- ADP employment expected to downshift a bit but still show a near-trend increase
- U.S. ISM non-manufacturing index is expected to show its third consecutive decline but remain well above 50
- MBA mortgage apps have risen sharply so far in January
- EIA report expected to show a continued surge in U.S. oil inventories
- U.S. oil production has yet to drop despite plunge in oil rigs to new 5-3/4 -year low
ADP employment expected to downshift a bit but still show a near-trend increase — The market is expecting today’s Jan ADP employment report to show an increase of +193,000, which would be close to the 12-month moving average trend of +200,000. ADP jobs showed a strong increase in December of +257,000 that produced a 3-month average monthly increase of +214,000.
On the labor front, the market is mainly looking ahead to Friday’s Jan payroll report, which is expected to dip back to a longer-term trend increase of +190,000 after the surprising strength seen in Q4 (Oct +307,000, Nov +252,000, Dec +292,000). It will be difficult for Friday’s Jan payroll report to keep up with the 3-month average of an impressive +284,000. Indeed, the downside stock market correction in January and the turmoil caused by China and the 12-year low in oil prices may have caused some businesses to get cold feet about hiring more workers in January and caused them to wait until they have a chance to see how things shake out.
A weaker-than-expected Jan payroll report on Friday would contribute to the sense in the market that the U.S. economy is losing some momentum. A stronger-than-expected Jan payroll report on Friday, by contrast, would support the view that the U.S. economy is still muddling through its various challenges and is in decent shape, all considered.
The market consensus is for Friday’s Jan unemployment report to be unchanged from the 7-3/4 year low of 5.0% posted in the last three reporting months of Oct-Dec. The unemployment rate is only +0.3 points above the Fed’s forecast that the unemployment rate by late this year will fall to 4.7% and remain at that level through 2017-18.
U.S. ISM non-manufacturing index is expected to show its third consecutive decline but remain well above 50 — The market is expecting today’s Jan ISM non-manufacturing index to show a -0.7 point decline to 55.1, adding to Dec’s -0.8 point decline to 55.8. In a negative leading indicator for today’s report, the market is expecting today’s final-Jan Markit services PMI to be left unrevised at 53.7, thus leaving intact the -0.6 point decline to 53.7 seen in the preliminary-Jan report.
The Dec ISM non-manufacturing index level of 55.8 indicated that the non-manufacturing sectors of the U.S. economy are still expanding at a decent rate. However, the ISM non-manufacturing index is losing momentum, having fallen in four of the last five months by a total of -3.8 points to post a new 8-month low in December. There is some good news, however, in that the ISM non-manufacturing new orders sub-index in December rose by +1.0 point to the relatively strong level of 58.9, indicating that the non-manufacturing orders pipeline remains in decent shape. Still, the markets are waiting to gauge the extent to which January’s turmoil has put a dent in business confidence.
MBA mortgage apps have risen sharply so far in January — The market will be watching to see if the surge in home mortgage activity seen in the first three weeks of January can continue. The MBA mortgage purchase sub-index has risen sharply by +21% in the past three reporting weeks and the refinancing sub-index has soared by +64%. Refinancing activity has surged due to the -22 bp drop in 30-year mortgage rate seen so far in January to a 3-month low of 3.79%. People are not only out applying for mortgage refinancing, but are also out applying for mortgages to buy a home as seen by the fact that the MBA mortgage purchase sub-index is currently at the second highest level in the last 5-3/4 years, i.e., since May 2010. That suggests that home buying activity is picking up in early 2016, which would be a positive sign for home prices, household wealth, housing starts, and the real estate sector in general.
EIA report expected to show a continued surge in U.S. oil inventories — The market consensus for today’s weekly EIA report is for a +3.75 million bbl rise in U.S. crude oil inventories, a +2.88 million bbl rise in gasoline inventories, a -1.25 million bbl decline in distillate inventories, and a -0.5 point decline in the U.S. refinery utilization rate to 86.9%.
U.S. crude oil inventories in the past two weeks have risen sharply by 12.4 million bbls (+2.6%) as oil producers rebuild inventories after the year-end draw-down tied to tax savings. U.S. crude oil inventories remain in a massive glut at +36.3% above the 5-year seasonal average. Meanwhile, product inventories are more than ample with gasoline inventories at +6.9% above average and distillate inventories at +16.2% above average.
U.S. oil production has yet to drop despite plunge in oil rigs to new 5-3/4 -year low — The number of active U.S. oil rigs dropped by -43 rigs in just the last six reporting weeks to post a new 5-3/4 year low of 498 rigs. the number of U.S. oil rigs has now plunged by -1,111 rigs (-69%) from the 27-year high of 1,609 posted in Oct 2014. Despite the continued drop in oil rigs in the last several months, U.S. oil production has been steady and remains above the 14-month low of 9.096 million bpd posted in Oct 2015. In fact, U.S. oil production last week was reported at 9.221 million bpd, which was +1.4% above October’s 14-month low. Nevertheless, U.S. oil production cannot continue to levitate since the declining number of oil rigs and severe financial stress on U.S. oil producers will eventually push U.S. oil production lower. Until there is a sharp decline in U.S. oil production, however, the epic U.S. oil inventory glut will continue and will keep downward pressure on WTI crude oil prices.
