- Markets are hoping U.S./China phase-one trade deal is on a glide path through the election
- 5-year T-note auction to yield near 0.29%
- U.S. Covid infections steadily decline to 2-month low
- U.S. durable goods orders expected to show a continued recoveryÂ
Markets are hoping U.S./China phase-one trade deal is on a glide path through the election — The markets are hoping that the U.S./China trade deal is on a glide path through the November 3 election after Monday night’s 6-month review of the deal went smoothly.
The stock market on Tuesday was pleased that the review went smoothly since President Trump had previously canceled the review at the last minute when it was scheduled to be held on Aug 15. The USTR’s read-out of the meeting said that both sides “are committed to taking the steps necessary to ensure the success of the agreement.” That underlined that the Trump administration is expecting China to play catchup on its purchases of U.S. products, which are lagging far behind the targets.
In an apparent attempt to keep the deal intact, China has already purchased a record amount of U.S. crude oil for delivery in September. China will also likely purchase U.S. soybeans as the harvest arrives in September and October, just ahead of the November election.
The prospects for U.S./Chinese trade relations after the November election, of course, depend mainly on who wins the election. If Mr. Trump wins, then the markets will likely be facing uncertainty about the status of the phase-one deal and likely a new set of negotiations over a phase-two trade deal. If Mr. Biden wins, U.S./Chinese trade tensions may ease somewhat, but there is no guarantee that U.S. tariffs on Chinese goods will go away anytime soon.
History has shown that once tariffs are imposed, they can stay in place for a long time. The best known example is the so-called “Chicken Tax,” which was a 25% tariff on imported light trucks imposed by President Johnson in 1963 as retaliation for European tariffs on American chicken imports. That tariff remains in place to this day, more than five decades later.
5-year T-note auction to yield near 0.29% — The Treasury today will sell $51 billion of 5-year T-notes. The Treasury will then conclude this week’s gargantuan $170 billion T-note package by selling $22 billion of 2-year floating-rate notes and $47 billion of 7-year T-notes on Thursday.
Yesterday’s 2-year T-note auction saw respectable demand given the massive $50 billion size of the auction. The bid-cover ratio of 2.78 was stronger than the 12-auction average of 2.59, and indirect bidders took 57.6% of the auction, higher than the 12-auction average of 51.7%. The solid results for the 2-year were a positive sign that the Treasury market may be able to also absorb today’s record-sized 5-year T-note auction without a case of indigestion.
The $51 billion size of today’s 5-year auction is up by $2 billion from July’s auction size of $49 billion and is up by a total of $10 billion (+24%) from the $41 billion size that prevailed in 2019 before the Treasury was hit by pandemic expenses.
Today’s 5-year T-note issue was trading at 0.29% in when-issued trading late yesterday afternoon. The 5-year T-note yield is trading near the upper end of the range seen since July. Yields have been pushed mildly higher by the drop in U.S. Covid infections, which is positive for the economy but hawkish for Fed policy. Still, the market is not expecting a Fed rate hike for at least the next two years.
The 12-auction averages for the 5-year are: 2.45 bid cover ratio, $23 mln in non-competitive bids, 4.7 bp tail to the median yield, 24.5 bp tail to the low yield, and 41% taken at the high yield. The 5-year is mildly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.3% of the last twelve 5-year T-note auctions, which is mildly below the median of 62.5% for all recent Treasury coupon auctions.
U.S. Covid infections steadily decline to 2-month low — The U.S. stock market has seen support in the past several weeks as the number of new U.S. Covid infections has steadily declined. The 5-day average of new U.S. Covid infections has fallen to a new 2-month low of about 39,000, down from July’s peak near 70,000, according to Johns Hopkins That decline seems to be the result of the more restrictive measures taken in states that saw severe Covid outbreaks in June and July.
The decline in Covid infections is an encouraging sign that Americans are learning to live with the restrictions that are necessary to suppress the pandemic. However, those restrictions mean that major sectors of the U.S. economy remain at least partially closed, such as restaurants, bars, theatres, sports, and travel. The economy will continue to be hobbled until an effective and widely-available vaccine becomes available that ends the pandemic and gives Americans the confidence to return to their previous activities.
U.S. durable goods orders expected to show a continued recovery — The consensus is for today’s July durable goods orders report to show a gain of +4.5% m/m and +1.9% m/m ex-transportation, adding to June’s gain of +7.6% and +3.6% ex-transportation. Meanwhile, the July core capital goods orders report (ex defense and aircraft), a proxy for capital spending, is expected to show an increase of +1.7% m/m, adding to June’s increase of +3.4% m/m.
Durable goods orders through June recovered only about half of the plunge seen during the spring. The good news, however, is that the ISM manufacturing new orders sub-index has moved sharply higher to 61.5 in July, suggesting that manufacturers are starting to see their order pipelines fill back up.
