- U.S. offers new trade talks to China
- ECB today expected to leave policy unchanged
- BOE policy expected unchanged today
- U.S. core CPI expected to remain at 10-year high
- Unemployment claims illustrate strong labor market
- 30-year T-note yield is near a 5-week high ahead of today’s auction
U.S. offers new trade talks to China — The Wall Street Journal yesterday first reported that the Trump administration has proposed another round of trade talks with China. New talks could perhaps prevent, or at least delay, the Trump administration from going ahead with implementing tariffs of up to 25% on another $200 billion of Chinese goods and teeing up another $267 billion tranche so that there would be tariffs on all U.S. imports of Chinese goods.
The caveat is that the new talks are being offered by Treasury officials led by Treasury Secretary Mnuchin, not by the trade hawks in Trump administration such as USTR Lighthizer and trade advisor Navarro who might work against any compromise. Still, it is mildly encouraging that there are at least talks about talks.
ECB today expected to leave policy unchanged — The ECB at its meeting today is unanimously expected to leave its monetary policy unchanged. ECB policy is currently on autopilot with the ECB already set to end its QE program on Dec 31 and promising that it will not raise interest rates until at least summer 2019. The market is not expecting an ECB rate hike until the second half of 2019.
BOE policy expected unchanged today — The Bank of England at its policy meeting today is unanimously expected to leave its monetary policy unchanged since it just raised the base rate by +25 bp to 0.75% in August at its last meeting. The market is not expecting another BOE rate hike until Q2-2019 when it becomes clear whether Brexit goes smoothly by the deadline of March 2019 or whether the UK crashes out of the EU without an agreement. In the event of a hard Brexit, the BOE may not raise rates against until late 2019 or even 2020 depending on the extent of the damage.
U.S. core CPI expected to remain at 10-year high — The market is expecting today’s Aug CPI report to ease slightly to +2.8% y/y from July’s 6-1/2 year high of +2.9% and the Aug core CPI to be unchanged from July’s 10-year high of +2.4% y/y. The fact that the CPI in July rose to a new high was a negative factor for inflation but it would be positive if today’s CPI report were to be steady to lower, as expected.
Market concern about inflation eased after yesterday’s much weaker-than-expected Aug PPI report of +2.8% (vs expectations of -0.1 to 3.2%) and Aug core PPI report of +2.3% (vs expectations of unchanged at +2.7%). The PPI was undercut by a decline in food prices and trade services. However, the decline in the PPI was generally perceived as a one-off event as opposed to the beginning of a trend.
A stable to weaker CPI report today would not reduce the market odds of 100% that the FOMC at its meeting in two weeks (Sep 25-26) will go ahead with a +25 bp rate hike. However, the markets would be pleased if the inflation statistics in August take a breather after having risen steadily this year. Inflation expectations have recently been stable with the 10-year breakeven rate at 2.12%, near the middle of the May/Sep range and 9 bp below May’s 4-year high of 2.21%.
Unemployment claims illustrate strong labor market — Unemployment claims remain in very favorable shape and show that layoffs are at their lowest level in more than four decades. Businesses are having a hard time finding new employees and are holding on tightly to their current employees. Businesses are also still hiring at a decent clip as shown by last Friday’s Aug payroll report of +201,000.
The initial claims series last week fell to a new 49-year low of 203,000 and the continuing claims series in last week’s report was just 6,000 above June’s 45-year low of 1.701 million. The consensus is for today’s initial claims report to show an increase of +7,000 to 210,000, regaining part of last week’s -10,000 decline to 203,000. The consensus is for today’s continuing claims report to show a small increase of +3,000 to 1.710 million, reversing last week’s -3,000 decline to 1.707 million.
30-year T-note yield is near a 5-week high ahead of today’s auction — The Treasury today will sell $15 billion of 30-year T-bonds in the first reopening of August’s 3% 30-year T-bond of August 2048, thus concluding this week’s $73 billion coupon package. The $15 billion size of today’s 30-year T-bond is up by $1 billion from the June-July reopenings and is up by $3 billion from the $12 billion reopening size seen during most of 2016/17.
The 30-year T-bond yield on Tuesday rose to a 5-week high of 3.13% but then settled back to 3.10% on Wednesday. The 30-year bond yield is currently at the upper end of the range seen June and is only 16 bp below May’s 4-year high of 3.26%.
The 30-year bond yield has risen by about +15 bp in the past two weeks due to (1) last Tuesday’s surprisingly strong Aug ISM manufacturing index report of +3.2 to a 14-year high of 61.3, (2) last Friday’s stronger-than-expected Aug payroll report of +201,000, and (3) last Friday’s stronger-than-expected increase in Aug hourly earnings to a 9-year high of +2.9% y/y. The 30-year bond yield on Wednesday fell by 1.5 bp to 3.10% due to the soft PPI report.
The 12-auction averages for the 30-year are as follows: 2.38 bid cover ratio, $69 million in non-competitive bids, 4.4 bp tail to the median yield, 42.0 bp tail to the low yield, and 34% taken at the high yield. The 30-year T-note is slightly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.2% of the last twelve 30-year T-bond auctions, slightly below the median of 62.8% for all recent Treasury coupon auctions.
