- FOMC meeting expected to confirm Fed’s policy-hold
- Trade tensions continue to buffet the markets
- 10-year T-note auction to yield near 1.82%Â
FOMC meeting expected to confirm Fed’s policy-hold — The FOMC at its 2-day meeting that begins today is unanimously expected to leave interest rates unchanged with its funds-rate target at 1.50%/1.75% and the IOER rate at 1.55%. The probability of a rate cut at this week’s meeting is negligible at 3%, according to the federal funds futures market. After this week’s meeting, the market is expecting an unchanged funds rate target for the first part of 2020 but is then discounting one rate cut in Q4-2020.
While the Fed is expected to leave rates unchanged this week, the markets will be carefully watching the Fed’s updated macroeconomic forecasts and the new Fed-dot forecast for the federal fund rate. The current set of Fed dots from the Sep 17-18 meeting is obsolete since the Fed at its following meeting on Oct 28-29 went ahead and cut the funds rate by -25 bp to 1.50/1.75%.
The Fed continues to be a very poor forecaster of the funds rate since the Fed in September didn’t even forecast the rate cut that came just six weeks later. The September Fed dots forecasted an unchanged fed funds target of 1.75%/2.00% through the end of 2020, and then one 25 bp rate hike in 2021 and a second rate hike in 2022, leaving the funds rate at 2.25/2.50% by the end of 2022.
FOMC policy is now clearly on hold, as long as there is no material change in the U.S. economic outlook. That means that the new Fed dots are likely to forecast no change in the funds rate from the current level of 1.50/1.75% through at least the end of 2020, with a possible forecast for an annual +25 bp rate hike in 2021 and 2022, such as those seen in the September Fed dots.
Trade tensions continue to buffet the markets — The markets this week are being buffeted by trade tensions on several fronts including the USMCA, WTO developments, and the US/Chinese trade talks.
A USMCA agreement among the U.S., Mexico, Canada, and House Democrats now appears to be essentially a done deal. The U.S. and Mexico wrapped up a deal over the weekend and forwarded it to House Speaker Pelosi, who conferred with her caucus and outside stakeholders such as unions. AFL-CIO President Richard Trumka yesterday said that there was a deal, according to the Washington Post. Ms. Pelosi seems to have given her blessing to the deal, but she said that final approval will have to wait until the implementing legislation is written.
The Mexican peso on Monday closed up +0.4% on expectations for a USMCA deal, extending last week’s 1.2% rally. The markets will be relieved when Congress gives final approval to the new USMCA treaty because President Trump in the past has threatened to withdraw from NAFTA altogether if he didn’t get a new treaty, which would be a disaster for a variety of industries, especially the auto and agriculture industries.
Regarding the WTO, the organization’s enforcement process will be crippled after today since the WTO’s appellate panel will no longer have a quorum allowing it to operate. There are currently only three members on the 7-member panel, which is the minimum for a quorum. The terms of two of those three members expire today, meaning that as of tomorrow, there will be only one member on the panel and it will no longer be able to function to resolve trade disputes.
The Trump administration over the past several years has refused to allow the appointment of new members to the WTO appeals panel as it pushes for a major overhaul of the WTO. There are fears in the market that there will be a new outbreak of illegal tariff retaliation across the world now that there is no legal process for redressing trade violations.
Regarding US/Chinese trade talks, there was some optimism on Monday after U.S. Agriculture Secretary Perdue said that, “We have a deadline coming up on Dec 15 for another tranche of tariffs. I do not believe those will be implemented and I think we may see some backing away.” However, Mr. Perdue has not been directly involved in the trade talks and he provided no evidence for his view, leading to some doubts about the predictive value of his comment.
10-year T-note auction to yield near 1.82% — The Treasury today will sell $24 billion of 10-year T-notes in the first reopening of the 1-3/4% 10-year T-note of November 2029 that the Treasury first sold in November. The Treasury will then conclude this week’s $78 billion coupon package by selling $16 billion of reopened 30-year T-bonds on Thursday, leaving Wednesday clear for the announcement of the FOMC meeting results.
The 10-year T-note yield on Monday fell by -2 bp to 1.82%, where it is in the upper half of the narrow trading range seen in August. T-note yields have seen some upward pressure since August since the U.S. economy continues to chug along at a decent pace despite trade tensions, and since the market is generally anticipating that the U.S. and China will reach a cease-fire with a phase one trade deal.
The 12-auction averages for the 10-year are as follows: 2.42 bid cover ratio, $14 million in non-competitive bids, 4.6 bp tail to the median yield, 35.3 bp tail to the low yield, and 52% taken at the high yield. The 10-year is mildly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.5% of the last twelve 10-year T-note auctions, mildly above the median of 60.8% seen for all recent coupon auctions.
