- 7-year T-note auction to yield near 1.83%
- 2020 trade preview
- Washington 2020 preview
7-year T-note auction to yield near 1.83% — The Treasury today will sell $32 billion of 7-year T-notes. The benchmark 7-year T-note yield is currently trading at 1.83%, near the top of its recent range. The 12-auction averages for the 7-year are: 2.43 bid cover ratio, 4.6 bp tail to the median yield, 32.8 bp tail to the low yield, 54% taken at the high yield, and 60.8% taken by indirect bidders (matching the median for all recent Treasury coupon auctions).
2020 trade preview — The markets are hoping that trade tensions in 2020 will be less severe than in 2018-19. The good news is that the USMCA agreement should receive the final approval of Congress in early 2020. The U.S. has already concluded a revised free-trade agreement with South Korea and a first-stage trade agreement with Japan. The U.S. and China are expected to sign their phase-one trade agreement in early January with a reduction in February of September’s 15% tariff to 7.5% on about $120 billion of Chinese goods.
Still, there are plenty of potential flash points for trade in 2020. There are sure to be continued trade tensions in 2020 with China, Europe, India, and other nations. In addition, the U.S. in 2020 will be trying to quickly negotiate a trade deal with the UK.
The U.S. and China will be engaged in phase-two trade talks in 2020 and it is possible that President Trump will apply new trade measures to gain more leverage in those talks. It is also possible that President Trump might believe that China is not living up to its promises in the phase-one trade agreement to buy at least $40 billion of U.S. ag products, leading him to reimpose tariffs. There is no sign that the U.S. pressure on Chinese tech companies such as Huawei has abated.
The U.S. is also likely to clash with the EU in 2020 on trade since the US/EU trade talks on autos and other sectors have made virtually no progress, although President Trump at least has not yet made good on his threat to slap tariffs on European autos. Also, the U.S. and EU will be exchanging blows on WTO-sanctioned tariffs related to subsides on Airbus and Boeing. Also, the U.S. may proceed with its penalty tariffs related to France’s tax on digital trade.
Washington 2020 preview — Congress is on holiday recess and will not reconvene until Jan 6-7. The near-term focus in Washington is on President Trump’s trial in the Senate since basically nothing can get done in the Senate until the trial is over.
By most accounts, President Trump is assured of being acquitted in the Senate trial because of the Republican majority, unless some grave new evidence or testimony emerges, or unless Republican politics unexpectedly turns drastically against the President. The timing of the Senate trial cannot be set until House Speaker Pelosi transmits the articles of impeachment to the Senate, which she is holding back in order to gain some leverage over the Senate trial rules. Senate Majority Leader McConnell said he does not expect negotiations on the Senate rules to resume until the Senate reconvenes in early January, which suggests that a Senate trial may not begin until mid to late January, or perhaps even later.
On the trade front in Washington, the Senate Finance Committee will hold a markup of the USMCA bill on January 7, according to Chairman Grassley’s office. However, the full Senate is not expected to take up the USMCA bill until after President Trump’s trial. The markets will be relieved when the USMCA is approved by Congress since that will reduce trade uncertainty and could lead to a burst of new investment once the new North American trade rules have been locked in.
On the Washington fiscal front, the coast is clear for the markets through September 2020. Washington last week approved the spending bills for the remainder of fiscal 2020, meaning the earliest threat for a government shutdown is now Oct 1, 2020, when the new fiscal year begins. Even then, a government shutdown is very unlikely just ahead of the November election. Instead, Congress is likely to pass a continuing resolution in September that lasts into December or early 2021, thus deferring the threat of a government shutdown until after the Nov 2020 election.
There will be no risk of a Treasury default in 2020 based on the debt ceiling since Congress has already suspended the debt ceiling until July 2021, which is a full six months into the next presidential term. Depending on the outcome of the November 2020 election, there could be the risk of a Treasury default in 2021 if there is a political deadlock in Washington over raising the debt ceiling.
Since the fiscal coast is clear in 2020, the main focus in Washington will be on the November 2020 election. The markets are not likely to see much reaction if the current situation continues with divided control of Washington. In that case, ongoing political gridlock will prevent any major new legislation from passing. Even if Republicans regain control of Washington with a sweep of the presidency and Congress, the markets may not show much reaction since Republicans already passed their big tax cut in the first half of President Trump’s term.
If Democrats win a sweep of the presidency and Congress, then there will be some concern in the stock market about the possibility of a hike in the corporate tax rate, which would undercut after-tax earnings and thus stock prices. However, Democrats’ power would still be limited by Senate filibuster rules, assuming those filibuster rules remain in place. With a filibuster, Senate Republicans could block any Democratic bills from passing, except those passed under the budget reconciliation process that requires only a majority vote for cloture and final passage of a bill.
