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The Missile – September 23

Fed Chair Powell today will appear before the House select committee on the Covid pandemic to discuss the Fed’s response to the pandemic.

For his third day of testimony this week, Mr. Powell on Thursday will then join Treasury Secretary Mnuchin before the Senate Banking Committee for the same quarterly review of the CARES Act that they did Tuesday before the House Financial Services Committee.

Tuesday’s Powell-Mnuchin appearance before the House committee had little market impact and was in line with market expectations. Mr. Powell warned that the recovery is “highly uncertain,” and the U.S. economy has a long way to go before fully recovering from the Covid pandemic. Mr. Powell also pressed for more fiscal support when he said, “the path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government.”

Meanwhile, Chicago Fed President Evans on Tuesday called for Congress to provide fiscal support by saying that the economy would worsen without “at least $500 billion if not $1 trillion” of additional fiscal support.

Mr. Evans on Tuesday also created a stir by saying, “We could start raising interest rates before we start averaging 2% in inflation.” However, that comment was still compatible with last Wednesday’s FOMC’s post-meeting statement that said, “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

The FOMC statement said that it expects the target range to remain at its current level until “inflation has risen to 2%” but added that it only must be on track to exceed 2%.

In any case, it will be a matter of years before the markets need to get serious about expecting a rate hike. The federal funds futures market indicates that the markets are not expecting a funds rate hike for as long as the futures contracts extend, which is July 2022. The July 2022 federal funds rate futures contract yesterday closed at 0.00%, which indicates that the market is expecting the funds rate in that month to average 9 bp lower than the current effective federal funds rate level of 0.09%.

Congressional leaders and the White House Tuesday evening reached a deal on a continuing resolution (CR) to fund the government through Dec 11. The House approved the CR Tuesday evening and sent it to the Senate.

The deal came after Speaker Pelosi acceded to President Trump’s demand for $30 billion in farm aid in exchange for $8 billion of additional school-lunch aid for children. The deal came about because no one in Washington wants to be blamed for a government shutdown just before the November 3 election. The CR must now be passed by the Senate and signed by President Trump by next Wednesday, or there will be a government shutdown next Thursday (Oct 1).

The consensus is for today’s July FHFA house price index to show a +0.4% m/m increase, adding to June’s sharp increase of +0.9% m/m. The house price index in June showed a large year-onyear gain of +5.7% y/y.

U.S. home prices are shooting up in response to both strong demand and tight supplies. Yesterday’s Aug U.S. existing home sales report showed a +2.4% gain to a new 13-1/2 year high of 6.00 million units. Meanwhile, the supply of homes on the market is tight at only 3.0 months, which matches the record low seen on several occasions in recent months. The squeeze in home prices is likely to continue until mortgage forbearance measures expire, thus resulting in a wave of foreclosures.

U.S. home sales are surging because many people are buying larger homes so they can work from home. Also, many people are buying homes to escape from urban areas or from multi-family units. The low level of mortgage rates is also encouraging home purchases. The current 30-year mortgage rate of 2.87% is only 1 bp above the previous week’s record low of 2.86%.

The Treasury today will sell $22 billion of floating-rate notes and $53 billion of 5-year T-notes. The $53 billion size of today’s 5-year T-note auction is up by $2 billion from Aug’s $51 billion auction and is up by a total of $12 billion from the $41 billion size that prevailed in 2019 and early 2020 before pandemic expenses exploded the U.S. budget deficit. The Treasury will conclude this week’s $177 billion T-note package by selling $50 billion of 7-year T-notes on Thursday.

Today’s 5-year T-note issue was trading at 0.27% in when-issued trading late yesterday afternoon, which is near the middle of the very narrow 14 bp range of 0.19% to 0.33% seen since July 1.

The 12-auction averages for the 5-year are as follows: 2.47 bid cover ratio, 4.7 bp tail to the median yield, 25.4 bp tail to the low yield, and 44% taken at the high yield. The 5-year is mildly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 60.8% of the last twelve 5-year T-note auctions, which is mildly below the median of 63.6% seen for all recent Treasury coupon auctions.

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