- EU moves toward granting a long Brexit extension at today’s summit
- Minutes will provide details of dovish March 20-21 FOMC meeting
- ECB meeting tone will be dovish
- US/EU exchange tariff threats over Airbus/Boeing subsidies
- 10-year T-note auction to yield near 2.50%
EU moves toward granting a long Brexit extension at today’s summit — EU leaders at their emergency summit today are expected to approve a “flextension” of the UK’s Brexit deadline until either December 2019 or March 2020. The flextension will give the UK the option of leaving the EU earlier than the deadline if the UK Parliament approves the Brexit withdrawal agreement. EU leaders do not seem to be considering Prime Minister May’s request for an extension only to June 30 because the EU wants to give the UK plenty of time to reassess its Brexit options including the possibility of a snap election or a Brexit do-over vote.
There is still a chance that Ms. May might soon be able to reach an agreement with the Labour Party for a Brexit compromise such as staying within the EU customs union, which would allow the UK to cancel its participation in the May 23 elections for the EU Parliament. If UK Parliament does approve the Brexit withdrawal agreement with Labour’s help, then the UK will officially end its EU membership and move into a quiet transition period until Dec 2020. However, the Conservative-Labour talks have so far produced little progress because Ms. May has refused to accede to Labour’s demand to remain in the EU customs union.
If the UK today gets a long extension and if Ms. May cannot reach a compromise with Labour leader Corbyn over the next few weeks, then there will be a Parliamentary deadlock that may well require new elections. The question then will be who will lead the Conservatives into the election because Ms. May has already promised to step down before the next election.
The good news for the markets is that there is a near-zero chance for a no-deal Brexit on this Friday’s (April 12) Brexit deadline since an extension appears to be assured. However, the bad news from a long extension is that the Brexit uncertainty will continue for potentially up to a year, thus extending the negative impact of Brexit on the UK and Eurozone economies.
Minutes will provide details of dovish March 20-21 FOMC meeting — The markets will be carefully assessing today’s release of the minutes from the March 20-21 FOMC meeting, which produced an even more dovish outcome than the markets were expecting. The FOMC trimmed its Fed-dot forecast to zero rate hikes in 2019 from two hikes and forecast only one rate hike in 2020.
The FOMC also announced an earlier end to its quantitative tightening program than the markets had been expecting. 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.
ECB meeting tone will be dovish — The ECB at its meeting today will maintain a dovish tone due to the weak Eurozone economy and the ECB’s conclusion that the risks are to the downside. The ECB today will actively discuss its new round of TLTRO loans to banks and whether those loans could be used to offset the deleterious effects of negative interest rates on banks. The ECB at its March meeting announced that it will begin quarterly targeted longer-term refinancing operations (TLTROs) starting in September and lasting through March 2021. The ECB at the March meeting also extended its promise not to raise interest rates from this summer to the end of this year.
US/EU exchange tariff threats over Airbus/Boeing subsidies — President Trump on Tuesday threatened to impose penalty tariffs on $11 billion of EU products in response to the WTO’s conclusion that EU subsidies to Airbus harmed U.S. aircraft manufacturers. The EU quickly responded yesterday by promising retaliatory tariffs due to subsidies that Washington state provides to Boeing.
The new flare-up could endanger the US/EU trade talks that are due to begin soon on reducing industrial and auto tariffs. The EU has yet to finalize the mandate that EU Trade Commissioner Malmstrom needs to begin the talks. President Trump’s threat to impose tariffs on imported European autos continues to hang over the potential talks and the markets.
10-year T-note auction to yield near 2.50% — The Treasury today will sell $24 billion of 10-year T-notes in the second and final reopening of the 2-5/8% 10-year T-note of Feb 2029 that the Treasury first sold in February. The Treasury will then conclude this week’s $78 billion coupon package by selling $16 billion of 30-year bonds on Thursday.
The 10-year T-note yield has rebounded higher by +16 bp to 2.50% from the 1-1/3 year low of 2.34% seen two weeks ago. Still, the 10-year yield is down sharply by -76 bp from last October’s 8-year high of 3.26% due to the slower U.S. and global economies, reduced inflation expectations, and the Fed’s switch to a neutral policy from its previous forecast for three more rate hikes.
The 12-auction averages for the 10-year are as follows: 2.50 billion cover ratio, $21 million of non-competitive bids from mostly retail investors, 4.3 bp tail to the median yield, 26.5 bp tail to the low yield, and 44% taken at the high yield. The 10-year is a little above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.5% of the last twelve 10-year T-note auctions, which is a little above the median of 62.1% for all recent Treasury coupon auctions.
