaccine dose.
The official number of people who contracted Covid and recovered is over 29 million, which accounts for about 9% of the U.S. population. However, there are estimates that the actual number of people who had Covid is far higher than the reported statistics, either because the infected person was asymptomatic or didn’t want to go through the trouble and expense of trying to get tested. The implication is that 55% or more of the U.S. population likely has some degree of Covid immunity by now.
With the U.S. now administering 2.5 million doses per day, Covid immunity is growing by about 0.7% of the U.S. population every day. Herd immunity is growing closer every day. The disease is unlikely ever to be completely stamped out. However, community transmission could be down to a trickle by year-end.
The markets are expecting the U.S. economy to roar back over the next two quarters as people spend their stimulus checks and spend the cash they stockpiled during the pandemic when they couldn’t go to restaurants or travel.
In addition, the fiscal stimulus from the federal government will be a huge boost. The U.S. government has approved a total of $2.8 trillion of pandemic aid just in the last several months, including the $900 billion package in late December 2020 and the $1.9 trillion package in March.
The consensus is for U.S. real GDP growth to improve to +4.8% in Q1 from +4.1% in Q4. GDP growth is then expected to kick into the very high gear of +6.9% in Q2 and +7.0% in Q3. GDP growth is then expected to ease a bit to +4.6% in Q4, leading to an overall 2021 growth rate of +5.7%.
A +5.7% growth rate in 2021 would more than offset the -3.5% decline seen last year during the pandemic. A GDP growth rate of +5.7% in 2021 would be the strongest growth rate in 38 years, i.e., since 1984.
The consensus is for continued strong GDP growth of +4.0% in 2022, but GDP growth is then expected to fall back to a more normal level of +2.4% by 2023.
U.S. initial unemployment claims expected to resume the decline — Today’s initial unemployment claims report is expected to show a decline of -40,000 to 730,000, reversing most of last week’s +45,000 rise to 770,000. Continuing claims are expected to fall -124,000 to 4.000 million, adding to last week’s decline of -18,000 to 4.124 million.
Fed Chair Powell yesterday expressed some optimism about the job outlook and said that he is encouraged that people are coming back into the labor market. However, the U.S. economy still needs to produce another 9.5 million jobs just to get the labor market back to its pre-pandemic record.
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 +553,000, and continuing claims are up by 2.4 million.
7-year T-note auction arrives — The Treasury today will conclude this week’s $209 bln T-note package by selling $62 billion of 7-year T-notes.
The markets are nervous about today’s 7-year T-note auction since last month’s 7-year auction on Feb 25 was a debacle that caused the 7-year T-note yield to surge by +19 bp in a single day and post what was then a 1-year high of 1.26%. However, the markets are less nervous about today’s auction after demand was solid for Tuesday’s 2-year T-note auction and Wednesday’s 5-year T-note auction.
The 7-year T-note yield yesterday fell to a 1-week low and closed the day -1 bp at 1.26%. The 7-year yield is down by -13 bp from last Thursday’s 13-month high of 1.39%.
The 12-auction averages for the 7-year are as follows: 2.41 bid cover ratio, $5 million of non-competitive bids, 5.5 bp tail to the median yield, 36.7 bp tail to the low yield, and 47% taken at the high yield. The 7-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.7% of the last twelve 7-year T-note auctions, which matches the median of 61.6% for all recent coupon auctions.