President Trump dials back a bit on Friday’s investment restriction announcement
U.S. durable goods orders expected at +0.5% ex-transportation
U.S. pending home sales expected to recover a bit
5-year T-note auction to yield near 2.75%
Weekly EIA report
President Trump dials back a bit on Friday’s investment restriction announcement — The markets were a little less worried about trade on Tuesday after President Trump seemed to side with Treasury Secretary Mnuchin about being a bit less confrontational about restricting China’s investment in the U.S. Mr. Trump on Tuesday mentioned using the already-existing review process by the Committee on Foreign Investment in the U.S. (CFIUS), although he said other methods could be used as well.
Market fears arose on Monday that the Trump administration might be planning to use a dusty 1977 law called the International Emergency Economic Powers Act to halt Chinese investment in sensitive U.S. technology sectors. That law could give the Trump administration broad powers to decide what investment in the U.S. will be permitted without much of a formal review process.
The CFIUS process, by contrast, would use the existing review process, although in a much more aggressive and targeted manner. Congress in any case is working on legislation to expand the powers of the CFIUS.
President Trump on Tuesday also confirmed Treasury Secretary Mnuchin’s comment on Monday that the investment restrictions will not be limited to China and will apply to any countries that the Trump administration believes are trying to acquire U.S. technology.
The technology restrictions to be announced by Friday will only be a proposal and will not go into effect until after a review process, meaning the restrictions could change.
Meanwhile, there are now only 9 days left until next Friday (July 6), when the reciprocal 25% tariffs on $34 billion worth of U.S. and Chinese products go into effect. There seems to be little hope for those tariffs to be averted considering that the U.S. and China are miles apart on their trade positions and that there seem to be no serious negotiations at this point.
Separately, the U.S. will hold a hearing on July 24 on the Trump administration’s plan to levy tariffs on another $16 billion of Chinese goods, bringing the total up to $50 billion. China’s list of the $16 billion worth of U.S. products due for a retaliatory tariff include U.S. energy products such as oil and coal.
Also on the trade front, the markets are nervous that Mr. Trump could be getting close to officially announcing the 20% tariff on European auto imports. Mr. Trump on Tuesday said that “we are finishing out study on tariffs on cars from the EU” even though Mr. Trump just announced that specific idea last Friday. The EU will undoubtedly launch another round of retaliatory tariffs against U.S. exports to Europe if the Trump administration goes through with its tariffs on EU autos.
U.S. durable goods orders expected at +0.5% ex-transportation — The market consensus for today’s May durable goods report is for changes of -1.0% and +0.5% ex-transportation following April’s report of -1.6% and +0.9% ex-transportation. Durable goods orders in April showed strong year-on-year growth of +7.9% y/y for both the headline series and the ex-transportation series.
Durable goods orders have been strong in recent months due to the strong economy and increased capital spending by firms that have extra cash available from the massive Jan 1 corporate tax cut. Regarding capital spending, the consensus is for today’s May capital goods new orders ex-defense and ex-aircraft to show an increase of +0.5%, adding to April’s +1.0% increase. That series showed a strong year-on-year gain of +5.7% y/y in April.
U.S. pending home sales expected to recover a bit — The market consensus is for today’s May pending home sales report to show an increase of +0.5% m/m, recovering part of April’s -1.3% decline. Pending home sales have sagged on a year-on-year basis and were down -2.1% y/y in April. The pending home sales report is a leading indicator for the existing home sales series since pending home sales contracts generally lead to closed home sales on a 1-2 month basis. Existing home sales in April and May showed a back-to-back decline totaling -3.1%, with sales being undercut by tight supplies and rising mortgage rates.
5-year T-note auction to yield near 2.75% — The Treasury today will auction $16 billion of 2-year floating-rate notes and $36 billion of 5-year T-notes. The $36 billion size of today’s 5-year auction is unchanged from May’s auction but is up by $2 billion from the $34 billion size that prevailed during 2016/17. Today’s 5-year T-note issue was trading at 2.75% late yesterday afternoon, which was 20 bp below May’s 9-year high of 2.95%. The 12-auction averages for the 5-year are: 2.48 bid cover ratio, $59 million in non-competitive bids to mostly retail investors, 4.5 bp tail to the median yield, 21.8 bp tail to the low yield, and 43% taken at the high yield. The 5-year enjoys only average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.5% of the last twelve 5-year auctions, which is right on the median of 63.5% for all recent coupon auctions.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -2.2 million bbl drop in U.S. crude oil inventories, +1.2 mln bbl rise in gasoline inventories, and a +1.2 mln bbl rise in distillate inventories. Relative to their respective 5-year seasonal averages, crude oil inventories are -1.6% below average, gasoline inventories are +5.9% above average, and distillates are -13.4% below average. U.S. oil production in last week’s EIA report was unchanged from the previous week’s record high of 10.900 million bpd.