Market Still Awaiting Stimulus 2.0
With the Fed meeting behind us, and not much movement off of it, the market turns its complete attention to negotiations over a Stimulus 2.0 Bill. Senate Majority Leader Mitch McConnell said late yesterday a deal is close at hand, but several sticking points remain, as they always do in these things. The nearly $900 billion bill is rumored to have $600/person in stimulus and $300/week in additional jobless benefits, good for 10 weeks. Also included is another round of PPP loans, and about $17 billion for the airline industry. It does, however, omit liability protection for businesses and state and local funding. The state and local piece may not be as a critical as once thought months ago as state revenue receipts are coming in stronger than earlier projections. That could be delayed into 2021 without imminent danger for many state and local governments. On the other hand, both the unemployment benefit and the stimulus checks are half the CARES Act amount, and with the jobless benefit ending in early March is that enough to bridge to a post-vaccinated world? Probably not and both of those realities are why the risk-on rally was rather muted. Once a bill is passed, likely early next week, the market’s focus will turn back to virus counts and measuring the success of vaccine take-up. A Moderna vaccine is likely to be fully approved over the weekend so that will begin to double the number of people getting daily vaccinations and that may aid the risk-on story through year-end.
Now back to the weekly jobless claims series and it’s not painting a pretty picture lately. The move higher in claims that we noticed a few weeks ago is continuing and that doesn’t bode well for the December employment report. The latest report for the week ending December 12 showed a jump in claims to 885 thousand versus expectations of 818 thousand while the previous week was revised slightly higher to 862 thousand. It’s the highest claims figure in three months. The claims increase undoubtedly reflects the increase in virus cases and renewed lockdowns are indeed having an adverse impact on the labor market recovery.
As we mentioned last week, the weekly data implies a negative print for December payrolls. The weekly survey for the jobs report was this past week as claims neared 900 thousand. The Bloomberg consensus for December jobs is for negative 200 thousand. The increasing claims, and likely negative job growth in December, increases the imperative for Stimulus 2.0 legislation.
Dollar Weakness Feeds Increasing TIPs Breakeven Inflation Rates
We’ve mentioned lately that the Treasury market, and equities as well, have been more focused on issues surrounding the virus, stimulus bills, and the election rather than things directly economic. That doesn’t mean there are not things going on in the background that aren’t beginning to be felt by the market. Take the increasing TIPs breakeven inflation rates and the declining US dollar. The graph below tracks both over the last few years. This year, however, the dollar has been falling since March when the Fed moved rates to zero and just Wednesday the forecast is rates will stay near zero through 2023. That led to another bout of dollar selling.
While the latest CPI report for November was a little hotter than expected, the Fed still sees a fairly docile inflation picture with core inflation not expected to hit 2.0% until 2023. A falling dollar should feed some inflation by making imports more expensive and decreasing the cost of our exports to foreign buyers. That combination should stir some inflationary embers, and that’s what you see in the increasing TIPs breakeven inflation rates, which is the rate that TIPs buyers need to receive in order to breakeven with a regular Treasury note of similar maturity. That increase in TIPs breakeven to near pre-pandemic levels is not going unnoticed in the nominal Treasury market and is one market-related reason yields have been trending higher and will likely continue to be biased in that direction as long as the trend above remains in place. The question is will it? The Fed would love to see a return to 2.0% inflation sooner rather than later but they forecast it will be 2023 while Treasury investors see it happening much quicker. We tend to side with the Fed here in that global forces well beyond just dollar strength have been creating deflationary pressure for years, and that trend is not likely to stop in a post-COVID world. While a return to 2.0% inflation may happen with the Fed keeping monetary accommodation wide open, it may be a more grinding process then the TIPs market anticipates.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.08%||+0.01%||1 Mo LIBOR||0.16%||+0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.251%|
|6 Month||0.08%||Unch||3 Mo LIBOR||0.24%||+0.02%||Prime Rate||3.25%||5 Year||0.444%|
|2 Year||0.12%||-0.01%||6 Mo LIBOR||0.26%||+0.01%||IOER||0.10%||10 Year||0.937%|
|10 Year||0.93%||+0.04%||12 Mo LIBOR||0.33%||+0.01%||SOFR||0.09%|
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