Today’s Economic Preview & Perspectives #Futures

U.S. home prices expected to show another solid increase — The markets are expecting today’s Jan FHFA house price index to show another solid increase of +0.5%, adding to the +0.4% m/m increase seen in December.  The FHFA index is up +5.7% y/y and has risen by a total of +27.8% from the housing-bust low posted in March 2011.  U.S. home prices continue to rise due to recent strength in home sales and a mildly tight supply of homes on the market.  There were 4.4 months worth of existing homes available for sale in February, which was much tighter than the 7-8 month supply that the National Association of Realtors says is consistent with stable home prices.

At some point, however, the climb in U.S. home prices will have to slow as buyers finally display resistance to the relentless rise in home prices seen in the past five years.  Indeed, Feb existing home sales yesterday fell sharply by -7.1% to 5.08 million units, which was due in part to tight supplies and high prices as well as some winter weather disruptions.  Some potential home buyers are refusing to pony up for the high prices being asked for homes in today’s markets.

Markit U.S. manufacturing PMI expected to show March confidence improvement — The market is expecting today’s Markit preliminary-Mar U.S. manufacturing PMI to show a +0.6 point increase to 51.9, reversing about one-half of February’s -1.1 point decline to 51.3.  The Markit PMI index in February was only +0.1 point above the 3-1/3 year low of 51.2 posted two months earlier in December.  Still, the Markit index is in better shape than the ISM index.  The Markit index has managed to remain above the expansion-contraction level of 50.0 during the current downdraft whereas the ISM manufacturing index has been below 50.0 for the last five reporting months (Oct-Feb).

Today’s expected +0.6 point increase in the Markit U.S. manufacturing PMI index would be a positive leading indicator for the March ISM manufacturing index report, which will be released next Friday (April 1).  The market consensus is for the March ISM manufacturing index to show a +0.9 point increase to 50.4, vaulting back above the expansion-contraction level of 50.0 and perhaps indicating that the recent rout in the U.S. manufacturing sector is over.  The U.S. manufacturing sector took a hit last year from the petroleum and mining sector recessions combined with weak exports caused by the strong dollar and poor overseas economic growth.

Richmond Fed index expected to show an improvement along with the other two regional surveys seen so far for March — The market is expecting today’s March Richmond Fed manufacturing index to show a +4 point increase to zero, reversing part of February’s -6 point drop to -4.  The Richmond Fed index has been fluctuating narrowly on either side of zero since last summer, suggesting that the Richmond Fed’s manufacturing district has simply been moving sideways without any real growth since last summer.  The March regional business confidence surveys released thus far have been generally strong, suggesting an improvement in business confidence in March after the mostly negative readings seen since late last year.  The March NY Empire index rose by +17.26 to 0.62 and the March Philadelphia Fed index rose by +15.2 points to 12.4. 

EIA report expected to produce a new record high in U.S. oil inventories — The market consensus for Wednesday’s weekly EIA report is for a +2.7 million bbl increase in U.S. crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a -1.0 mln bbl decline in distillate inventories, and a +0.3 point increase in the U.S. refinery utilization rate to 89.3%.

There has been no let-up in the surge in U.S. oil inventories despite declining U.S. oil production.  U.S. oil inventories last week rose by +0.3% to post a new record high of 523.178 million bbls, which is +36.5% above the 5-year seasonal average.  Oil inventories at Cushing, the hub where WTI crude oil futures are prices, also hit a record high in last week’s report of 67.941 million bbls.  

U.S. oil inventories based on seasonal patterns are likely to continue rising for at least another month due low demand from U.S. refineries, some of which are shut down for maintenance and/or the switch-over to producing summer fuels.  In that sense, the current rise in oil inventories is not surprising.  The key for the oil markets, however, is whether oil production will fall by enough in coming weeks to start working down the massive surplus of oil that is currently being held in U.S. storage facilities.

U.S. oil production in the second half of January started to show a sustained decline as the renewed plunge in oil prices in Jan-Feb caused more oil companies to give up hope and close down more oil rigs.  Yet production on a year-to-date basis has so far fallen by only -1.5% even though another 151 rigs (-28%) have been shut down so far this year.  The grand total decline in oil production so far is only -5.6% from the 43-year high of 9.610 million bpd posted in June 2015.

Meanwhile, product inventories are also bulging in a bearish factor for gasoline and heating oil prices.  U.S. gasoline inventories are a hefty +10.1% above the 5-year seasonal average and distillates are in an all-out glut at +25.3% above the 5-year seasonal average.