Today’s Economic Preview & Perspectives #Futures

Jan U.S. consumer confidence expected to hold steady — The market is expecting today’s Jan U.S. consumer confidence index from the Conference Board to be unchanged at 96.5, stalling after the +3.9 point rise to 96.5 seen in December.  The Conference Board’s U.S. consumer confidence index posted an 8-1/3 year high a year ago in Jan 2015 but has since been bouncing around below that high and was -7.3 points below that high in December.  U.S. consumer confidence in today’s report for January has every reason to decline given the sharp drop in the U.S. stock market and concern about overseas turmoil.  However, the University of Michigan has already reported that its U.S. consumer confidence index for early-Jan actually rose by +0.7 points to 93.3, defying the negative sentiment in the U.S. financial markets.  U.S. consumers may have been focused instead on the sharp drop in gasoline prices that is boosting their disposable income.

Nov U.S. home prices expected to show a solid gain — The market is expecting today’s U.S. Nov home price indexes to both show solid increases as home sales remain relatively strong.  U.S. existing home sales in December were at 5.46 million units, which was only -2% below the 8-3/4 year high of 5.58 million units posted in July 2015.  The market is expecting today’s Nov FHFA house price index to show an increase of +0.5% m/m (matching Oct’s +0.5%) and today’s Nov CaseShiller composite-20 home price index to show a +0.80% m/m increase (just below Oct’s +0.84% increase).  The FHFA home price index in October posted a record high, finally taking out the previous peak posted in 2007.  The FHFA index has risen by +27% from its housing-bust low and the CaseShiller index has risen by +31%.  Home prices are likely to rise at a slower rate in 2016 given the likelihood of slowly rising mortgage rates and increasing buyer resistance to higher home prices.

2-year T-note auction to yield near 0.86% — The Treasury today will sell $26 billion of 2-year T-notes.  The Treasury will then continue this week’s $105 billion T-note package by selling $35 billion of 5-year T-notes and $15 billion of 2-year floating rate notes on Wednesday and $29 billion of 7-year T-notes on Thursday.  The benchmark 2-year T-note late yesterday afternoon was trading at 0.86%, which translates to an inflation-adjusted yield of 0.34% against the current 2-year breakeven inflation expectations rate of 0.52%.

The 12-auction averages for the 2-year are as follows:  3.29 bid cover ratio, $148 million in non-competitive bids from mostly retail investors, 3.1 bp tail to the median yield, 10.5 bp tail to the low yield, and 51% taken at the high yield.  The 2-year T-note is the least popular coupon security among foreign investors and central banks.  Indirect bidders, a proxy for foreign buying, have taken an average of only 45.3% of the last twelve 2-year T-note auctions, well below the average of 55.0% for all recent Treasury coupon auctions.

Zero chance for a Fed rate hike this week but FOMC may adopt more conciliatory language — The chances that the FOMC will raise interest rates another notch at its 2-day meeting that begins today are virtually zero.  The federal funds futures market is discounting the chances at only about 8%.  The FOMC just implemented its first rate hike to a mid-point funds target of 0.375% in December and the markets have since been very volatile because of turmoil in China, the plunge in oil prices, and uncertainty about how tighter Fed liquidity will affect the markets going forward.  Given this turmoil, the FOMC will not spring a surprise rate hike on the global markets that could cause a stock market meltdown.

In fact, the federal funds futures market is now discounting only one 25 bp rate hike this year by December.  This stands in contrast to expectations before the January turmoil emerged for two 25 bp rate hikes in 2016.

The plunge in the U.S. stock market has not only reduced American household wealth but has also raised questions about how stable the American economy really is against the backdrop of weak growth across much of the rest of the world.  Moreover, the plunge in oil prices seen so far this year has driven inflation expectations even lower, virtually ensuring that the Fed can’t hope to meet its 2% inflation target within even the next two years.  The 10-year breakeven inflation expectations rate, which measures the difference between nominal and TIPS 10-year T-notes, fell to a 6-3/4 year low of 1.29% last Friday but rebounded higher to 1.33% on Monday.  Some members of the FOMC were already worried about low inflation before their December rate hike and those worries within the FOMC can only have grown after January’s plunge in oil prices and commodity prices in general.

EIA report expected to show a large 4.0 million bbl rise in U.S. crude oil inventories — The market consensus for Wednesday’s weekly EIA report is for a large +4.0 million bbl rise in U.S. crude oil inventories, a +500,000 bbl rise in gasoline inventories, a -2.0 million bbl decline in distillate inventories, and a -1.0 point decline in the refinery utilization rate to 89.6%.  U.S. oil inventories remain in a major glut at 36.1% (129.0 million bbls) above the 5-year seasonal average.  Meanwhile, gasoline inventories are ample at +5.2% above average and distillates are approaching glut territory at +16.8% above average.  U.S. crude oil production has so far fallen by only -3.9% to 9.235 milion bpd from the 43-year high of 9.610 million bpd posted in june 2015 despite the fact that the number of active U.S. oil rigs has plunged by 68% (1,099 rigs) to a 5-3/4 year low of 510 rigs.