Today’s FOMC Meeting won’t lead to any changes in monetary policy but the most important piece of information is likely to come from the post-meeting press conference where Fed Chair Powell is likely to be asked about what other measures might be employed from here. Most likely the answer will be strong forward guidance as to when rates might be adjusted, continued use of quantitative easing, and perhaps some discussion of Yield Curve Caps. That last one may be a bit early to be instituted today, but it’s gathering more discussion for a possible fourth quarter introduction. The other issue being debated in Washington remains the fate of the next stimulus legislation. Senate Republicans are closing in on a $1 trillion package that will need approval by the full Senate and then to a conference committee where the House Dems have already passed a $3.5 trillion stimulus bill. So while the $600 supplementary benefits expire this week, it looks like even the Senate’s planned $200 per week replacement faces a long road in getting passed. A break in benefits and replacing them with less seems a recipe to slow the economy even more as it struggles with the headwinds of on-again, off-again reopening plans and spiking case counts.
A relatively modest decline in the Conference Board’s measure of July consumer confidence is probably a prelude to a much larger drop that we’ll see in the August reading. The July consumer sentiment report captured responses during the initial spiking of Covid-19 cases from mid-June. Since then, several states have paused or rolled back plans to restart activity. Consumer confidence fell 5.7 points in July to 92.6, missing the 95 forecast. The breakdown seems to suggest consumers are realizing that recovery beyond the initial rebound may not be a straight-line affair but more of a bumpy road.
In addition, Senate Republicans have so far failed to offer a new bill that extends or replaces the $600/week supplementary jobless benefits -- which have effectively expired -- and other aid that is expiring in coming weeks. A delay in funding benefits may dim consumer optimism when the next data is collected at the beginning of August. A reauthorizing of aid, but in smaller amounts, is also likely to weigh on consumers; thus, we see the August report taking a more significant drop than the July dip.
Treasury Yields Reflect Fading Hopes for V-Shaped Recovery
As discussed before, consumer sentiment is starting to dip and it looks a steeper drop is coming in August, especially if expiring stimulus benefits are delayed and/or renewed in smaller amount, which seems will be the case. Thus, the V-shaped recovery that was looking like a possibility in the May/June rebound seems a pipedream at this point. Thus, the question now is how much of a slowing in the economic bounce will occur? With virus cases continuing to mount, schools looking perplexed at how to reopen in coming weeks, businesses throttling back on re-hiring plans, or stopping them altogether, the bounce that looked promising in May/June has become anything but. That has led to Treasury yields moving back to the lower end of the range that has prevailed since early March.
The graph above tracks the 10-year note yield in 2020. The current yield of 0.577% is tantalizingly close to the 0.54% low set back on March 9. Given the grinding turn lower in yields over the last month, it’s very likely the low end of the range will be challenged in the coming days or weeks. With a Fed poised to give its latest read on the economy, and they’ve been rather suspect of the nascent recovery, may well offer a dour forecast given the headwinds noted above and that may be the impetus to move rates through the lower end of the four month range. We shall see.
Agency Indications — FNMA / FHLMC Callable Rates
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