10-year T-note yield rises to 14-month high ahead of Biden stimulus announcement
Biden today announces new infrastructure program
ADP employment expected to surge
U.S. pending home sales10-year T-note yield rises to 14-month high ahead of Biden stimulus announcement — The 10-year T-note yield on Tuesday rose to a 14-month high of 1.77% but then fell back and closed the day slightly lower at 1.70%.
On Tuesday’s high, the 10-year yield rose by a total of +86 bp from the end-2020 level of 0.91%. The 10-year T-note is currently only 22 bp below the pre-pandemic end-2019 level of 1.92%.
The 10-year T-note yield has risen very sharply since the end of 2020 due to expectations for the U.S. economy to fully recover now that vaccinations are available to end the pandemic eventually.
The 10-year T-note yield has also risen due to the massive amount of fiscal stimulus that is in the system, which has caused Treasury debt sales to soar and is boosting inflation expectations. The 10-year breakeven inflation expectations rate on Tuesday rose to a new 7-3/4 year high of 2.38%, which is well above the Fed’s 2% inflation target.
The U.S. government has passed $5 trillion of pandemic aid spending over the past year, including the $2.2 trillion CARES Act in March 2020, the $900 billion package in December, and the $1.9 trillion package earlier this month. Moreover, the Biden administration is proposing another $4 trillion of federal spending over the coming decade.
The consensus is for very strong U.S. GDP growth of +5.7% this year, which would be the strongest growth rate since 1984. GDP growth in Q2 is expected to spike higher to +11.7% and remain very strong at +5.7% in Q3 and +6.0% in Q4.
Biden today announces new infrastructure program — President Biden today in Pittsburgh is expected to announce some details of his overall stimulus program, which is expected to eventually total $4 trillion.
Mr. Biden today will announce a $2.25 trillion jobs and infrastructure program, with $650 billion of that program dedicated to traditional infrastructure projects such as roads, bridges, highways, and ports, according to reporting yesterday by the Washington Post. The Post said other elements of the program will include $400 billion for the care for the elderly and disabled, $300 billion for housing infrastructure, and $300 billion to revive manufacturing. There will also be hundreds of billions of dollars for other investments such as the electric grid, broadband, and water.
The Post said that the Biden administration will announce the rest of its Build Back Better plan within weeks, which would take the overall spending package up to as much as $4 trillion. The Post reported the second package will include health insurance, an expanded child tax benefit, family leave, education, among many other items.
The Biden administration has not yet said whether it will pursue those two programs separately or as one giant bill. There is little doubt that all the legislation will have to be approved through the Senate budget reconciliation process in order to avoid a Senate Republican filibuster.
The question for the markets is the final spending tab and the size of the tax hikes needed to help pay for the program. The Washington Post on Monday reported that the Biden administration’s latest version of the program involves $3 trillion in new taxes, which would cover three-quarters of the program’s overall spending of $4 trillion.
The Post reported that the Administration is looking at raising the top corporate tax rate to 28% from 21%, repealing tax credits for the fossil fuel industry, and raising the corporate minimum tax. In addition, the marginal tax rate is expected to be raised on taxpayers earning more than $400,000, and the capital gains tax may be raised for high-earners as well.
ADP employment expected to surge — The consensus is for a strong March ADP employment report today of +550,000, which would represent a big improvement over February’s lackluster increase of +117,000. The economy needs to start seeing monthly job increases of +500,000 or more if the labor market is expected to get back to normal by next year. ADP jobs still need to recover by another 9.6 million to reach the pre-pandemic level.
The surge in March jobs is expected to stem from the sharp drop in the pandemic statistics and reduced business restrictions. People are starting to eat out at restaurants more and airline travel is up to a 1-year high, prompting some new hiring.
Friday’s payroll report is expected to show a strong increase of +650,000, adding to Feb’s increase of +379,000. Payroll jobs have risen by +12.9 million from the pandemic trough in April 2020, but need to rise by another +9.5 million to match the record high seen in February 2020.
Friday’s March unemployment rate is expected to fall -0.2 points to 6.0%. That would be a new 1-year low but would still be well above the pre-pandemic record low of 3.5%. The unemployment rate is likely to just edge lower in coming months as more people come back into the labor market to look for a job as economic conditions improve.
U.S. pending home sales — The consensus is for today’s Feb pending home sales report to show a decline of -3.0% m/m, adding to Jan’s -2.8% decline. Home sales are seeing some downward pressure due to the lack of homes on the market and rising mortgage rates. The 30-year mortgage rate has risen to a 9-month high of 3.17%, up by +52 bp from Jan’s record low of 2.65%.