- Mnuchin says high-level US/Chinese talks are on for next weekÂ
- US/Japan trade deal could be delayed as Japan tries to make sure that it won’t be subject to auto tariffs
- UK Supreme Court today will release its ruling on Parliament’s suspension
- U.S. home prices expected to continue long-term riseÂ
- U.S. consumer confidence expected to slip
- 2-year T-note auction to yield near 1.67%
Mnuchin says high-level US/Chinese talks are on for next week — Treasury Secretary Mnuchin on Monday afternoon said that Chinese Vice Premier Liu will travel to Washington next week for high-level trade talks with himself and USTR Lighthizer. Next week’s timing was a surprise considering recent news reports saying that the two sides were focused on a meeting around October 10. The accelerated timing could be a good sign that the two sides have something substantive on the table to discuss.
The markets were disappointed last Friday when President Trump said that he wasn’t interested in “a partial deal” with China and wants a full deal. That knocked back recent media reports that the two sides might be moving towards a “mini-deal” or “interim” deal whereby President Trump would agree to defer the upcoming Oct 15 and Dec 15 tariffs, and possibly roll back the Sep 1 tariff, in return for Chinese ag purchases and commitments on IP protection.
The markets on Monday were also encouraged when U.S. officials said the U.S. forced last Friday’s cancellation of a visit by a Chinese delegation to U.S. farms. U.S. officials said they thought the visit might draw a media circus and might result in confusion on the trade issue. President Trump was apparently unaware of the farm-visit decision and said on Monday that he is in favor of such a visit, which is now being rescheduled for a later date. The markets initially thought China had canceled the farm visit because of President Trump’s statement on Friday that he is not interested in a partial trade deal.
US/Japan trade deal could be delayed as Japan tries to make sure that it won’t be subject to auto tariffs — President Trump in August at the G-7 meeting already announced that the U.S. and Japan have reached a trade agreement on a preliminary basis. The two sides have been trying to complete the deal in time for it to be signed this week in a joint Trump-Abe appearance on the sidelines of the UN meetings in New York.
However, the New York Times on Monday reported that a US/Japan trade deal might be delayed because Japan is seeking assurances that it will not be subject to auto tariffs if it signs a deal. NYT reported that Japan wants a “sunset clause” in the agreement that voids the trade deal, along with Japan’s trade concessions, if President Trump in the future should go ahead with tariffs on Japanese autos.
UK Supreme Court today will release its ruling on Parliament’s suspension — The UK Supreme Court said it will release its ruling today on the legality of Prime Minister Johnson’s suspension of Parliament. By suspending Parliament for an unusually long time between sessions, Mr. Johnson appeared to be trying to reduce the number of days that Parliament had to oppose his Brexit “do-or-die” plan for October 31. However, Mr. Johnson was not particularly successful in that effort since Parliament already had enough time to approve legislation that requires Mr. Johnson to request an extension of the October 31 Brexit deadline if there is no Brexit deal by October 19, i.e., just after the EU Summit on Oct 17-18.
If the UK Supreme Court today rules against Mr. Johnson, then presumably Parliament will be brought back into session within the next week or two. That will give Mr. Johnson’s opponents a stronger platform to try to stop a no-deal Brexit on October 31. Mr. Johnson seems to be making little progress in getting the EU to revise or eliminate the Irish border backstop. However, the betting probability for a no-deal Brexit in 2019 remains low at 22% (oddschecker.com) since the consensus seems to be that Mr. Johnson will be forced into another extension.
U.S. home prices expected to continue long-term rise — The markets are expecting today’s U.S. home price reports to rise with the July S&P Core Logic Composite-20 index up +0.1% m/m (after June’s +0.04%) and the July FHFA index up +0.3% m/m (after June’s +0.1%). U.S. home prices continue to rise due to firm home sales and relatively tight inventories. U.S. existing home sales are up +10% year-to-date and the supply of existing homes on the market is tight at 4.0 months, well below the long-term average of 7.0 months.
U.S. consumer confidence expected to slip — The consensus is for today’s Sep Conference Board U.S. consumer confidence index to show a -2.1 point decline to 133.0, adding to Aug’s -0.7 point decline to 135.1. U.S. consumer confidence has recently been undercut by the talk in the media about the trade war and a possible recession. However, consumer sentiment has relatively strong underpinnings from the tight labor market, the generally strong stock market, rising home prices, and generally low gasoline prices.
2-year T-note auction to yield near 1.67% — The Treasury today will sell $40 billion of 2-year T-notes. The Treasury will then continue this week’s $131 billion T-note package by selling $41 billion of 5-year T-notes and $18 billion of 2-year floating-rate notes on Wednesday and $32 billion of 7-year T-notes on Thursday. The benchmark 2-year T-note yield on Monday closed at 1.67%, which is 24 bp above the early-Sep 2-year low of 1.43%.
The 12-auction averages for the 2-year are as follows: 2.56 bid cover ratio, $277 million in non-competitive bids from mainly retail investors, 2.7 bp tail to the median yield, 19.7 bp tail to the low yield, and 35% taken at the high yield. The 2-year T-note is the second least popular security among foreign investors and central banks behind the 3-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of 47.0% of the last twelve 2-year T-note auctions, which is well below the median of 59.6% for all recent Treasury coupon auctions.
