Jan U.S. consumer confidence expected to remain strong due in part to tax cuts
U.S. metropolitan home prices expected to show continued strength
Little chance of a FOMC rate hike tomorrow
10-year T-note yield hits 3-3/4 year high due to increased expectations for inflation and Fed tightening
German coalition negotiations resume today
Jan U.S. consumer confidence expected to remain strong due in part to tax cuts — The market consensus is for today’s Jan Conference Board U.S. consumer confidence index to show a +0.9 point increase to 123.0, recovering some of December’s sharp -6.5 point decline to 122.1. The index is just modestly below November’s 17-1/4 year high of 128.6. The University of Michigan’s U.S. consumer sentiment index for early-Jan has already been reported at -1.5 points to 94.4, which did not bode well for today’s Conference Board report.
U.S. consumer confidence in January should see support from the tax-cut bill approved by Congress in late December, which will put more cash in consumers’ pockets when the new tax withholding rules are implemented in Feb-March. Other reasons for strong consumer confidence include (1) the record highs in the stock market, (2) the strong economy, (3) the strong labor market and rising consumer incomes, and (4) rising home prices.
Mildly negative factors for consumer confidence include (1) rising gasoline prices due to the OPEC production-cut agreement, (2) rising mortgage rates, and (3) the likelihood that U.S. interest rates will steadily rise this year as the Fed progressively ratchets up its funds rate target.
U.S. metropolitan home prices expected to show continued strength — The market consensus is for today’s Nov S&P CoreLogic composite-20 home price index to show another strong increase of +0.6% m/m, adding to the sharp overall +1.7% increase seen in the previous two months (Sep +1.0%, Oct +0.7%). On a year-on-year basis, the index in November rose to a 3-1/4 year high of +6.4% y/y. The index has now soared by +48% from the housing-bust low posted in Jan 2012. The FHFA U.S. home price index for November was already reported at +0.4% m/m, which suggested that today’s Composite-20 index may not show an increase as large as the +0.6% consensus.
There is room for U.S. home prices to continue rising in coming months due to both strong demand and tight supplies, although the rise may not be as strong as that seen in the Sep-Oct period. Strong demand is seen by the fact that existing home sales in December were just -3.6% below November’s 11-year high. Tight supplies are seen by the fact that there were only 3.2 months worth of homes on the market in December, 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.
Little chance of a FOMC rate hike tomorrow — There will be no press conference following the 2-day FOMC meeting that begins today. This will be Janet Yellen’s last FOMC meeting since Jerome Powell is due to take over as Fed Chair this Saturday (Feb 3).
The federal funds futures market is discounting only a 20% chance that the FOMC will raise its funds rate target by another +25 bp at this week’s meeting. The FOMC just raised its funds rate target range by +25 bp to 1.25-1.50% at its last meeting on Dec 12-13, meaning it would be too soon for another rate hike. However, the market is discounting a 100% chance for the first +25 bp rate hike of the year at the next FOMC meeting on March 20-21.
10-year T-note yield hits 3-3/4 year high due to increased expectations for inflation and Fed tightening — The 10-year T-note yield on Monday rose to a new 3-3/4 year high of 2.725%, closing the day up +3.6 bp at 2.696%. The 10-year T-note yield has now risen sharply by about 30 bp since early December when it became clear that the Republican Congress would pass their big tax-cut bill.
The rise in the 10-year T-note yield has been due to increased expectations for both inflation and Fed tightening. The 10-year breakeven inflation expectations rate has risen sharply by about +20 bp since mid-December and posted a new 3-1/4 year high of 2.12% on Monday. Inflation expectations have been rising because of higher crude oil prices and expectations that the tax cut will boost the economy and inflation. Feb WTI crude oil prices last Thursday posted a new 3-year high and are currently just below that level.
Meanwhile, expectations for Fed tightening in 2018 have increased substantially by about +20 bp since mid-December. The market is currently expecting +64.5 bp worth of Fed tightening in 2018, which amounts to a little more than 2-1/2 rate hikes. Despite those higher expectations, the market is still more dovish than the Fed-dot forecast for three rate hikes in 2018. That means there is room for a further rise in Fed rate-hike expectations as the market catches up with the Fed.
German coalition negotiations resume today — German Chancellor Merkel’s CDU bloc and the Social Democrats (SPD) will resume negotiations today towards a final coalition agreement. Party leaders have only a few days left to reach an agreement before their self-imposed deadline of this Sunday (Feb 4). Social Democrats are pushing for more concessions from the CDU than were contained in the preliminary agreement since SPD leaders must produce an agreement that will be approved in a vote by party members. The SPD has been reluctant to enter another grand coalition with the CDU because the SPD has progressively lost public support in recent years as a junior coalition partner.
The odds favor a coalition agreement by CDU-SPD party leaders and an approval vote by rank and file party members. However, if the process breaks down at any point, then the most likely outcome would be new elections since Ms. Merkel has said she would not rule with a minority government.