U.S. unemployment claims to remain favorable after holiday distortions
U.S. housing starts expected to dip slightly after post-hurricane surge
10-year TIPS auction to yield near 0.55%House expected to vote today on a short-term CR
4 China GDP expected to remain strong
Weekly EIA report
U.S. unemployment claims to remain favorable after holiday distortions — The unemployment claims data will start settling down after the holiday distortions. The market is expecting today’s weekly initial unemployment claims report for the week ended Jan 12 to show a -12,000 decline to 249,000, more than reversing last week’s +11,000 increase to 261,000. Meanwhile, the consensus is for today’s continuing claims report for the week ended Jan 5 to show a +33,000 increase to 1.900 million, reversing most of last week’s -35,000 decline to 1.867 million.
The initial claims series is mildly elevated at +38,000 above the 44-3/4 year low of 223,000 posted in October. By contrast, the continuing claims series last week edged to a new 44-1/4 year low of 1.867 million. Businesses in general are holding on tightly to their current employees. However, new hiring dipped a bit in December with payrolls rising by only +148,000, which was weaker than the 12-month trend average of +171,000.
U.S. housing starts expected to dip slightly after post-hurricane surge — The market consensus is for today’s Dec housing starts report to show a -1.7% m/m decline to 1.275 million, giving back part of the overall +11.7% surge seen in Oct/Nov in the wake of the Aug/Sep hurricane damage. U.S. housing starts are in very strong shape at only -2.3% below the 10-1/4 year high of 1.328 million units posted in Oct 2016.
U.S. home builder confidence is in very strong. Wednesday’s Jan NAHB housing market index fell by -2 points, but that left the series only 2 points below the 18-1/2 year high of 74 posted in December.
Strong U.S. home builder confidence and building activity is being driven by (1) very strong new home sales (10-1/2 year high of 733,000 units in November), (2) strong Nov new home prices of $248,000 (-6% below the record high of $263,300 posted in June 2017), (3) the tight supply of new homes on the market of 4.6 months (tighter than the long-term average of 6.1 months), and (4) strong consumer confidence and spending in general.
10-year TIPS auction to yield near 0.55% — The Treasury today will sell $13 billion of 10-year TIPS. Today’s auction will be a new security, as opposed to a reopening of a previously-sold security. Today’s 10-year TIPS was trading at 0.55% in when-issued trading late yesterday afternoon.
The 10-year TIPS yield has been trading in a narrow range around 0.50% since last November. The 10-year TIPS yield fell to a 1-1/4 year low of 0.22% in early-Sep 2017 but then rallied up to the 0.50% area in late 2017 when it became clear that Congress would pass a corporate tax-cut bill, which improved the U.S. investment climate and boosted real long-term interest rates. The nearby chart illustrates how the 10-year TIPS yield roughly tracks U.S. GDP growth as a proxy for capital demand.
The 12-auction averages for the 10-year TIPS are as follows: 2.34 bid cover ratio, $22 million in non-competitive bids to mostly retail investors, 6.5 bp tail to the median yield, 14.1 bp tail to the low yield, and 48% taken at the high yield. The 10-year TIPS is the second most popular security among foreign investors and central banks behind the 30-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 67.5% of the last twelve 10-year TIPS auctions, which is well above the average of 63.0% for all recent Treasury coupon auctions.
House expected to vote today on a short-term CR — House Republican leaders are planning a vote today on a short-term continuing resolution (CR) that would last until Feb 16. The vote is expected to be close and the U.S. government remains in jeopardy of a shutdown on Friday at midnight when the current CR expires. However, as long as there is some forward progress on a bipartisan DACA agreement, it would be in the interest of Democrats to agree to a 1-month CR, thus relieving them of shouldering blame for a government shut-down that might not even be successful in achieving a DACA agreement in the end.
Q4 China GDP expected to remain strong — The market consensus is for tonight’s China Q4 GDP report to ease slightly to +6.7% y/y from Q3’s report of +6.8%. The consensus is for the full-year 2017 report to rise slightly to +6.8% from 2016’s 26-year low of +6.7%.
The Chinese economy in 2017 improved substantially from 2015 and 2016, regardless of what the officials GDP figures indicate. Several Chinese regions have admitted to faking prior GDP data, meaning that GDP data prior to 2017 is weaker than the official figures.
Looking ahead, the consensus is for the Chinese economy to slow mildly to +6.4% in 2018 and +6.2% in 2019. However, that weaker growth will be welcome since it should be more sustainable and carry less risk. The Chinese government is now specifically targeting quality over the quantity of growth and its deleveraging campaign is designed to reduce both debt growth and financial risks.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -3.0 million bbl decline in U.S. crude oil inventories, a +4.0 million bbl rise in gasoline inventories, a +2.0 million bbl rise in distillate inventories, and a -0.5 point decline in the refinery utilization rate to 94.8%. U.S. oil inventories have dropped sharply since early 2017 and are currently only +8.4% above the 5-year seasonal average, the tightest level in more than 3 years. Meanwhile, product inventories are mildly above average with gasoline inventories at +3.7% above their 5-year seasonal average and distillate inventories at +3.1% above average.