- Stimulus bill might be getting closer
- U.S. weekly unemployment claims expected to show a continued slow improvement in the U.S. labor market
- U.S. leading indicators index is expected to extend its recovery but remain far short of pre-pandemic level
- 30-year TIPS auction to yield near -0.33%
Stimulus bill might be getting closer — Republicans and Democrats are at least making some noises that they are seriously considering a compromise stimulus bill. President Trump late Wednesday said he just heard the Democrats want to talk about stimulus. That followed White House Chief of Staff Mark Meadows’ earlier comment that, “The outlook for a skinny deal is better than it has ever been.” Mr. Meadows also said he has had private talks with Democrats that went “extremely well.” On Wednesday, White House Press Secretary McEnany said that the White House is willing to look at the $25 billion of Post Office funding that the Democrats are proposing.
House Speaker Pelosi has called House members back to Washington on Saturday to vote on a $25 billion Post Office funding bill, and she could bring up a skinny stimulus bill for a vote at that time. Republicans are now reportedly focussed on a $500 billion deal that includes measures that Republicans and Democrats mostly agree on, including an unemployment bonus, PPP funding for small businesses, and funding for education, virus testing, and vaccines. Republicans are still refusing to provide aid for state/local governments. The second stimulus payment to individuals is up in the air. It is not clear whether Democrats would go along with such a deal since their last offer was $2 trillion.
U.S. weekly unemployment claims expected to show a continued slow improvement in the U.S. labor market — Today’s weekly unemployment claims report is expected to show a further improvement in the labor market. However, unemployment is still at an extraordinarily high level. Initial claims are 746,000 persons above the pre-pandemic level seen at the end of February, and continuing claims are 13.787 million persons above the pre-pandemic level.
The consensus is for today’s weekly initial unemployment claims report to show a decline of -43,000 to 920,000, adding to last week’s decline of -228,000 to 963,000. Continuing claims are expected to fall by -486,000 to 15.000 million, adding to last week’s decline of -604,000 to 15.486 million.
U.S. leading indicators index is expected to extend its recovery but remain far short of pre-pandemic level — The consensus is for today’s July leading indicators index to show a +1.1% m/m increase, adding to the rebounds of +2.8% in May and +2.1% in June. Despite those rebounds, the LEI in June was still down sharply by -8.7% on a year-on-year basis. Moreover, the LEI would have to recover by another +10% to match the pre-pandemic level seen in January.
The markets remain focused on how quickly the U.S. economy will recover from the pandemic-induced recession seen in the first half of 2020. U.S. GDP dropped by -1.3% q/q in Q1 and -9.5% in Q2, leading to an overall peak-to-trough recession of -10.8% in the first half of 2020.
That -10.8% decline was the worst in post-war history and was more than two-and-a-half times worse than the -4.0% decline seen during the Great Recession in 2007/09. However, the first-half-2020 decline was less than half as bad as the -26% decline seen during the Great Depression.
The good news is that the consensus is for GDP to rebound moderately higher in the second half of 2020 with gains of +4.2% q/q (+18.0% annualized) in Q3 and +1.6% q/q (+6.5% annualized) in Q4.
Still, the expected second-half rebound is not expected to be strong enough to overcome the 1st-half loss and the consensus is for 2020 calendar-year GDP to fall sharply by -5.9%. The consensus is that GDP growth in 2021 will rise by +4.0%, which would still not be strong enough for GDP to reach the pre-pandemic peak.
30-year TIPS auction to yield near -0.33% — The Treasury today will sell $7 billion of 30-year TIPS. Today’s auction will be the first and only reopening of the 1/4% 20-year TIPS of February 2050, which the Treasury first sold in February. The Treasury’s pattern has been to sell a new 30-year TIPS issue in February and then reopen that bond in August.
The benchmark 30-year TIPS issue was trading at -0.33% late yesterday afternoon. The negative yield indicates that investors who buy today’s security will lose money on the security on an inflation-adjusted basis, but they can at least be assured that their money will be safely warehoused by the Treasury in the meantime.
The 12-auction averages for the 30-year TIPS are as follows: 2.47 bid cover ratio, $12 million in non-competitive bids, 6.4 bp tail to the median yield, 20.4 bp tail to the low yield, and 60% taken at the high yield. The 30-year TIPS is the most popular Treasury coupon security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 75.5% of the last twelve 30-year TIPS auctions, which is far above the median of 62.5% for all recent Treasury coupon securities.
The disappointing outcome of yesterday’s 20-year T-bond auction caused some concern that demand may be flagging for longer-term Treasury securities due to the massive new supply combined with rising inflation expectations. The $25 billion size of the 20-year bond was up sharply by $5 billion from May’s new-issue of $20 billion. The 20-year bond auction carried an auction yield of 1.185%, which was about 1 bp higher than the yield level just before the bidding deadline. The bid-cover ratio of 2.26 was substantially below the 3-auction average of 2.53, illustrating sub-par interest by investors in the auction.
