- Markets wait to see if Powell at FOMC meeting will reiterate his opposition only to “disorderly” markets
- U.S. retail sales expected to settle back after January’s surge on stimulus checks
- U.S. Feb manufacturing production expected to continue higherÂ
- U.S. NAHB housing market index
- 20-year T-bond auctionÂ
Markets wait to see if Powell at FOMC meeting will reiterate his opposition only to “disorderly” markets — The FOMC today begins its 2-day meeting. The FOMC at this week’s meeting will provide an updated Summary of Economic Projections, which will include a new Fed-dot forecast for the funds rate.
The main issue is whether Fed Chair Powell, at his press conference Wednesday afternoon, will reiterate his view that he would only be worried about higher T-note yields if the move becomes “disorderly.”
Fed Chair Powell, on March 4, said that the recent yield surge “caught my attention.” He also reiterated that the Fed is a long way from reaching its policy goals of full employment and an average inflation rate of 2.0%, suggesting that there is currently no end in sight for the Fed’s near-zero target rate or the $120 billion per month QE program.
However, Mr. Powell also said, “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threaten the achievement of our goals.” The markets had been hoping at the time that Mr. Powell would push back against the surge in yields, as ECB officials are doing with their words and their announcement last week that the ECB will boost bond purchases in its PEPP QE program.
U.S. retail sales expected to settle back after January’s surge on stimulus checks — The consensus is for a Feb retail sales report today of -0.5% m/m and +0.2% m/m ex-autos, down sharply from January’s surge. Retail sales in January surged by +5.3% m/m and +5.9% m/m ex-autos due to the $600 stimulus checks that were sent out as part of the $900 billion pandemic aid bill that was signed into law in late December.
Consumers went on a spending spree with those checks, which pushed retail sales up +5.3% in January. Retail spending in February then tailed off after the impact from stimulus checks started to wear off.
Consumers will soon receive a new round of $1,400 checks from the $1.9 trillion pandemic aid bill, which was just signed into law last Thursday. The stimulus checks are starting to go out this week, which will give consumers another dose of cash to use for shopping, debt repayment, or savings. Retail sales in March and April should see another surge, such as the one seen in January, mainly since the $1,400 size of the new stimulus check is more than double the $600 check received in January.
U.S. consumer spending should also improve in coming months as the pandemic fades and people venture out to shop, go to restaurants, and travel. Indeed, last Friday’s early-March consumer sentiment index from the University of Michigan showed a larger than expected increase of +6.2 points to a 1-year high of 83.0, which was the strongest consumer sentiment index level since the pandemic began last spring.
U.S. Feb manufacturing production expected to continue higher — The consensus is for today’s Feb U.S. manufacturing production report to show an increase of +0.2% m/m, adding to January’s strong increase of +1.0% m/m. The broader Feb industrial production report is expected to show a +0.4% m/m increase, adding to Jan’s strong increase of +0.9% m/m.
U.S. manufacturing production is finally getting close to turning positive on a year-on-year basis, after having shown negative year-on-year figures every month since July 2019. Manufacturing production showed its worst report of -16.3% y/y in April 2020, but improved to -1.0% y/y for the most recent report for January.
U.S. manufacturing confidence is in very strong shape, which bodes well for the health of the manufacturing sector in the coming months. The ISM manufacturing index in February rose by +2.1 points to a 17-year high of 60.8, reaching the highest confidence level since 2004.
U.S. NAHB housing market index — The consensus is for today’s March NAHB housing market index to be unchanged from February’s level of 84. Homebuilder confidence remains in very strong shape at only 6 points below the record high of 90 posted in November 2020. New single-family home sales in January remained very strong at 5.93 million units, which was just mildly below the 15-year high of 6.01 million units posted in October 2020.
20-year T-bond auction — The Treasury today will sell $24 billion of 20-year T-bonds in the first of two reopenings of the 1-7/8% 20-year bond of February 2041 that the Treasury first sold last month. The size of today’s auction is unchanged from the last two reopenings in December and January. The Treasury started selling 20-year T-bonds again in May 2020 for the first time since 1986.
The 20-year T-bond yield (which has history only back to May 2020) reached a record high of 2.32% last Friday, but then backed off to close at 2.26% on Monday.
The 9-auction averages for the 20-year bond are as follows: 2.38 bid cover ratio, $2 million in non-competitive bids, 5.8 bp tail to the median yield, 31.8 bp tail to the low yield, and 46% taken at the high yield. The 20-year T-bond is mildly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.8% of the last nine 20-year bond auctions, which is mildly below the median of 61.6% for all recent Treasury coupon auctions.
