- Expectations for dovish FOMC meeting help drive gold to record high and dollar to 2-year low
- Negotiations finally begin for pandemic rescue bill
- U.S. consumer confidence expected to fade
- U.S. home prices expected to show continued rise
- Treasury sells 7-year T-notes and 2-year floating-rate notes today
Expectations for dovish FOMC meeting help drive gold to record high and dollar to 2-year low — Aug gold futures on Monday rallied to a new record nearest-futures high of $1968 per oz and have now soared by +9% from the $1800 level seen as recently as mid-July. The rally in gold was driven in part by Monday’s collapse in the dollar index to a 2-year low. Gold was also driven higher by record lows in real Treasury yields and by expectations for a dovish outcome from the 2-day FOMC meeting that begins today.
The FOMC tomorrow is expected to announce an unchanged policy with its funds rate target at 0.00%/0.25% and its QE program at $120 billion per month. However, the FOMC is expected to take a dovish tone as it battles negative sentiment from the second Covid wave that began in mid-June.
FOMC members today are expected to discuss adopting more specific interest rate guidance tailored towards convincing market participants that it will keep interest rates low for a long period of time. At the last FOMC meeting, some members favored guidance that the Fed would not raise interest rates until inflation hits the Fed’s 2% inflation target. The federal funds futures market shows that the market is not expecting a rate hike at least through June 2023, which is as far out as the futures contracts are trading right now. Indeed, the market is discounting a funds rate cut to -0.03% by spring 2022.
Negotiations finally begin for pandemic rescue bill — The negotiations for another pandemic bill finally got started Monday evening after Republicans during the afternoon released their pandemic rescue proposal. White House Chief of Staff Meadows said that he and Treasury Secretary Mnuchin had a “very productive” meeting with House Speaker Pelosi and Senate Minority Leader Schumer at the Capitol early Monday evening. Mr. Meadows said, “We will be back tomorrow” as negotiations continue.
The Republican plan was in line with expectations with funding for a second stimulus payment to individuals, a PPP extension, schools, stepped-up virus testing, and a host of other items. Senate Majority Leader McConnell tried to set a red line by saying he would not agree to any compromise that doesn’t include Covid liability protections for businesses. Republicans offered a $200 per week bonus unemployment payment, down from the current $600, and proposed to switch to a 70% wage replacement plan in two months when state unemployment agencies might be able to handle the extra work.
The $600 per week unemployment bonus payment already started expiring this past weekend in some states and will fully expire by this Friday (July 31). If that bonus lapses, Bloomberg Economics estimates there would be a $65 billion loss of monthly income from the economy, which would erase a large part of the expected improvement in Q3 personal spending.
Republican leaders in the past several days have pushed the idea of passing a narrow bill that mainly extends the unemployment benefits. Democrats have been cool to that idea, but Politico reports that Democrats have not completely ruled out the idea of a stop-gap bill if the bonus payment stays at $600 per week. Time is short for a deal since Congress is due to leave for their August recess next Friday.
U.S. consumer confidence expected to fade — The consensus is for today’s July Conference Board U.S. consumer confidence index to show a -3.4 point decline to 94.7, reversing part of June’s +12.2 point jump to 98.1. Today’s report is expected to show a slide in consumer confidence due to the second Covid wave that started in mid-June and caused renewed shutdowns and layoffs. Consumers turned less optimistic in July after they realized that the Covid pandemic is going to be a longer haul than they had previously hoped. The University of Michigan has already reported that its consumer sentiment index in July fell by -4.9 points to 73.2, reversing most of June’s +5.8 point increase.
U.S. home prices expected to show continued rise — Today’s May S&P CoreLogic Composite-20 home price index is expected to show an increase of +0.3% m/m and +4.1% y/y, which would be close to April’s report of +0.3% m/m and +4.0% y/y. Today’s Composite-20 index of home prices in metropolitan areas is expected to continue rising despite the pandemic mainly because of tight supply and firm demand from people moving to larger homes to work-from-home and from city-dwellers escaping to the suburbs.
However, the Federal Housing Financing Agency (FHFA) has already reported that its broader home price index in June fell by -0.2% m/m, which was the first drop since 2012. Home prices are likely to move lower later this year when a wave of foreclosed homes start to hit the market and when buyers start to disappear after the pent-up demand from the pandemic dries up.
Treasury sells 7-year T-notes and 2-year floating-rate notes today — The Treasury today will sell $44 billion of 7-year T-notes and $24 billion of 2-year float-rate notes, wrapping up this week’s $165 billion T-note package in time for Wednesday’s outcome of the 2-day FOMC meeting.
The 7-year T-note late yesterday was trading at 0.47% in when-issued trading, which was only 11 bp above February’s record low of 0.36%. The 7-year yield is trading at -1.13% on a real, inflation-adjusted basis after subtracting the current 7-year breakeven rate of 1.49%. That means that investors who buy today’s 7-year T-note can expect to lose -1.13% per year if inflation over the next 7 years matches current inflation expectations.
