Stimulus 2.0 and Fed Meeting Highlight the Week

If there’s going to be a Stimulus 2.0 before year-end it has to come together this week unless members of Congress want to hang around Capitol Hill for Christmas. Senate Majority Leader McConnell stated late last week that there is no way forward in the negotiations but more upbeat reports where heard over the weekend. The sticking points are around a liability shield for businesses and funding for state and local governments. The liability shield in one bill is just for 2021, while McConnell prefers a longer period stretching over several years. Meanwhile, state and local funding is wanted by Dems while McConnell says he doesn’t have the votes in his caucus to pass that provision. Turning to the Fed, while they won’t be adjusting the fed funds rate at its FOMC meeting this week, they will have one eye on the stimulus negotiations, or lack thereof, as that may weigh on their decision regarding adding longer-maturity purchases in the quantitative easing program. If it looks like no stimulus will happen, the Fed may feel compelled to initiate those purchases sooner. If a stimulus deal is reached they will likely keep that tool in the tool box into next year and see how the economy and markets react to the fiscal stimulus.  This meeting also comes with new economic and rate projections from the Fed.


Treasuries
Treasury Curve Today Week Change
3 Month 0.07% -0.01%
6 Month 0.08% -0.01%
1 Year 0.09% -0.01%
2 Year 0.13% -0.02%
3 Year 0.18% -0.02%
5 Year 0.38% -0.02%
10 Year 0.93% -0.02%
30 Year 1.66% -0.05%

 

Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.25%
12 Mo LIBOR 0.34%
Swap Rates
3 Year 0.248%
5 Year 0.439%
10 Year 0.918%

 

Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Dec 15 Emire Manufacturing Dec 6.9 6.6 6.3
Dec 15 Industrial Production MoM Nov 0.3% 0.3% 1.1%
Dec 16 Retail Sales Advance MoM Nov -0.3% -0.3% 0.3%
Dec 16 Retail Sales Ex Auto and Gas MoM Nov 0.2% 0.1% 0.2%
Dec 16 Retail Sales Control Group MoM Nov 0.2% 0.2% 0.1%
Dec 16 FOMC Rate Decision Dec 16 0.00-0.25% 0.00-0.25% 0.00-0.25%
Dec 17 Housing Starts Nov 1.533mm 1.535mm 1.530mm
Dec 17 Building Permits Nov 1.558mm 1.560mm 1.544mm
Dec 17 Leading Index Nov 0.4% 0.5% 0.7%

calendar icon Top 5 Events for the Week

Dec. 14 — 18, 2020

1. Stimulus 2.0 Developments — All Week
2. FOMC Rate Decision — Wednesday
3. November Retail Sales — Wednesday
4. November Housing Starts & Permits — Thursday
5. November Leading Index — Thursday

 

1.  Stimulus Developments or Lack Thereof — All Week

If there’s going to be a Stimulus 2.0 before year-end it has to come together this week unless members of Congress want to hang around Capitol Hill for Christmas. Senate Majority Leader McConnell stated late last week that there is no way forward in the negotiations but some rosier talk was heard over the weekend. The sticking points are around a liability shield for businesses and funding for state and local governments. The liability shield in one bill is just for 2021 while McConnell prefers a longer period stretching over several years. The Democrats think the shorter period is sufficient. Meanwhile, state and local funding is wanted by the Dems while McConnell says he doesn’t have the votes in his caucus to pass a bill with state and local funding. So, we’ll see how the horse-trading goes this week and the market will react to rumors and news headlines as ideas get floated then shot down.

 

2.  FOMC Rate Decision — Wednesday

While the Fed won’t be adjusting the fed funds rate at its meeting this week, they will have one eye on the stimulus negotiations, or lack thereof, as that may weigh on their decision regarding adding longer-maturity purchases in the quantitative easing program. If it looks like no stimulus will happen, at least not before year-end, the Fed may feel compelled to initiate those purchases sooner in an effort to drive down longer-term rates and whatever benefit that bestows on the rate sensitive sectors of the market. If a stimulus deal is reached they will likely keep that tool in the tool box into next year and see how the economy and markets react to the fiscal stimulus.  This meeting also comes with new economic and rate projections from the Fed, and investors will chew on the dot plots looking for and shift from the September forecasts which called for the fed funds rate remaining unchanged through  2023.

Implied Fed Funds Target Rate

 

3.  November Retail Sales — Wednesday

Perhaps second to the monthly jobs reports the Advance Retail Sales Report is a first-tier indicator of the health of the consumer and hence the economy. For November, sales are expected to fall -0.3% reversing the 0.3% gain in October. Sales ex-auto and gas are expected to stay positive at a 0.1% pace but off the 0.2% in October. The retail sales Control Group—a direct feed into GDP—is expected to be up 0.2% versus a disappointing 0.1% in October.  Thus, if  expectations are met, despite a weak headline number owing to soft car sales, other sales in November should be similar to the so-so October results which may start to weigh on fourth quarter GDP expectations. Currently, the Bloomberg consensus is for fourth quarter GDP to be 4.5%.

 

4.  November Housing Starts and Permits — Thursday

The housing market is one sector of the economy that has kept up the momentum from June though the summer, and November is expected to continue that trend.  Starts are expected to increase 0.3% to 1.535 million units annualized versus October’s whopping 4.9% gain or 1.530 million units annualized. Permits are expected to increase  1.0% to 1.560 million annualized versus 1.544 million in October.  So a solid read is expected for November, holding on to the big gains in October and that speaks to the continuing strength in all segments of the housing market.

 

5.  November Leading Index — Thursday

The Leading Index plumbed new depths in March and April, as one would expect, but rebounded smartly in May and June  while July and August saw a little fade from the May/June bounce. For November the index is expected to be up 0.5% print and that will be coming off a 0.7 gain in October. The stock rally is helping to hold up the index, but on the other hand the increasing virus cases and the reinstitution of lockdowns in some parts of the country are limiting gains in the index. We’ll see if the recent vaccine news gives a bump to the index next month.

 

 


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Yield/Duration Relationship

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Published: 12/14/20 Author: Thomas R. Fitzgerald