Trade tensions ease a bit on news Trump administration is negotiating with Chinese
U.S. consumer confidence expected to edge to new 17-year high
U.S. metropolitan home prices expected to show another strong increase
Another big Treasury supply day that includes 5-year T-notes
Five Star/League relations warm up and cause some market concern
Trade tensions ease a bit on news Trump administration is negotiating with Chinese — The S&P 500 index on Monday rallied sharply by 2.72% on reduced trade worries after Treasury Secretary Mnuchin tried to reassure the markets that U.S. and Chinese officials are discussing trade and that he is cautiously hopeful that there will be a negotiated deal that averts tariffs.
China last week announced tariffs on $3 billion of U.S. products as retaliation for President Trump’s tariffs on steel and aluminum tariffs. However, China has not yet announced any retaliation for President Trump’s tariffs on $50 billion of Chinese goods, apparently deferring that decision while talks are in progress.
President Trump in early February caused a sharp stock market sell-off when he announced across-the-board tariffs on U.S. steel and aluminum imports. However, the administration has since temporarily exempted key nations from the tariffs totaling about 70% of U.S. steel and aluminum imports. That suggests that the steel-aluminum tariff announcement was designed in large part to force U.S. trade partners to the bargaining table. The markets are hoping that President Trump’s announcement of tariffs on $50 billion of Chinese products is likewise more of a negotiating tactic as opposed to a done deal that would surely draw a large retaliatory response from China.
Yet the trade risks remain high since there is no telling whether the Trump administration might launch new trade broadsides against China or other countries for other trade violations.
U.S. consumer confidence expected to edge to new 17-year high — The consensus is for today’s Conference Board March U.S. consumer confidence index to show a small +0.2 point increase to 131.0, adding to Feb’s +6.5 surge to 130.8. The confidence index in February rose sharply to a new 17-year high despite the downward stock market correction seen in early February on President Trump’s announcement of steel and aluminum tariffs.
U.S. consumer confidence remains in good shape due to (1) the strong labor market, (2) improved household finances due to rising incomes and rising home prices, (3) the Jan 1 tax cut, and (4) recent strength in the U.S. economy, although the first quarter is looking weak. Consumers have so far shaken off the stock market correction and the White House political uncertainty.
U.S. metropolitan home prices expected to show another strong increase — The consensus is for today’s Jan S&P CoreLogic Composite-20 home price index to show another strong increase of +0.6% m/m and +6.1% y/y. That would be similar to December’s report of +0.64% m/m and +6.3% y/y.
The Composite-20 index of home prices in the top-20 U.S. metropolitan areas went through a soft spot in spring-summer 2017 but has been on a tear since September 2017. The index since September has risen by +3.0% and was up by +6.3% y/y in December. The index has risen by +50% from the housing-bust low posted in 2012. U.S. home prices continue to see upward pressure from strong demand and tight supplies. Last week’s Jan FHFA housing index showed a sharp gain of +0.8% m/m, which was a supportive indicator for today’s Composite-20 index.
Another big Treasury supply day that includes 5-year T-notes — The Treasury today will sell $35 billion of 5-year T-notes, $65 billion of 4-week T-bills and 24 billion of 1-year T-bills. Today’s 5-year T-note was trading at 2.65% in when-issued trading late yesterday afternoon. The 5-year T-note yield reached an 8-year high of 2.73% last Wednesday after the hawkish FOMC meeting but has since eased to 2.65% due to last week’s sharp stock market sell-off.
The Treasury this week is selling a record $294 billion of securities as the Treasury is forced to finance a larger budget deficit due to tax cuts and higher spending. The $35 billion size of today’s 5-year T-note auction is unchanged from last month’s size, but is up by $1 billion from the $34 billion size that prevailed in 2016/17. The Treasury will conclude this week’s $109 billion T-note package on Wednesday by selling $15 billion of 2-year floating-rate notes and $29 billion of 7-year T-notes.
The 12-auction averages for the 5-year are as follows: 2.46 bid cover ratio, $58 million in non-competitive bids, 4.7 bp tail to the median yield, 17.9 bp tail to the low yield, and 33% taken at the high yield. The 5-year is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 64.8% of the last twelve 5-year T-note auctions, which is moderately better than the 12-auction average of 63.3% for all recent Treasury coupon auctions.
Five Star/League relations warm up and cause some market concern — Italy’s President Mattarella is expected to start talks with party leaders next Tuesday on forming a government. There is some market concern after the far-right League and the populist Five Star parties successfully coordinated electing speakers to the two houses of parliament last Friday and are now expected to see if it would be possible for them to form a government, which would be a worst-case scenario for the markets. However, a Five Star/League government seems unlikely because the two parties are far apart on their policy views. Still, there is no obvious combination of parties to form a stable government, which means that anything is possible.
The markets are showing mildly increased anxiety about the Italian government formation process, which is likely to take weeks or even months. The Italian 10-year bond yield spread over German bunds on Monday rose by +4 bp to 139 bp, but remains below the mid-March 2-1/4 month high of 142 bp.