- Eurodollar futures curve turns more hawkish on FOMC minutes
- Unemployment claims expected to show continued improvement in the U.S. labor market
- U.S. LEI expected to show another sharp increase as the economy soarsÂ
- 10-year TIPS auction
Eurodollar futures curve turns more hawkish on FOMC minutes — The markets had a mildly bearish take on yesterday’s release of the April 27-28 FOMC meeting minutes. The Eurodollar futures contracts were mostly unchanged through 2022, but tightened up by 4-6 bp for the contracts of 2023 through 2029.
The markets were a little surprised to hear that “a number” of FOMC members suggested that discussions might have to begin at some point on QE tapering. However, that comment in the FOMC minutes was carefully couched and did not indicate that FOMC members are chomping at the bit to start tapering QE now.
The minutes said, “A number of participants suggested that if the economy continued to make rapid progress towards the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
Still, that comment confirmed that the FOMC is taking the first tentative steps towards discussing when to start tapering QE. A survey taken by Bloomberg several weeks ago 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.
Aside from the QE tapering reference, the tone of the minutes remained dovish and was in line with the Fed’s recent theme that a rate hike is far away. The minutes reiterated that the FOMC believes the current inflation surge is transitory.
The April FOMC meeting took place before last Wednesday’s April CPI showed a surge of +7.2% headline and +5.6% core on a 3-month annualized basis. However, most Fed officials since last Wednesday’s CPI report have stressed that the Fed still believes that the current inflation surge is transitory and does not justify an interest rate hike.
The markets are still not expecting the Fed’s first rate hike until early 2023, according to the federal funds futures market and the 3-month Eurodollar futures market.
Unemployment claims expected to show continued improvement in the U.S. labor market — Today’s unemployment claims report is expected to show a continued improvement in the U.S. labor market. The consensus is for today’s initial claims report to fall -23,000 to 450,000, adding to last week’s -34,000 decline to 473,000. The consensus is for today’s continuing claims report to fall -25,000 to 3.630 million, adding to last week’s -45,000 decline to 3.655 million.
Despite the ongoing improvement in the labor market, unemployment claims remain highly elevated relative to the pre-pandemic levels. From the pre-pandemic levels, initial claims are still up by +257,000 and continuing claims are up by 1.947 million.
U.S. LEI expected to show another sharp increase as the economy soars — The consensus is for today’s April leading economic indicator to show another sharp rise of +1.3% m/m, matching March’s +1.3% rise. On a year-on-year basis, the LEI in March soared to +7.9% y/y from -1.5% in February. That increase was partially due to the low year-earlier base caused by the pandemic shutdowns. However, the LEI is showing recent strength as seen by the fact that LEI in March, on a 3-month annualized basis, rose sharply by +7.1%.
The U.S. economy is currently booming as consumers spend their stimulus checks and spend some of the money they saved up during the pandemic. The consensus is that U.S. GDP in the current Q2 will surge by +9.4% (q/q annualized) and will remain very strong at +6.8% in Q3, before tailing off a bit to +4.8% in Q4. For 2021 as a whole, the consensus is for a very strong GDP growth rate of +6.5%, which would more than overcome the -3.5% decline seen in 2020.
10-year TIPS auction — The Treasury today will sell $13 billion of 10-year TIPS. Today’s auction will be the second and final reopening of the 1/8% 10-year TIPS of Jan 2031 that the Treasury first sold in January. The Treasury has recently been following a pattern of selling 10-year TIPS every two months, with the sale of a new issue in January and July followed by reopenings at the next two auctions.
The benchmark 10-year TIPS yield yesterday closed at -0.83%, which is in the lower third of the range seen since March. The 10-year TIPS yield peaked at -0.59% in mid-March and has since fallen back to -0.83%.
The 12-auction averages for the 10-year TIPS are as follows: 2.49 bid cover ratio, $24 million in non-competitive bids, 6.6 bp tail to the median yield, 27.8 bp tail to the low yield, and 55% taken at the high yield. The 10-year TIPS is the third most popular coupon security among foreign investors and central banks behind the 30-year TIPS and the 5-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 66.0% of the last twelve 10-year TIPS auctions, which is well above the median of 60.7% for all recent Treasury coupon auctions.
