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U.S. existing home sales expected to fall back from an 11-year high
U.S. FHFA house prices expected to show another solid gain
Markit U.S. PMI report will shed light on business confidence following the December tax cut
Treasury auctions 5-year T-notes with the yield near Monday’s 5-3/4 year high
ECB is moving towards tightening up its guidance
Weekly EIA report

U.S. existing home sales expected to fall back from an 11-year high — The market consensus is for today’s Dec existing home sales report to show a -1.9% decline to 5.70 million, giving back part of November’s +5.6% surge to 5.81 million. A pull back in December would not be surprising since home sales surged to an 11-year high in November.

Looking ahead, home sales should remain generally strong in 2018. Confidence should remain strong among home buyers due to the solid economy and the December tax cuts, which put more cash into their pockets. However, there will also be some headwinds for home sales in 2018 from high home prices and rising mortgage rates.

U.S. FHFA house prices expected to show another solid gain — The market consensus is for today’s Nov FHFA house price index to show another solid gain of +0.5% m/m, matching October’s report of +0.5%. The FHFA index in 2017 showed a sharp +5.4% increase through October, well in excess of CPI inflation. The FHFA index has now risen by a total of +42% from the housing-bust low posted in 2011.

There is room for U.S. house prices to continue to rise in coming months due to both strong demand and tight supplies. Strong demand is seen by the fact that existing home sales in November rose to a new 11-year high. Tight supplies are seen by the fact that there were only 3.9 months worth of homes on the market in November, which is much tighter than long-term average of 7.0 months and the 7-8 month level that the National Association of Realtors says is consistent with stable home prices.

Markit U.S. PMI report will shed light on business confidence following the December tax cut– The markets will be watching today’s Markit U.S. PMI reports for a reading on business confidence in the wake of the tax cut that was passed by Congress in late December. The tax cut has freed up cash for businesses and their customers and should boost spending and investment.

The consensus is for today’s Jan Markit manufacturing PMI to show a small -0.1 decline to 55.0, pausing after December’s solid increase of +1.2 to 55.1. Meanwhile, the consensus is for today’s Jan Markit services PMI to show a +0.6 point increase to 54.3, reversing most of December’s -0.8 decline to 53.7.

Treasury auctions 5-year T-notes with the yield near Monday’s 5-3/4 year high — The Treasury today will sell $15 billion of 2-year floating-rate notes and $34 billion of 5-year T-notes. The Treasury will sell $28 billion of 7-year T-notes on Thursday.

Today’s 5-year T-note issue was trading at 2.42% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.43% against the current 5-year breakeven inflation expectations rate of 1.99%. The 5-year T-note yield has risen sharply by about +80 bp in the past four months and posted a new 5-3/4 year high on Monday of 2.46%, the highest level since mid-2010.

The 12-auction averages for the 5-year are as follows: 2.44 bid cover ratio, $55 million in non-competitive bids to mostly retail investors, 5.1 bp tail to the median yield, 15.5 bp tail to the low yield, and 35% taken at the high yield. The 5-year is mildly popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 64.7% of the last twelve 5-year T-note auctions, mildly above the average of 63.2% for all recent Treasury coupon auctions.

ECB is moving towards tightening up its guidance — The markets are on guard for the ECB at its meeting Thursday to move closer to fine-tuning its guidance to a slightly more hawkish stance. The minutes of the Dec 14 ECB meeting said that, “Looking ahead, the view was widely shared among members that the governing council’s communications would need to evolve gradually.”

The markets took this comment to indicate that the ECB, probably at its next meeting in March, will turn to slightly more hawkish guidance regarding its QE program. The current guidance is that the ECB will continue its asset-buying program “until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

The market speculation is that the ECB will adjust its guidance to remove the dependence on inflation as to when its QE program will end, thus giving the ECB the flexibility to end QE even if inflation remains subdued. Eurozone inflation remains mired at low levels and there is virtually no chance that core inflation will rise to the ECB’s 2% target by the end of this year. The Eurozone CPI has been locked in the narrow range of 1.4-1.5% since last August and the core CPI has been at only +0.9% y/y in the last three months (Oct-Dec 2017).

The jury remains out on whether the ECB will simply end its QE program in September, or whether it might continue the program at a lower level in Q4. The ECB cut its QE program to 30 billion euros/month for Jan-Sep 2018 from the 60 billion euros/month level seen in 2017. There is speculation that the ECB might cut the QE program to 15 billion euros/month in Q4 and then end the program at the end of 2018. The markets are not anticipating an ECB rate hike until at least mid-2019.

Weekly EIA report — The consensus for the weekly EIA report is as follows: -2.0 mln bbls crude oil, +2.2 mln bbls gasoline, -1.1 mln bbls distillates.

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