- UK awaits EU verdict on length of Brexit deadline extension
- Clarida today speaks on Fed’s monetary policy framework
- JOLTS job openings expected to remain strong
- 3-year T-note auction to yield near 2.32%
UK awaits EU verdict on length of Brexit deadline extension — There is a near-zero chance of a no-deal Brexit when the current Brexit deadline arrives this Friday (April 12). Prime Minister May has already requested a deadline extension and has agreed to meet the EU’s demand for the UK to hold elections for the EU Parliament, although questions remain about other commitments the UK will be forced to make such as a pledge not to disrupt EU business.
With her request to the EU for an extension until June 30, Ms. May has already essentially met the demand of Parliamentary legislation that would prevent a no-deal Brexit. That legislation received final approval on Monday night. However, MPs might now push for a new vote today or tomorrow to force Ms. May to request a longer extension.
Prime Minister May is scheduled to meet today with Chancellor Merkel in Berlin and French President Macron in Paris ahead of tomorrow’s emergency EU summit on Brexit. While Ms. May has requested a deadline extension until only June 30, the EU is considering a longer extension such as a year since the odds do not look favorable for Ms. May to get the Brexit separation agreement approved by Parliament by June. The EU is reportedly leaning towards giving the UK a 1-year “flextension,” which means extending the deadline by a year but saying that the UK can leave the EU sooner if the UK Parliament passes a Brexit separation agreement.
Meanwhile, the Conservative-Labour talks about a Brexit compromise are not going well since the Labour Party says that Ms. May is not meeting its firm demand for a customs union. If Ms. May cannot get a decent-sized block of Labour votes for her Brexit separation agreement, then there appears to be no chance of passage.
Clarida today speaks on Fed’s monetary policy framework — Fed Vice Chair Richard Clarida today speaks at a “Fed Listens” event hosted by the Minneapolis Fed to discuss the Fed’s year-long review of its monetary policy framework. The markets will be carefully assessing Mr. Clarida’s comments in an attempt to get a better read on where the Fed is going with its balance sheet and exactly how it will conduct monetary policy in coming years.
The Fed has already said it has decided to stick with the floor system that it has been using since the financial crisis rather than going back to the previous corridor system where the Fed adjusted scarce reserves to peg interest rates at its target. The floor system is based on having excess reserves in the banking system, which means that the Fed plans to have a much larger balance sheet than it did prior to the financial crisis.
Indeed, the FOMC at its last meeting on March 20-21 surprised the markets by announcing that it will end its balance sheet drawdown program earlier than expected. The FOMC said it will taper the decline of its Treasury security portfolio with a new cap of $15 billion starting in May versus its current cap of $30 billion. The Fed said that it plans to fully conclude its balance sheet reduction program at the end of September, with the balance sheet level then flat-lining. Mr. Powell said that he sees the balance sheet a bit above $3.5 trillion by year-end, down from the current $3.94 trillion but a massive $2.6 trillion above the pre-crisis level of $900 billion.
JOLTS job openings expected to remain strong — The market consensus is for today’s Feb JOLTS job openings report to show a small decline of -31,000 to 7.550 million, giving back part of January’s solid +102,000 gain to 7.581 million. The JOLTS series in January remained in very strong shape at only 45,000 below the record high of 7.626 million job openings posted in November 2018.
The high level of job openings is a positive leading indicator for the payroll report. On the payroll front, the markets were encouraged by last Friday’s news that March payrolls rose by a solid +196,000, rebounding from Feb’s paltry increase of +33,000. The payroll report revived market confidence about the strength of the U.S. labor market and economy.
3-year T-note auction to yield near 2.32% — The Treasury today will sell $38 billion of 3-year T-notes. The Treasury will then continue this week’s $78 billion coupon package by selling $24 billion of 10-year T-notes and $16 billion of 30-year bonds. The 10-year and 30-year auctions will be the second and final reopenings of the securities that the Treasury first sold in February.
Today’s 3-year T-note issue was trading at 2.32% in when-issued trading late yesterday afternoon. The 3-year T-note yield has rebounded higher by +12 bp to the current 2.32% level from the 14-month low of 2.10% posted two weeks ago, which may help improve demand at today’s auction. Still, the 3-year T-note yield has plunged by -73 bp from last November’s 11-year high of 3.05%. That plunge in yields has been due to the slower U.S. economy and the market’s new expectation for two Fed interest rate cuts over the next two years, which is far more dovish than the Fed’s view in late 2018 that it would be raising interest rates three times through 2020.
The 12-auction averages for the 3-year are as follows: 2.63 billion cover ratio, $88 million of non-competitive bids from mostly retail investors, 3.2 bp tail to the median yield, 17.4 bp tail to the low yield, and 61% taken at the high yield. The 3-year is the second least popular coupon security among foreign investors and central banks behind the 2-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of only 46.4% of the last twelve 3-year T-note auctions, which is far below the median of 62.1% for all recent Treasury coupon auctions.
