- U.S. stock market sees positive pops on Yellen and Biden transition news
- U.S. consumer confidence expected to fade as pandemic worsens
- U.S. home prices expected to show another solid gain
- Treasury finishes this week’s T-note auction package
U.S. stock market sees positive pops on Yellen and Biden transition news — The U.S. stock market saw an upward pop yesterday afternoon on reports that President-Elect Biden plans to name Janet Yellen as his Treasury Secretary.
Stock index futures then saw another upward pop in late-afternoon trading on news that the GSA signed the order allowing the Biden transition to begin. That should allow the incoming Biden administration to get to work faster on plans for dealing with the pandemic and vaccine roll-out, which will be a gargantuan effort. The market’s number one priority for the Biden administration is to get the pandemic over with as soon as humanly possible.
The markets already expected former Fed Chair Yellen to be appointed as Treasury Secretary based on reporting in recent days. Nevertheless, the stock market welcomed the news, mainly because of Ms. Yellen’s recent support for fiscal stimulus. Ms. Yellen said in an interview on Bloomberg TV on October 19, “While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support, but even beyond that, I think it will be necessary.” The markets are also pleased with the Yellen nomination since she is expected to work well with her former colleague, Fed Chair Powell, in getting the economy back on its feet.
The markets are hoping that Ms. Yellen, after she takes office in early 2021, will be able to apply the necessary pressure to Congress on both sides of the aisle that is necessary to get a stimulus deal done. Of course, the size and contents of any stimulus bill will depend heavily on which party has control of the Senate after the two run-off elections in Georgia on Jan 5 for the two Senate seats. Based on the betting odds at PredictIt.org, Ms. Yellen will likely be working with Senate Majority Leader McConnell since the betting odds are 75% that the Republicans will be in control of the Senate in January.
U.S. consumer confidence expected to fade as pandemic worsens — The consensus is for today’s Conference Board U.S. Nov consumer confidence index to show a -3.3 point decline to 97.6, adding to October’s -0.4 point decline to 100.9. The index plunged to a 6-1/2 year low of 85.7 in April and has so far only modestly recovered to 100.9, which is far below February’s pre-pandemic level of 132.6.
Expectations for a decline in today’s consumer confidence report are supported by the already-released news that the University of Michigan’s U.S. consumer sentiment index in early-November fell by -4.8 points to a 3-month low of 77.0.
U.S. consumer confidence is fading as the pandemic worsens and as more restrictions are imposed by cities and states, thus imperiling the labor market again. Consumer confidence in November also may have taken a hit from political uncertainty, with the disputed presidential election and uncertainty about control of the Senate.
On the more positive side, consumers are taking some encouragement from (1) hopes that vaccines will ride to the rescue in early 2021, (2) strength in stocks, (3) strength in home prices, which are boosting household wealth, and (4) a substantial improvement in household savings as households trimmed their spending during the pandemic shutdowns and paid down debt.
U.S. home prices expected to show another solid gain — The consensus is for today’s U.S. home price reports to show solid increases due to the extremely tight housing market. The consensus is for today’s Sep FHFA house price index to show an increase of +0.8% m/m, adding to August’s increase of +1.5% m/m. Meanwhile, today’s Sep S&P CoreLogic composite-20 home price index is expected to show an increase of +0.7% m/m, adding to August’s increase of +0.5% m/m.
U.S. home prices have risen sharply in recent months. On a year-on-year basis, the FHFA index in August was up +8.1% y/y and the Composite-20 index was up +5.2%. Home prices are rising sharply due to both tight supply and strong demand. On the demand side, existing home sales in October rose by +4.3% to a new 15-year high of 6.85 million units. On the supply side, the supply of homes on the market in October fell to a record low of 2.4 months.
Treasury finishes this week’s T-note auction package — The Treasury today will sell $24 billion of 2-year floating rate notes and $56 billion of 7-year T-notes, concluding this week’s $193 billion T-note package. The $56 billion size of today’s 7-year T-note auction is up by $3 billion from October’s auction of $53 billion and is up by a total of $24 billion from the $32 billion size that prevailed in 2019 and early 2020 before the budget deficit exploded due to pandemic expenses.
The benchmark 7-year T-note yield yesterday closed +1 bp at 0.64%. 7-year yield reached a 5-1/2 month high of 0.73% on Nov 9 on the initial surge of vaccine optimism but has since dropped back on the dim near-term outlook for the economy due to the surging pandemic and the broadening restrictions.
The 12-auction averages for the 7-year are as follows: 2.48 bid cover ratio, $6 million in non-competitive bids, 5.1 bp tail to the median yield, 48.0 bp tail to the low yield, and 55% taken at the high yield. The 7-year T-note is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.4% of the last twelve 7-year T-note auctions, matching the median of 63.4% for all recent Treasury coupon auctions.
