- U.S. CPI remains tepid despite the rise in inflation expectations to a 6-1/2 year high
- Trump’s Senate trial continues while House committees work on pandemic aid bill
- 10-year T-note auction to yield near 1.16%
U.S. CPI remains tepid despite the rise in inflation expectations to a 6-1/2 year high — The market is expecting a big increase in inflation in coming quarters and years and is essentially ignoring the current tepid levels of the CPI and PCE deflator. Time will tell whether the markets are wrong, and inflation will remain tepid, or whether the inflation statistics are about to surge above +2.0%.
The consensus is for today’s Jan CPI to rise slightly to +1.5% y/y from December’s +1.4%. However, today’s Jan core CPI is expected to ease slightly to +1.5% y/y from December’s +1.6%. Today’s expected Jan headline and core CPI reports of 1.5% y/y would remain well below the Fed’s +2.0% inflation target and the market’s expected 10-year inflation rate of +2.2%.
Meanwhile, the PCE deflator, which is the Fed’s preferred inflation measure, also remains in tepid shape. In December, the headline PCE deflator was at only +1.3% y/y, and the core PCE deflator was at +1.5% y/y.
Despite the fact that the actual inflation statistics remain tepid, the market is expecting a sharp increase in inflation in coming years. The 10-year breakeven inflation expectations rate on Monday rose to a 6-1/2 year high of 2.22% and closed just slightly below that high at 2.21% yesterday.
The markets are expecting inflation to rise because the economy could start running hot next year due to the fading pandemic and the hefty dose of fiscal and monetary stimulus that is already in the economy.
In addition, the Fed has adopted an average-inflation targeting scheme and is actively promoting an increase in the inflation rate above the +2.0% target. The Fed has said it will not let its foot off the monetary policy accelerator until inflation is well on its way above +2.0%.
Trump’s Senate trial continues while House committees work on pandemic aid bill — Mr. Trump’s impeachment trial in the Senate will continue today after the Senator yesterday voted in favor of the trial’s constitutionality by a vote of 56-44. The trial could wrap up as soon as next Tuesday.
Yesterday’s vote-count on the trial’s constitutionality means there is a maximum of 56 votes for conviction, well short of the 67 votes needed for conviction. The 44 Republican Senators who voted that the trial is unconstitutional have already confirmed that they will vote to acquit since it would make no sense for someone who thinks a trial is unconstitutional to then vote to convict. The odds of a Trump conviction at PredictIt.org, for whatever they are worth, remain very slim at 6%.
The sooner the Trump trial wraps up, the happier the stock market will be since the Senate can then get started on the Biden pandemic aid bill, which is a major bullish factor for the stock market. Another $1.9 trillion of fiscal stimulus would give U.S. GDP a significant boost and would be a positive factor for corporate earnings.
Meanwhile, House committees today will continue marking up the legislation that defines President Biden’s $1.9 trillion pandemic aid bill. There continues to be some contention within the Democratic party on issues of the income cutoffs for the stimulus checks, a hike in the minimum wage, and the contours of the unemployment extension.
House committees are scheduled to finalize the pandemic aid legislation by next Tuesday (Feb 16), allowing the full House to vote on the bill during the week of February 22. The bill would then go to the Senate for its approval by a majority vote. Democrats intend to pass the pandemic aid bill before the current expanded unemployment benefits expire in mid-March.
10-year T-note auction to yield near 1.16% — The Treasury today will sell $41 billion of new 10-year T-notes. The $41 billion size of today’s 10-year auction is unchanged from November’s auction but is up by $14 billion (+52%) from the $27 billion size that prevailed in 2019 and early 2020 before the pandemic caused the U.S. budget deficit to explode.
The Treasury will then conclude this week’s $126 billion quarterly refunding operation by selling $27 billion of 30-year T-bonds on Thursday.
The benchmark 10-year T-note yield yesterday closed -1.4 bp at 1.157%, just mildly below Monday’s 11-month high of 1.198%. The 10-year T-note has risen sharply since last fall due to optimism about vaccines and expectations for Democrats to sharply boost fiscal stimulus. That stimulus is expected to boost the economy and push inflation higher, both bearish factors for the T-note market.
In addition, the Treasury market is being called upon to finance a massive amount of new debt related to pandemic expenses and, later this year, to infrastructure and clean energy spending. The U.S. national debt has soared by $4.5 trillion (+18%) since the pandemic started a year ago, and will continue sharply higher until extra pandemic expenses start tailing off and/or taxes are raised.
The 12-auction averages for the 10-year are as follows: 2.44 bid cover ratio, $10 million in non-competitive bids, 5.3 bp tail to the median yield, 40.0 bp tail to the low yield, and 61% taken at the high yield. The 10-year is mildly below average in popularity among foreign investors and central banks. Indirect bidders have taken an average of 61.1% of the last twelve 10-year T-note auctions, mildly below the median of 63.6% for all recent coupon auctions.
