- Stimulus talks have yet to restart
- Prospects improve for Brexit agreement by next week
- U.S. Oct housing starts expected to improve further
- 20-year T-bond auction to yield near 1.38%
Stimulus talks have yet to restart — Speaker Pelosi and Senate Minority Leader Schumer yesterday wrote to Senate Majority Leader McConnell asking to restart the stimulus talks that were deadlocked before the election. Mr. McConnell indicated that he plans to give no ground and pointed to his last offer of $500 billion.
There seems to be little hope for a large stimulus deal during the lame-duck session. The best hope might be to attach some pandemic relief items such as enhanced unemployment benefits to the spending bill that must be passed by December 11 to avert a government shutdown.
Prospects improve for Brexit agreement by next week — There was some optimism on the Brexit front on Tuesday after Irish Prime Minister Michael Martin said that the UK and EU can now see “the landing zones.”
Bloomberg reported that officials are planning for the possibility of announcing a deal as soon as Monday, although the article emphasized that a deal has yet to be clinched and may yet fall apart. There is still a distance to cover for an agreement regarding the usual issues of British fishery access, state aid, and enforcement.
Time for a deal is getting very short since approvals will be needed from the UK Parliament, the EU Parliament, and the national parliaments of all the EU countries. The tentative approval schedule would be for EU leaders to approve a deal at a summit on Dec 10-11 and for the EU Parliament to vote on the deal on December 16, although that date could be moved back. The EU Parliament reportedly needs three weeks to study the deal before a vote.
GBP/USD rallied moderately on Tuesday to a 4-session high and remains near the top of the upward-sloping pattern seen since late September. The markets seem to be expecting a last-minute deal once both sides have exhausted every negotiating trick they can think of.
At this point, it would appear that the markets would be shocked if there was no deal, likely sending GBP/USD sharply lower. A hard Brexit on December 31 would be very negative for the UK economy, which is already struggling to keep its head above water with the latest pandemic surge. Prime Minister Johnson’s popularity has been slipping in recent months and he undoubtedly realizes that he cannot afford to compound his political problems with economic chaos on December 31.
U.S. Oct housing starts expected to improve further — The consensus is for today’s Oct U.S. housing starts report to show an increase of +3.2% to 1.460 million, adding to Sep’s increase of +1.9% to 1.415 million.
U.S. housing starts have recovered sharply by a total of +52% from April’s 5-1/2 year low of 934,000 to the current level of 1.415 million units. However, housing starts would still need to rise by another +14% to match January’s pre-pandemic 14-year high of 1.617 million units.
Weakness in multi-family housing starts, however, have dragged down the overall housing start figure. In fact, single-family home starts are on fire and rose to a 13-year high of 1.108 million units in September. Homebuilder confidence is at a record high as seen by yesterday’s news that the NAHB housing market index in November rose by another +5 points to 90, which is a record high for the series that has history back to 1985.
U.S. homebuilders are extremely bullish due to record-low mortgage rates combined with the strong demand for new homes from people looking to escape from apartments or move to larger homes. The current 30-year mortgage rate of 2.84% is just 6 bp above the record low of 2.78% posted in early November.
Meanwhile, U.S. homebuilder stocks remain in very strong shape. The S&P SPDR Homebuilders ETF (XHB) is currently trading just mildly below October’s record high. XHB is currently up +25% on a year-to-date basis, which is twice the +12% year-to-date gain in the S&P 500 index.
20-year T-bond auction to yield near 1.38% — The Treasury today will auction $27 billion of new 20-year T-bonds. The Treasury just started selling 20-year T-bonds again in May for the first time since 1986.
The $27 billion size of today’s 20-year T-bond auction is up by $2 billion from August’s auction size of $25 billion and up by $7 billion from May’s auction size of $20 billion. The Treasury has sharply boosted the size of its coupon auctions to cover the massive U.S. budget deficit that has been caused by pandemic expenses.
The benchmark 20-year T-bond yield on Tuesday closed -5.0 bp at 1.38% as the markets became more concerned about the near-term negative impact on the economy from the worsening pandemic. The 20-year T-bond yield last week hit a 5-1/2 month high of 1.53% on vaccine optimism but has since fallen back since the vaccines are not likely to start curbing the pandemic until early 2021.
The 6-auction averages for the 20-year T-bond are as follows: 2.45 bid cover ratio, $2 million in non-competitive bids from mostly retail investors, 5.8 bp tail to the median yield, 31.8 bp tail to the low yield, and 48% taken at the high yield. The 20-year T-bond is slightly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.6% of the last six 20-year T-bond auctions, which is mildly below the median of 63.8% for all recent coupon auctions.
