- Fed Chair Powell today expected to reiterate last week’s themes
- Time is running out for bipartisan infrastructure talks
- U.S. existing home sales expected to continue lower
- 2-year T-note auction
Fed Chair Powell today expected to reiterate last week’s themes — Fed Chair Jerome Powell will appear today before a House subcommittee hearing on the Covid crisis to discuss pandemic emergency lending and the economy. Mr. Powell today will have the opportunity to do any desired fine-tuning on last week’s hawkish FOMC message.
The FOMC, at its 2-day meeting last week, began talks on QE tapering and also turned more hawkish on its rate-hike projections. The Fed’s dot-plot now shows that 7 of 18 members see one rate hike in 2022, and 11 of 18 members now see at least two rate hikes by the end of 2023.
The general market view is that the FOMC is likely to provide an early warning about QE tapering at either the August Jackson Hole conference or the September FOMC meeting. The consensus is that the FOMC will then make a formal announcement of QE tapering sometime between September and December, taking effect a month or two after the announcement.
The markets are watching comments from other Fed officials this week for a further assessment of the FOMC’s new stance. On Monday, there were two dovish Fed comments and one hawkish comment. New York Fed President Williams said that in his view, “the spike in inflation mostly reflects the temporary effects of the surprisingly rapid reopening of the economy, and inflation will come down from around 3% this year to close to 2% next year and in 2023.” Also, St. Louis Fed President Bullard said the FOMC “is only now starting to talk about tapering, and it will take some time to get that organized and to get that running.”
On the hawkish side, Dallas Fed President Kaplan said he questions if the housing market needs continued Fed support via MBS purchases and he favors beginning the taper process “sooner rather than later.”
Time is running out for bipartisan infrastructure talks — Time is running out for the bipartisan infrastructure talks since the Senate is scheduled to leave this Friday for its 2-week Fourth of July recess. The Senate will then be in session for only four weeks (July 12 to Aug 6) before leaving for its August recess (Aug 7 to Sep 10).
The House will be in session until next Thursday (July 1) before leaving for its 2-1/2 week long Fourth of July recess from July 2 though July 18. The House will only be in session for the two weeks in July (July 19-30), and will then be in recess until September 20.
When Congress returns in September, its main job will be to pass spending authority for the new fiscal year that begins on October 1, or there will be a government shutdown. Another complication is that the debt ceiling will be reinstated on August 1. The Treasury will be able to limp along for some number of weeks as the Treasury uses emergency measures to conserve cash. However, when those emergency measures run out, then the U.S. Treasury will then be at risk of a sovereign debt default unless Congress raises or suspends the debt ceiling.
The White House has said it will respond to the bipartisan infrastructure proposal this week. The spending aspects of the $587 billion plan appear to be set, but the pay-fors are still up in the air. It is unclear whether the White House will give an up or down verdict on the bipartisan infrastructure plan by the end of this week before the Senate adjourns, or whether the negotiations will extend into mid-July.
If negotiations bleed into July, then there will be no hope of Congressional passage of a final infrastructure bill in July. The legislative process for an infrastructure bill will then extend into September or October, and even later.
U.S. existing home sales expected to continue lower — The consensus is for today’s May existing home sales report to show a decline of -2.2% m/m to 5.72 million, adding to April’s -2.7% m/m decline to 5.85 million. Existing home sales soared to a 15-year high last October but have since fallen by a total of -13% to a 10-month low in April.
Home sales are still stronger than before the pandemic but have fallen in the last few months due to the lack of homes on the market and resistance by some buyers to high home prices. The FHFA home price index is up sharply by +14% y/y.
2-year T-note auction — The Treasury today will sell $60 billion of 2-year T-notes. The Treasury will then continue this week’s $209 billion T-note package by selling $61 billion of 5-year T-notes and $26 billion of 2-year floating-rate notes on Wednesday, and $62 billion of 7-year T-notes on Thursday.
The 2-year T-note yield yesterday closed at 0.25%, which is just mildly below the 1-1/4 year high of 0.28% posted last week after the FOMC’s dot-plot turned significantly more hawkish. The 2-year T-note yield last week closed sharply higher by +11 bp on the week.
The 12-auction averages for the 2-year are as follows: 2.53 bid cover ratio, $114 million of non-competitive bids, 3.2 bp tail to the median yield, 9.3 bp tail to the low yield, and 50% taken at the high yield. The 2-year is the second least popular security among foreign investors and central banks behind the 3-year T-note. Indirect bidders, a proxy for foreign buying, have taken an average of only 51.7% of the last twelve 3-year T-note auctions, well below the median of 61.2% for all recent Treasury coupon auctions.
