- House passes $2,000 stimulus checks but passage by Senate is expected to be difficult
- U.S. inflation expectations approach Fed’s 2.0% inflation target
- U.S. home prices expected to show a sharp increase
- 7-year T-note auction to yield near 0.65%Â
House passes $2,000 stimulus checks but passage by Senate is expected to be difficult — The House late Monday passed a bill to increase the stimulus checks to $2,000 from $600, thus meeting President Trump’s demand. The bill easily passed by a margin of 275-134 and even met the two-thirds majority vote that was necessary since the bill was considered under an expedited process.
However, the Senate seems unlikely to approve an increase in stimulus checks to $2,000 due to general opposition from Republicans. President Trump, in a statement that accompanied his signature on the pandemic aid and omnibus spending bill on Sunday night, claimed that he had an agreement by the Senate to vote on $2,000 stimulus checks, a repeal of liability restrictions for social media, and an investigation into alleged voter fraud. However, Senate Majority Leader McConnell on Monday made no mention in public of any such promises.
Mr. McConnell seems likely to oppose the increase in stimulus checks to $2,000, although he may at least allow a procedural cloture vote that would require a two-thirds majority vote. An increase in the stimulus checks to $2,000 would cost another $435 billion, adding to the national debt and adding to the $164 billion that the $600 checks already cost, according to the Committee for a Responsible Federal Budget.
Mr. McConnell did allow the pandemic aid bill to rise to $900 billion from his previous ceiling of $500 billion. However, he seems unlikely to allow the total cost of the pandemic bill to rise by another $435 billion to $1.335 trillion, regardless of President Trump’s demands.
The House on Monday evening also voted 322-87 in favor of overriding President Trump’s veto of the $741 billion National Defense Authorization Act, which provides discretionary spending to the Defense Department. The Senate is expected to begin the voting process today, but the final vote could be delayed until as late as Sunday if some Senators choose to slow it down. The bill has strong bipartisan support, and the veto override is expected to succeed. That would be the first successful override of a Trump veto.
U.S. inflation expectations approach Fed’s 2.0% inflation target — In a bearish factor for T-note prices, the 10-year breakeven inflation expectations rate on Monday rose to a new 2-year high of 1.99% but then backed off to close the day little changed at 1.97%. The breakeven rate is well above February’s pre-pandemic level of about 1.75%.
The 10-year breakeven rate has been pushed higher in part by rising crude oil prices, which are currently at $47.62 per barrel and are just mildly below last week’s 10-month high of $49.28. Crude oil prices have been rising because of the OPEC+ production-cut agreement combined with hopes for an improvement in crude oil demand in 2021.
However, inflation expectations are mainly being pushed higher by the Fed’s extraordinarily easy monetary policy and the Fed’s shift to an inflation-averaging policy. Under that policy, the Fed is actively pursuing an above-2% inflation rate so that inflation over time averages near 2%. Also, the markets are expecting the U.S. economy to largely return to normal later in 2021 after vaccines kick in by mid-year.
While inflation expectations are knocking on the 2% door, the actual inflation statistics are lagging far behind. That will keep the Fed from getting too excited about the increase in the market’s inflation expectations, which could turn out to be misplaced. The PCE deflator in November was at only +1.1% y/y and the core PCE deflator was at only +1.4%, both well below the Fed’s +2.0% inflation target. The PCE deflator is the Fed’s preferred inflation measure.
U.S. home prices expected to show a sharp increase — The consensus is for today’s Oct S&P CoreLogic composite-20 home price index to show a sharp increase of +1.0% m/m, adding to September’s increase of +1.3%. Expectations for a strong increase are based in part on last week’s news that the FHFA’s home price index in October rose sharply by +1.5% m/m and +10.2% y/y.
U.S. home prices have soared in recent months due to strong demand for homes, combined with the tight supply. U.S. existing home sales in October rose to a 15-year high of 6.86 million units and fell back just slightly in November to 6.69 million. Meanwhile, the supply of existing homes that are on the market fell to a record low of 2.2 months in November.
7-year T-note auction to yield near 0.65% — The Treasury today will sell $59 billion of 7-year T-notes, wrapping up this week’s $176 billion T-note package. The Treasury on Monday sold $58 billion of 2-year T-notes and $59 billion of 5-year T-notes. Today’s 7-year T-note was trading at 0.65% in when-issued trading late Monday.
The 12-auction averages for the 7-year are as follows: 2.47 bid cover ratio, $6 million in non-competitive bids, 5.1 bp tail to the median yield, 45.8 bp tail to the low yield, and 53% taken at the high yield. The 7-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.1% of the last twelve 7-year T-note auctions, which exactly matches the median for all recent Treasury coupon auctions.
