- Fed Chair Powell testifies again today as fed funds rate tightens slightly
- U.S. housing starts expected to recover sharply
- Treasury auctions 20-year T-notes
Fed Chair Powell testifies again today as fed funds rate tightens slightly — Fed Chair Powell today will deliver the second day of his semi-annual report to Congress, this time before the House Financial Services Committee. Mr. Powell’s comments yesterday contained no surprises and the markets showed little net reaction.
The federal funds futures curve yesterday ticked higher by 0.5-1.0 bp. However, that was more because of tighter money markets than the comments by Mr. Powell. The tighter funding markets could be seen by the fact that the effective federal funds rate on Monday ticked higher to 0.09%, which was its highest level since March when the Fed slashed its funds rate target range of 0.00%/0.25%. The effective federal funds rate traded at 0.05% during May and has ticked slightly higher so far in June.
The slightly higher funds rate of 0.09% isn’t surprising since it is still 1 bp below the IOER (interest on excess reserves) rate of 0.10% and 3.5 bp below the 0.125% mid-point of the Fed’s target range.
Fed Chair Powell, in his comments yesterday to the Senate Banking Committee, continued to express a generally downbeat view of the economy. He said, “Recently, some indicators have pointed to a stabilization, and in some areas a modest rebound, in economic activity. That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the economy.”
Mr. Powell said the Fed is still in the early part of discussing the efficacy of a yield-curve control policy whereby the Fed might target certain areas of the yield curve such as 2-year or 5-year T-notes in order to prevent yields from rising. However, he said, “We’ve made absolutely no decision to go forward on it.”
The Fed and the markets received some good news yesterday with the sharp increase in May U.S. retail sales of +17.7% m/m and +12.4% m/m ex-autos, which was substantially stronger than expectations of +8.4 % and +5.5% ex-autos. The snap-back in retail sales was expected as consumers emerged from their pandemic hibernation and as consumers had money to spend from their pandemic checks from the government.
However, the question is whether the surge in consumer spending will continue in the coming months after the initial surge wears off. There are millions of Americans that are either unemployed or have had their incomes reduced, forcing them to slash their spending.
Fed Chair Powell today is expected to repeat his testimony from yesterday and reiterate the comments he made last Wednesday in his post-FOMC meeting press conference. The markets reacted dovishly to last week’s FOMC meeting because the Fed unexpectedly said that it would stop tapering its securities purchases and peg its QE program at $120 billion per month for the indefinite future ($80 billion of Treasury securities and $40 billion of MBS securities). The markets were also encouraged by last week’s Fed-dot forecast that the funds rate will remain at its current near-zero level at least through the end of 2022.
U.S. housing starts expected to recover sharply — The consensus is for today’s May housing starts report to show a sharp increase of +23.5% to 1.100 million, recovering a large part of April’s -30.2% plunge to 891,000. The consensus is for May building permits to increase by +17.3% to 1.250 million, recovering much of April’s -21.4% decline to 1.066 million.
U.S. homebuilders have been encouraged that new home sales have held up better than expected despite the pandemic. There are anecdotal reports suggesting that demand for new homes is fairly strong, possibly because people are looking for larger homes so they can work from home, or escape from apartments so they have their own space during the pandemic.
In any case, the National Association of Homebuilder’s housing market index yesterday rose sharply by +21 points in June, adding to May’s +7 point rebound from April’s 8-year low of 80. The NAHB confidence index has now recovered +28 points of the overall -46 point decline from December’s 21-year high of 75.
Moreover, U.S. homebuilder stocks are doing very well and are just moderately below pre-pandemic levels. The SPDR S&P Homebuilders ETF (XHB) has rallied by a total of +8% in the past three sessions and is now only 10% below February’s record high.
Treasury auctions 20-year T-notes — The Treasury today will sell $17 billion of 20-year T-bonds and will sell $15 billion of 5-year TIPS on Thursday. Today’s 20-year T-bond issue was trading at 1.31% in when-issued trading late yesterday afternoon. The 20-year T-bond is trading 9 bp above the 1.22% level that was seen at the Treasury’s May auction, giving investors some extra incentive to buy today’s bond.
The Treasury market was pleased by the favorable reception for the 20-year T-bond in May when the Treasury sold the 20-year T-bond for the first time since 1986. The 20-year T-bond auction in May saw a strong bid-cover ratio of 2.53. Indirect bidders, a proxy for foreign investors and central banks, took 60.7% of the auction, which was just below the median of 61.3% for all recent coupon auctions.
The Treasury sold about $3 trillion worth of new Treasury securities in Q2 in order to cover the massive budget deficit from pandemic expenses. The Treasury said it expects to sell another $677 billion of new debt in Q3.
