- FOMC expected to leave policy stance unchanged
- U.S. consumer confidence expected to reach new 1-year highÂ
- U.S. home prices expected to extend their sharp rise
- 7-year T-note auction to yield near 1.26%Â
FOMC expected to leave policy stance unchanged — The markets are expecting the FOMC at its 2-day meeting that begins today to leave its policy variables unchanged and simply reiterate its recent themes. The FOMC at this week’s meeting will not be providing an updated Summary of Economic Projections, which means there will not be a new Fed-dot forecast of the funds rate.
Fed officials in recent weeks have taken pains to remain dovish and reassure the markets that the Fed is not even thinking about tapering its QE program or raising interest rates. Fed Chair Powell recently reiterated that the Fed will not consider tapering its QE program until “we’ve made substantial further progress towards our goals” on inflation and employment.
A recent survey by Bloomberg found that the markets are expecting the Fed to start tapering when the unemployment rate has fallen to around 4.5%, and PCE deflator has risen to +2.1%. The unemployment rate is currently at 6.0%. The PCE deflator in February was at +1.6% y/y and the core deflator was at +1.4% y/y. On a 3-month annualized basis, however, the deflator in February was up +3.8% and the core deflator was up +2.5%.
Mr. Powell said that QE tapering would “in all likelihood be before, well before, the time we consider raising interest rates.” The Bloomberg survey found that 14% of the analysts surveyed expect the Fed to start tapering its QE program in Q3, and 45% of the analysts expect tapering to begin in Q4. Opportunities for the Fed to announce the tapering could come as soon as the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference. The consensus is for the tapering to last 7-12 months.
The market is not expecting the Fed to start raising rates until early 2023. The Bloomberg survey found a consensus for two +25 bp rate hikes in 2023 that would bring the funds rate target up to 0.50%/0.75% from the current level of 0%-0.25%.
The market expectation is more hawkish than the Fed-dot forecast, where the consensus among FOMC members is that the funds rate will remain unchanged through the end of 2023. However, there are a number of FOMC members that are more hawkish than their colleagues, with 4 of the 18 FOMC members expecting at least one rate hike in 2022 and 7 of the 18 FOMC members expecting one or more rate hikes by 2023.
U.S. consumer confidence expected to reach new 1-year high — The consensus is for today’s April Conference Board U.S. consumer confidence index to show a +3.3 point increase to 113.0, adding to March’s surge of +19.3 points to a 1-year high of 109.7.
U.S. consumer confidence is expected to show continued strength in April due to stimulus checks, the strengthening labor market, and the fading pandemic. Many consumers in March and April received $1,400 stimulus checks, which gave households a boost and led to a surge of spending. Retail sales in March soared by +9.8% m/m and +27.9% y/y.
The stronger U.S. labor market is also providing consumers with a boost in confidence. Payroll jobs have risen by an average of +692,000 per month over the last three reporting months (Jan-March).
U.S. home prices expected to extend their sharp rise — The consensus is for strong home price reports again in February with expected gains of +1.0% m/m for the FHFA index and +1.1% m/m for the S&P CoreLogic Composite 20 index. On a year-on-year basis, the FHFA index in January was up +12.0% y/y and the Composite 20 index was up +11.1% y/y.
Home prices continue to rise sharply due to strong demand and tight supplies. The supply of homes on the market was at only 2.0 months in March, which was just slightly above the record low of 1.8 months posted in December and January.
Existing home sales were weak in Q1 due to bad weather and the tight supply of homes on the market. However, new home sales in March soared by +20.7% m/m to a 14-year high of 1.021 million units, illustrating the continued strong underlying demand for homes.
7-year T-note auction to yield near 1.26% — The Treasury today will sell $28 billion of 2-year floating-rate notes and $62 billion of 7-year T-notes, concluding this week’s T-note package. The Treasury sold 2-year and 5-year T-notes on Monday.
The benchmark 7-year T-note yield yesterday closed at 1.26%. The 7-year yield this year raced up to a 14-month high of 1.44% in early April, but then settled back a bit to a 1-1/2 month low of 1.21% last week.
The 12-auction averages for the 7-year are as follows: 2.37 bid cover ratio, $10 million in non-competitive bids, 5.6 bp tail to the median yield, 41.8 bp tail to the low yield, and 43% 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 61.1% of the last twelve 7-year T-note auctions, which matches the median for all recent coupon auctions.
