- U.S. Q3 GDP expected to show sharp rebound but not enough to overcome first-half loss
- Presidential election betting odds are little changed with the election about half over
- U.S. unemployment claims expected to show continued improvement
- ECB expected to expand QE program by December’s meeting
- 7-year T-note auction to yield near 0.55%
U.S. Q3 GDP expected to show sharp rebound but not enough to overcome first-half loss — The consensus is for today’s Q3 GDP report to show an increase of +32.0% (q/q annualized), which would be equivalent to a quarter-on-quarter rise of +7.2% q/q.
Today’s expected Q3 GDP increase would not be enough to overcome the overall plunge of -10.2% seen in the first half of 2020 (-1.3% q/q in Q1 and -9.0% q/q in Q2). Even if today’s Q3 GDP report shows the expected increase, GDP would have to rise by another +3.8% to match the record high posted in Q4-2019 and overcome the worst recession in post-war history. Based on the consensus, the U.S. economy will not fully regain its recession losses until Q4-2021.
On a calendar year basis, the consensus is for GDP this year to fall sharply by -4.0%. The consensus is then for a modest recovery of +3.8% in 2021 and +2.8% in 2022.
Presidential election betting odds are little changed with the election about half over — The betting odds for the presidential election continue to be little changed with former VP Biden at 63% and President Trump at 40%. However, the betting odds for control of the Senate have been more volatile in the past two weeks, with Democrats losing some ground. The betting odds are at 58% for Democrats taking control of the Senate versus 46% for Republicans. Democrats continue to have strong odds of 85% for retaining control of the House versus 16% for Republicans.
In any case, the election is already roughly half over, with 75 million people having already cast their ballots through mail-in ballots or early voting at the polls, according to the University of Florida’s U.S. Elections Project. There are still five days until the election, but early voting already amounts to 54% of the 138 million votes that were cast in the 2016 election and 31% of the overall 240 million people who are eligible to vote.
U.S. unemployment claims expected to show continued improvement — Today’s unemployment claims report is expected to show some continued improvement in the U.S. labor market. However, the labor market remains in very poor shape overall, particularly since there could be new pandemic restrictions that cause more layoffs due to the surge in the pandemic to new record highs.
The consensus is for today’s initial unemployment claims report to fall -14,000 to 773,000, adding to last week’s -55,000 decline to 787,000. Continuing claims are expected to fall by -673,000 to 7.700 million, adding to last week’s decline of -1.024 million to 8.373 million.
Even after the recent declines, there are still 570,000 more people filing new unemployment claims each week than there were before the pandemic. Also, there are still 6.7 million more people on the unemployment rolls than there were before the pandemic.
ECB expected to expand QE program by December’s meeting — The consensus in a recent survey by Bloomberg is that the ECB will take no policy action at its regular meeting today, but at its next meeting in December will announce a 500 billion euro hike in the capacity of its QE Pandemic Emergency Purchase Program (PEPP) program to 1.85 trillion euros from the current 1.35 trillion euros. The ECB is also expected to extend that program by six months to December 31, 2021 from the current ending date of June 30, 2021. The ECB will release its next set of macroeconomic forecasts at its next meeting in December, making that meeting more appropriate for announcing a QE extension.
The ECB will be forced to extend its QE program as the economy worsens in response to the pandemic surge that is forcing new shutdowns in Europe. Friday’s Eurozone Q3 GDP is expected to show an increase of +9.6% q/q, which would not fully overcome the -11.8% q/q plunge seen in Q2. Looking ahead, the consensus is for a Q4 GDP increase of +2.0% q/q, but forecasts are being revised lower due to the worsening pandemic, and there is even talk about the possibility of a double-dip recession.
7-year T-note auction to yield near 0.55% — The Treasury today will sell $53 billion of 7-year T-notes, concluding this week’s $188 billion T-note package. The $53 billion size of today’s 7-year T-note auction is up by $3 billion from last month’s $47 billion auction and is up by a total of $18 billion (+56%) from the $32 billion size that prevailed in 2019 and early 2020 before the U.S. budget deficit exploded due to the pandemic.
The benchmark 7-year T-note yield on Wednesday fell to a 1-1/2 week low but then recovered to close slightly higher at 0.55%. The 7-year T-note yield has fallen back from last Thursday’s 4-month high of 0.62%. Treasury yields rose last week on hopes for a pre-election stimulus bill and on talk about a possible Democratic sweep that would produce a big stimulus bill in early 2021. However, yields have since fallen back mainly because of the worsening pandemic, which will hurt the economy and undercut Treasury yields no matter which party controls Washington.
The 12-auction averages for the 7-year are as follows: 2.49 bid cover ratio, $6 million in non-competitive bids, 5.0 bp tail to the median yield, 45.8 bp tail to the low yield, and 59% 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 63.8% of the last twelve 7-year T-note auctions, which matches the median of 63.8% for all recent coupon auctions.
