- Markets wait for China’s response to U.S. closure of its Houston consulateÂ
- McConnell may release Republican pandemic rescue bills as soon as today
- U.S. initial unemployment claims expected to stop improving
- LEI expected to show back-to-back gain in May-June
- 10-year TIPS auction to yield near -0.94%
Markets wait for China’s response to U.S. closure of its Houston consulate — The markets are waiting to see whether China will retaliate for the Trump administration’s sudden announcement of the closure of China’s Houston consulate within three days. The U.S. State Department did not specify the exact reason for the closure except to say that there was a need to protect intellectual property and “private information” of Americans. The U.S. move could have been retaliation for two Chinese hackers who were charged by the U.S. Justice Department on Tuesday of extensive hacking against the United States.
The Houston consulate is one of five Chinese consulates in the U.S., with the others being in San Francisco, Los Angeles, Chicago, and New York. The U.S. has five consulates in mainland China plus a consulate in Hong Kong. A proportionate response from China would be to close one of the U.S. consulates in mainland China. However, China would likely escalate the situation if they chose to close the U.S. consulate in Hong Kong, which is already a flash-point for U.S./Chinese relations after China’s recent implementation of the Hong Kong security law.
Wednesday’s closure of China’s consulate in Houston represented a new low in U.S./Chinese relations. However, the markets still haven’t been too rattled by the recent U.S. moves on China since the phase-one trade deal remains intact so far.
On that note, Bloomberg reported on Wednesday that Chinese buyers are seeking to purchase soybeans for shipment in October and November. China may be trying to signal its commitment to the phase-one trade despite the tensions on a range of other issues, including Hong Kong, suppression of minorities, tech companies, and hacking.
The normal seasonal pattern is for Chinese soybean purchases from the U.S. to be light during the summer but then pick up sharply in autumn as the U.S. soybean harvest arrives. Chinese soybean purchases have been disrupted this year by the Covid pandemic. Chinese soybean purchases were strong in February but then tailed off in March-May.
McConnell may release Republican pandemic rescue bills as soon as today — Bloomberg late Wednesday reported that Senate Republicans hope to release at least part of their pandemic plan as soon as today. Bloomberg said that Senate Republicans and the White House late Wednesday reached an agreement on the spending portion of their stimulus plan, which will allow Senate Majority Leader McConnell to release a series of bills that will form the Republican pandemic stimulus package. Bloomberg said the plan will include another round of direct payments to individuals, $105 billion in aid for schools, $25 billion to expand virus testing, and other items.
There were also media reports yesterday that some Senate Republicans are discussing the possibility of passing a temporary extension of the $600 per week unemployment bonus, which expires this weekend. However, some Senate Republicans strongly oppose the $600 bonus for any length of time and House Democrats generally responded by saying they want to get to a final bill and not allow a delay.
The U.S. national debt has now soared by $3.1 trillion (+13%) from the pre-pandemic level in February, reaching a record high of $26.5 trillion. The only good news is that the debt limit has been suspended until next July, which is six months into the new presidential administration. Congress therefore isn’t presently being forced to grapple with a debt ceiling hike, which in the past has led to the threat of Treasury sovereign debt default.
U.S. initial unemployment claims expected to stop improving — The consensus is for today’s weekly initial unemployment claims report to be unchanged at 1.300 million following last week’s small -10,000 decline to 1.300 million. If initial claims are just unchanged today, that would snap the 15-week string of consecutive declines, illustrating that the U.S. labor market may be starting to backslide as states clamp down in response to the second Covid wave and as PPP money runs out.
The good news, however, is that the total number of people on unemployment is expected to continuing declining today. The consensus is for today’s continuing claims to fall by -238,000 to 17.100 million, adding to last week’s -422,000 decline to 17.338 million. But that would mean that there are still 15.4 million more people on the unemployment rolls than there were before the pandemic.
LEI expected to show back-to-back gain in May-June — The consensus is for today’s June leading indicators report to show an increase of +2.1% m/m, adding to May’s +2.8% increase. The LEI plunged by a total of -13.3% in Feb-April before rebounding higher by +2.8% in May. Today’s expected increase would still leave the LEI 10% below January’s record high for the index, illustrating that the U.S. economy has a long way to go for a full recovery.
10-year TIPS auction to yield near -0.94% — The Treasury today will sell $14 billion of 10-year TIPS. Today’s 10-year TIPS issue was trading at -0.94% in when-issued trading late yesterday afternoon. The 12-auction averages for the 10-year TIPS are as follows: 2.45 bid cover ratio, $21 million in non-competitive bids, 6.7 bp tail to the median yield, 25.6 bp tail to the low yield, and 56% taken at the high yield. The 10-year TIPS is the second most popular security among foreign investors and central banks behind the 30-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 65.9% of the last twelve 10-year TIPS auctions, which is well above the median of 62.1% for all recent Treasury coupon auctions.
