- Markets wait to hear about how concerned Powell is about coronavirus and any news on T-bill purchase program
- JOLTS job openings expected to partially recover from Nov’s plunge
- Treasury’s refunding operation kicks off with 3-year T-notes
Markets wait to hear about how concerned Powell is about coronavirus and any news on T-bill purchase program — Fed Chair Powell today will appear before the House Financial Services Committee on the first day of his 2-day presentation of the Fed’s semi-annual report to Congress on monetary policy.
The market’s main question is how worried the Fed is about the coronavirus. The Fed last Friday in its semi-annual report to Congress on monetary policy said, “The effects of the coronavirus in China have presented a new risk to the outlook.” The Fed said, “Because of the size of the Chinese economy, significant distress in China could spill over to the U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices.”
Before the coronavirus emerged as a major problem in mid-January, the Fed said that its policy would remain firmly on hold unless there was a material change in the outlook. The market so far does not consider the U.S. impact from the coronavirus to be serious enough to justify a near-term Fed rate cut. The market is discounting only a 10% chance of an FOMC rate cut at its next meeting on March 17-18 and a 30% chance at the following meeting on April 28-29.
However, the market is fully discounting a 25 bp rate cut by the July 28-29 meeting. The August federal funds futures contract on Monday closed at a yield of 1.36%, which is 26 bp below the current 1.625% mid-point of the Fed’s current target range of 1.50%-1.75%.
Fed Chair Powell today is likely to reassure the markets that the Fed believes the economy is strong and that the current stance of monetary policy remains in a good place. Indeed, both Fed Governor Bowman and Philadelphia Fed President Harker (voter) as recently as yesterday said they believe the U.S. economic outlook remains strong. As long as the coronavirus does not gain a foothold and start spreading within the U.S., the Fed will likely stick with its theme of stability.
The markets are also waiting for any update on when the Fed might start winding down its T-bill purchases, although such an announcement is not likely to come until after a formal FOMC meeting. It is likely no coincidence that the S&P 500 index started its current +12.6% rally a week after the Fed started its T-bill purchase program on October 1, 2019.
From the 6-year low in its balance sheet in August 2019, the Fed has boosted its balance sheet by a total of $407 billion (+10.8%), thus reversing 54% of the overall balance sheet drawdown seen during 2015-19. The Fed continues to insist that its T-bill purchase program is a neutral policy move and is designed only to boost reserves to the minimum level needed by the banking system. The Fed continues to deny that its T-bill purchase program is a new QE attempt to stimulate the economy, although the impact is similar to that of the Fed buying longer-dated Treasury coupon securities in a traditional QE program.
The Fed has so far said that it expects its T-bill purchase program of $60 billion per month to last at least through Q2. The market consensus is for the Fed to end the program in June, likely with a tapering in the 2-3 months before the ending date. When the program ends, the markets will then be able to gauge the extent to which the stock market gains have been driven by the Fed’s injection of $407 billion of liquidity thus far into the banking system.
JOLTS job openings expected to partially recover from Nov’s plunge — The market consensus is for today’s Dec JOLTS job openings report to show an increase of +125,000 to 6.925 million, recovering only about one-quarter of November’s plunge of -561,000 to 6.800 million. The plunge in job openings in November was a negative indicator that businesses might be pulling back on hiring. In the meantime, there was good news in December with the US/China phase-one trade deal but then bad news in January with the emergence of the coronavirus.
The concern about Nov’s plunge in job openings was offset to some extent by the strength in last Friday’s Jan payroll report of +225,000. Payroll growth in recent months has been strong with a 3-month average of +211,000 and a 6-month average of +206,000. Yet the considerable uncertainty about the impact of the coronavirus on the global economy could still damage hiring in February and March.
Treasury’s refunding operation kicks off with 3-year T-notes — The Treasury today will sell $38 billion of 3-year T-notes, kicking off this week’s $84 billion refunding operation. The Treasury will then sell $27 billion of new 10-year T-notes on Wednesday and $19 billion of new 30-year T-bonds on Thursday. The sizes of this week’s refunding auctions are the same as the last five quarterly refunding operations.
The 3-year T-note yield dropped with the rest of the Treasury curve during January due to the global economic damage being done by the Chinese coronavirus. The 3-year T-note yield on January 31 fell to a 3-1/4 year low of 1.29% but has since rebounded mildly by 9 bp to the current level of 1.38%.
The 12-auction averages for the 3-year are as follows: 2.45 bid cover ratio, $58 million of non-competitive bids, 3.0 bp tail to the median yield, 27.6 bp tail to the low yield, and 61% taken at the high yield. The 3-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 47.5% of the last twelve 3-year T-note auctions, which is far below the median of 60.1% for all recent Treasury coupons.
