- Weekly global market focus
- US/China trade talks could be disrupted by U.S. bill on Hong Kong
- Treasury squeezes $131 billion of T-note sales into Mon-Wed
Weekly global market focus — The U.S. markets this week will focus on (1) any fallout for the US/Chinese trade talks if President Trump signs the Hong Kong bill passed by Congress last week, (2) comments by Fed Chair Powell this evening at the Greater Providence Chamber of Commerce dinner, (3) whether U.S. consumers will continue to support the economy as the all-important holiday shopping season unofficially begins this week with Black Friday, (4) the Treasury’s sale of $131 billion of T-notes today through Wednesday, and (5) a very busy U.S. economic calendar on Tuesday and Wednesday.
Washington politics will remain in the news this week even though Congress has recessed for the Thanksgiving holiday. A U.S. District Court judge is expected to rule today on whether former White House lawyer Don McGahn can be compelled by subpoena to testify to Congress, although the decision is likely to be appealed. The House Intelligence Committee’s impeachment hearings are over for now and that Committee is expected to deliver a report to the House Judiciary Committee, which will then consider whether to draft articles of impeachment. House Speaker Pelosi seems to be aiming for a House impeachment vote before the end of the year, although that deadline could easily slip into the New Year, particularly if there are more hearings.
Separately, Congressional negotiators on Saturday took a big step forward and reached a bipartisan agreement on spending levels for each of the 12 appropriation bills needed to fund the government. That agreement makes a government shutdown less likely when the current continuing resolution expires on Dec 20. However, negotiators sidestepped for now the contentious issues involved with President Trump’s wall funding.
In Europe, the markets this week will focus on (1) a series of speaking engagements by ECB members, (2) several confidence reports that are expected to stabilize after the recent declines, and (3) Friday’s Eurozone Nov CPI, which is expected to show a small increase to +0.9% y/y headline and +1.2% y/y core from Oct’s +0.7% and +1.1%, respectively.
The markets continue to closely watch the UK campaign since Prime Minister Johnson believes he has the support of all his party members to approve his Brexit withdrawal bill by the Jan 31 Brexit deadline if Conservatives win a majority of seats in Parliament in the upcoming Dec 12 election. Conservatives are out-polling Labour by a margin of 42% to 30%, according to a YouGov poll. The betting probability remains strong at 69% that Conservatives will capture a majority of seats, according to oddschecker.com.
In China, the focus will remain on US/China trade talks and the protests in Hong Kong. Also, Chinese PMI reports will be released Friday night. In Japan, the focus is on Wednesday night’s Oct retail sales report, which is expected to show a plunge of -10.4% m/m due to the sales tax hike to 10% from 8% that took effect on Oct 1. There is a raft of other Japanese economic reports late this week.
US/China trade talks could be disrupted by U.S. bill on Hong Kong — The markets are waiting to see if President Trump signs the Hong Kong bill that Congress passed by almost unanimous consent last Wednesday. Mr. Trump last Friday said he “stands with” Hong Kong but wants a trade deal, saying that he would take a “good look” at the bill. China has threatened unspecified retaliation if President Trump signs the Hong Kong bill, but China probably cannot afford to walk away from the trade deal. In some positive trade news, China on Sunday announced higher criminal penalties for IP theft in line with U.S. demands.
The markets are waiting for any signs of progress in the US/Chinese trade talks. The Wall Street Journal last Thursday reported that China has invited USTR Lighthizer and Treasury Secretary Mnuchin to China for another round of face-to-face talks, but that the U.S. is reluctant to agree unless China shows a stronger commitment for concessions on IP protection, forced technology transfers, and ag purchases.
The two sides seem to be far apart on a deal as they argue over issues such as the U.S. demand for Chinese ag purchases to be specified in writing and China’s demand for tariff rollbacks. The two sides are reportedly discussing the possibility of rolling back tariffs with a complicated formula as to how much of a trade deal is completed in the first round.
President Trump seems willing to forgo the upcoming Dec 15 tariff as part of a phase-one trade deal, and possibly roll back all or some of the Sep 1 tariff. However, Mr. Trump seems unlikely to agree to any near-term rollback of the original tariff on $250 billion of Chinese goods since he needs the leverage from those tariffs to try to negotiate a phase two of a trade agreement.
Treasury squeezes $131 billion of T-note sales into Mon-Wed — The Treasury today will sell $40 billion of 2-year T-notes. The Treasury will then continue this week’s $131 billion T-note package by selling $18 billion of floating-rate notes and $41 billion of 5-year T-notes on Tuesday, and $32 billion of 7-year T-notes on Wednesday. The benchmark 2-year T-note yield last Friday closed at 1.63%, in the upper half of its recent 5-week range and 27 bp above the early-Oct 2-1/4 year low of 1.36%.
The 12-auction averages for the 2-year are: 2.58 bid cover ratio, $230 million in non-competitive bids to mostly retail investors, 2.7 bp tail to the median yield, 29.7 bp tail to the low yield, and 36% 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 buyers, have taken an average of only 48.6% of the last twelve 2-year T-note auctions, well below the 12-auction average of 59.7% for all recent coupon auctions.
