Oil prices rise to 3-1/4 year high as OPEC officials meet Friday
U.S. unemployment claims expected to show declines
U.S. leading indicators expected to show continued strength
5-year TIPS auction to yield near 0.62%
Japan CPI expected to settle back after recent gains
Oil prices rise to 3-1/4 year high as OPEC officials meet Friday — OPEC and non-OPEC oil ministers will meet Friday in Saudi Arabia to discuss how to proceed with their production cut agreement. The ministers will certainly continue with their plan for the agreement to last through year-end. Ministers will also discuss how to continue with at least some production cuts into 2019 to ensure that oil prices remain high even in the face of record U.S. oil production. OPEC and non-OPEC members have fully stuck to their production cut agreement levels and OPEC production has also fallen due to a sharp decline in Venezuelan oil production due to its domestic economic crisis.
The OPEC/non-OPEC agreement has been very successful in erasing the oil glut. Indeed, the IEA estimates that world oil inventories have fallen to a surplus of only about 30 million bbls from the 340 million bbl surplus seen at the beginning of 2017 when the production cut agreement began. Moreover, the oil inventory glut in the U.S. has also been erased despite record U.S. oil production. U.S. oil inventories are now -3.3% below the 5-year seasonal average, the tightest such level in 9-1/2 years.
May WTI crude oil prices yesterday rallied to a new 3-1/2 year high and closed the day sharply higher by +2.93% at $68.47. Crude oil prices rallied sharply on the bullish weekly EIA report and also on speculation that President Trump on May 12 may announce that the U.S. is reimposing sanctions on Iran, which would curtail Iran’s current oil exports of 2.1 million bpd.
U.S. unemployment claims expected to show declines — The initial unemployment claims series this week should settle down after the Good Friday holiday disruption. The consensus is for today’s initial claims report for the week ended April 13 to show a -3,000 decline to 230,000, adding to last week’s -9,000 decline to 233,000. Meanwhile, the consensus is for today’s continuing claims report to show a -26,000 decline to 1.845 million, reversing about half of last week’s +53,000 rise to 1.871 million. Unemployment claims remain in very favorable shape. The initial claims series is only +16,000 above February’s 45-1/4 year low and the continuing claims series is only 53,000 above its recent 44-1/2 year low.
U.S. leading indicators expected to show continued strength — The market consensus is for today’s March leading indicators index to show an increase of +0.3% m/m, adding to Feb’s strong report of +0.6% m/m. The LEI has surged since late last year with an average monthly gain of +0.8% since October. The LEI in February was up by 6.5% y/y, the strongest growth rate in 7 years.
The U.S. economy may see some seasonal weakness in Q1 but the market consensus is for a strong economy this year with GDP growth of 2.8%, up from 2.3% in 2017 and +1.5% in 2016. This year’s expected growth rate of +2.8% would be well above the Fed’s estimated long-term U.S. growth potential of +1.8%. This year’s economic strength is expected to stem from (1) solid consumer spending and improved business investment tied in part to the Jan 1 tax cuts, (2) generally strong overseas growth that is boosting U.S. exports, and (3) the U.S. government’s very stimulative fiscal policy due to the Jan 1 tax cuts and increased government spending.
5-year TIPS auction to yield near 0.62% — The benchmark 5-year TIPS is currently trading at the relatively high level of 0.56%, which is just 3 bp below February’s 8-1/2 year high of 0.59%. The 5-year TIPS yield has risen sharply by more than 50 bp from the levels below zero seen last September. That rise in the 5-year TIPS yield was due in large part to the Jan 1 tax bill, which resulted in expectations for a stronger economy, stronger business investment, and stronger demand for investment capital.
The Treasury today will sell $16 billion of 5-year inflation-adjusted TIPS securities. Today’s new 5-year TIPS issue was trading at 0.62% in when-issued trading late yesterday afternoon. The 12-auction averages for the 5-year TIPS are as follows: 2.50 bid cover ratio, $40 million in non-competitive bids, 5.3 bp tail to the median yield, 13.1 bp tail to the low yield, and 42% taken at the high yield. The 5-year TIPS is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 64.3% of the last twelve 5-year TIPS auctions, which is right in line with the median for all recent Treasury coupon auctions.
Japan CPI expected to settle back after recent gains — The consensus is for tonight’s March Japan CPI to fall back to +1.1% y/y from February’s 3-year high of +1.5% y/y. February’s rise in the CPI to a 3-year high of +1.5% appeared on its face to represent some progress by the BOJ in boosting inflation towards its target of +2.0%. However, much of the strength in the CPI was due to higher energy and fresh food prices. Excluding energy and fresh food, today’s March CPI is expected to be unchanged from Feb’s report of a much more subdued +0.5% y/y.
Nevertheless, the BOJ has been making some progress in pushing inflation higher. Japan’s CPI ex energy and fresh food has at least risen to +0.5% y/y from the level of zero seen a year ago. The BOJ still has a long way to go in order to reach its inflation target but can be pleased that inflation is at least moving steadily higher.
The BOJ in any case is not expected to make any moves to tighten its monetary policy until at least next year. The BOJ is currently following a policy of targeting the 10-year JGB yield near zero (with a range of -0.1% to +0.1%) and conducting its QE program with annual security purchases of about 80 trillion yen.