- What’s next on Washington’s fiscal agenda?
- U.S. Feb pending home sales expected to recover most of January’s decline
- 7-year T-note auction to yield near 2.25%
- EIA report
What’s next on Washington’s fiscal agenda? — Congress will be in session only until next Thursday and will then be on the Easter recess for the following 2-1/2 weeks (April 7-24). After the recess, Congress will return to session for the last four business days of April (April 25-28). During those last four days of April, Congress will be under the gun to approve new government spending by April 28 when the current continuing resolution (CR) expires.
There is the possibility of a government shutdown on April 28 when the CR expires. However, even if there is a shutdown, the markets are not likely to be too worried since a shutdown would probably be brief and would have little macroeconomic importance. Senate Democrats have said they will filibuster the new spending bill that is necessary on April 28 if it includes what they consider to be poison pills such as defunding Planned Parenthood or funding President Trump’s border wall (for which contractor bids are due today). Democrats have also said they would refuse to go along with the White House’s proposed $18 billion cut in health, energy and foreign aid spending in 2017.
It is unclear at this point whether President Trump and Republican leaders will be willing to risk a government shutdown on April 28 in order to push through their specialized priorities, or whether they would leave those battles for the 2018 budget or the debt ceiling increase. Republicans are considering putting the border wall bill into a separate supplemental spending bill, which would reduce Republican-Democratic conflict on that issue.
Aside from budget authority, the markets will of course be watching carefully to see what direction the White House and Congressional Republican leaders go in developing a tax reform plan. In order to stay within the confines of Senate reconciliation rules, Republicans at this point basically have a choice between a budget-neutral tax reform plan that is limited in size, or a go-for-broke plan with a 10-year tax cut that is not subject to budget neutrality.
The stock market, of course, is mainly interested in how much corporate tax rates might be cut, since those cuts fall directly to the stock market’s bottom line via higher after-tax profits for investors. The markets will also be watching to see if the White House seeks to fast-track infrastructure spending legislation to follow a parallel track with tax reform.
Adding to the mix, the debt ceiling must be raised by October or November when the Treasury’s emergency measures run will out. The debt ceiling hike has the potential for causing trouble for the markets because the legislation will need to be at least partially bipartisan in order to avoid a Senate Democratic filibuster and make up for the fact that some conservative House Republican may not be able to bring themselves to vote for a debt limit hike. Separately, Congress will also have to approve a 2018 budget by Oct 1, 2017.
U.S. Feb pending home sales expected to recover most of January’s decline — The market is expecting today’s Feb pending home sales report to show a gain of +2.5% m/m, thus reversing most of January’s -2.8% m/m decline. The pending home sales report measures the change in home sales contracts, which generally lead to existing home sales within one to two months, thus providing some leading information on the existing home sales series.
The markets will be watching closely to see whether existing home sales cool off a bit over the next few months. U.S. existing home sales in January rose by +3.3% to a new 10-year high of 5.69 million units, but then faded by -3.7% in February to 5.48 million units.
U.S. existing home sales in general remain at very strong levels. However, existing home sales are running into some headwinds from a tight supply of available homes on the market and reduced affordability. The supply of existing homes on the market was at 3.8 months in February, just mildly above the record low of 3.5 months seen in December 2016. U.S. home sales are also facing some headwinds from reduced affordability due to (1) the sharp +35% rise seen in home prices (FHFA data) seen since the housing bust, and (2) the recent rise in mortgage rates. The current 30-year mortgage rate of 4.23% is up by +69 bp from the pre-election level of 3.54%.
7-year T-note auction to yield near 2.25% — The Treasury today will sell $28 billion of 7-year T-notes and $13 billion of 2-year floating rate notes, concluding this week’s $101 billion T-note package. Today’s 7-year T-note issue was trading at 2.25% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.32% against the current 7-year breakeven inflation expectations rate of 1.93%.
The 12-auction averages for the 7-year are as follows: 2.53 bid cover ratio, $15 million in non-competitive bids, 4.6 bp tail to the median yield, 17.4 bp tail to the low yield, and 45% taken at the high yield. The 7-year is currently the third most popular coupon security among foreign investors and central banks behind the 10-year TIPS and the 30-year TIPS. Indirect bidders, a proxy for foreign buying, have taken an average of 64.3% of the last twelve 7-year auctions, which is well above the average of 59.2% for all recent Treasury coupons.
EIA report — The market consensus for today’s weekly EIA report is for a +1.4 million bbl rise in U.S. crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a -1.1 million bbl decline in distillate inventories, and a +0.5 point increase in the refinery utilization rate to 87.9%.
