5Yr Treasury Supply Awaits Skittish Investors

• New Treasury supply looms over the market, but the auctions this week are of the shorter variety (2yr, 5yr, 7yr), offering an easier sell than longer-dated maturities where expanding deficit/supply worries are a bigger part of the buy/no-buy decision. A 5yr auction awaits this afternoon (1pm ET), and coming on the heels of a well-received 2yr auction yesterday the expectation is similar. Meanwhile, the Japanese and US governments are working hard to convince investors that coupon supply will continue at present levels for the near-term in order to avoid the wrath of bond vigilantes and increasing yields. So far, they seem to be offering a convincing story. Currently, the 10yr is yielding 4.45%, up 2bps on the day, while the 2yr is yielding 3.96%, up 1bp in early trading.

 

• While this holiday-shortened week has a decent line-up of economic data to distract from tariff headlines, today is not one of those days. Perhaps the headline event will be the afternoon release of the FOMC minutes from the May 7 meeting. However, given the deluge of Fed Speak since the meeting, it’s hard to see anything potentially market-moving in the minutes. The watchword during the Powell post-meeting press conference, and numerous other Fed officials speaking since, is uncertainty. And nothing since the meeting has alleviated that concern. We suspect the minutes will provide more of the same, but we stand ready to be proven wrong.

 

• Yesterday did provide another look at “soft” data in the form of the Conference Board’s latest read on consumer confidence. The overall reading, along with the expectations and present situation gauge, improved from April’s depressed levels, which dipped below anything seen during the depths of the pandemic period. This survey period encompassed the 90-day deadline extension for China tariffs and that likely contributed to the large improvement in consumer opinions.

 

• While sentiment levels rose, they remain below the average post-pandemic reading and the Jobs Hard to Get metric worsened to a post-pandemic low (see graph below). Still, the various consumer survey releases are becoming less reliable to investors and the Fed. The hyper-political divide in the country is exhibited in the latest Michigan inflation responses that vary wildly between Dem and Republican expectations (see graph below). Thus, you have and will continue to hear FOMC members speak about wanting to see the soft data weakness reflected in the hard numbers before acting. Take this, for example, from Richmond Fed President Tom Harkin (non-voter) yesterday, “consumer sentiment, which historically has been strongly correlated with consumer spending, has not seemed to be for the last two or three years.  Nothing I’m seeing in the real time spending data suggests that spending is dropping.” That is a direct reflection of the diminishing signal, and increasing noise, generated by recent survey data. My stock response to these disparities is to watch what the consumer does and not so much what they say.

 

• In that regard, we’ll get a look at personal consumption numbers on Friday with the Personal Income and Spending Report. The PCE inflation series gets star billing when this report is released, and expectations are that core PCE will run around 0.1% MoM which will align with the other April inflation numbers that were cooler than expected. The more important number in the report this month may well be the personal consumption figures. Recall, the already released Retail Sales Report noted some softening in consumer spending, with 7 of 13 categories in the red vs. just 1 of 13 in March. The consumption numbers are more comprehensive than the more goods-based retail sales series so this Friday’s report will provide a better assessment of the degree to which the consumer is tightening the purse strings given the ongoing economic uncertainty. The expectation is for a pullback of modest proportions from the tariff front-running pop seen in March. The question is whether it is a clear reduction in spending or a pause after that front-running splurge.

 

• In the meantime, the market continues to wrestle with Treasury supply angst, aided by the deficit-expanding House budget bill. That contributed to much of the yield back-up experienced early last week. However, the realization that the Senate will not have a finished version of their budget bill until July has moved the supply concerns slightly to the back burner for now. In addition, once the Senate finishes their budget work it will go to a joint committee to hammer out differences, so a late summer approval and signed budget bill seems the most optimistic timeline. Also, Treasury Secretary Bessent has reiterated that coupon auctions of Treasury debt will occur at current levels for several more quarters which has also allayed some supply concerns. The 2yr auction went well yesterday and the 5yr today is expected to do the same. It’s the longer maturities that sit at the crux of supply and deficit worries. That said, given the volatile and significant yield moves of late it suggests the supply/deficit topics will remain a nagging concern for investors as Congress moves through the budget approval process.

 

• Meanwhile, the first look at Durable Goods Orders for April were released yesterday with a pullback in the headline number due to light aircraft orders, which followed a pop in March sales. Orders, net of the volatile transportation sector, were better than expected (+0.2% vs. 0.1% expected and 0.0% in March), but orders non-defense ex-air (a proxy for business equipment) were down -1.3% vs. -0.2% expected and 0.3% in March. Thus, a so-so report with little to signal a material shift in this sector’s activity.

 

• Finally, home price appreciation (HPA) levels continue to slip lower as the S&P CoreLogic 20-City HPA for March was 4.1% vs. 4.5% in February. Nationwide, annual HPA dipped to 3.4% vs. 4.0% the prior month (see graph and table below). With housing inventory rising, and mortgage rates remaining stubbornly over 7%, the affordability issue will continue to bedevil the sector and probably work to suppress HPA levels even more in the near term. Falling appreciation rates can lead to reduced consumer expectations and diminished feelings of wealth, and combined with increased uncertainty seem certain to act as a partial headwind for consumer consumption.

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    Univ. of Michigan Inflation Expectations – Big Disparity Between Political Parties

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Conference Board’s Consumer Confidence Survey – After 90-Day China Tariff Delay Confidence Rebounds

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However, Consumers Say Finding a New Job is Getting Harder

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Annual Home Price Appreciation Rates Continue to Ease Lower

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  Annual Home Price Appreciation Rates by City and Nationwide