- Weekly market focus
- Feb U.S. personal income and spending expected to show slight increases
- U.S. core PCE deflator expected to keep creeping higher towards Fed’s target
- Pending home sales expected to recover modestly after Jan’s decline
- 2-year T-note auction to yield near 0.89%
Weekly market focus — The markets this week will focus on (1) Friday’s March payroll report (expected +208,000) and whether job growth can continue near recent levels, (2) Tuesday’s speech by Fed Chair Yellen at the Economic Club of New York and whether she provides any fresh information on when the Fed might raise interest rates another notch, (3) Friday’s March U.S. ISM manufacturing index, which is expected to rise by +1.2 points to 50.7, thus moving back above the 50.0 mark after spending five months (Oct-Feb) below 50.0 in contractionary territory, (4) crude oil prices, which gave back part of the month-long rally later last week after Wednesday’s EIA report that U.S. oil inventories in the latest reporting week surged by +9.4 million bbls (+1.8%) to a new record high, and (5) the U.S. stock market, which gave back some ground late last week on the sell-off in oil prices.
Appearances by Fed officials this week, other than Fed Chair Yellen on Tuesday, include San Francisco Fed President Williams on Tuesday, Dallas Fed President Kaplan on Tuesday, Chicago Fed President Evans on Wednesday, NY Fed President Dudley on Thursday, and Cleveland Fed President Loretta Mester on Friday. The Treasury will sell $88 billion of 2-year, 5-year and 7-year T-notes on Monday through Wednesday. There are only five of the S&P 500 companies that report earnings this week with Lennar and McCormick reporting on Tuesday; and Paychex, Micron Technology, and Carnival reporting on Wednesday.
In overseas news, the European markets are closed today for Easter Monday. China’s March manufacturing PMI report on Thursday night is expected to show a +0.3 point increase to 49.3, recovering a bit after the combined -0.7 point slide seen in Jan-Feb to the 7-year low of 49.0 posted in Feb. This is a busy week for European economic data with key reports including Wednesday’s Eurozone March economic confidence index (expected unchanged), Thursday’s German Feb retail sales (expected +0.3% m/m) and unemployment report (March unemployment rate expected unch at 6.2%), and Thursday’s Eurozone March CPI (expected -0.1% y/y vs Feb’s -0.2% and core CPI expected +0.9% y/y vs Feb’s +0.8% y/y).
Feb U.S. personal income and spending expected to show slight increases — The market is expecting today’s Feb personal income and spending reports to both show small increases of +0.1% m/m, falling back after the strong +0.5% increases seen in January. The markets are closely watching the consumer data since consumers are the only leg holding up the U.S. economy at present with weak business investment, net exports, and government spending. U.S. retail sales fell by -0.4% in January and -0.1% in February, illustrating that consumers remain in a cautious mood. The good news, however, is that consumers at least have a decent amount of income with personal income up by +4.3% y/y in January.
U.S. core PCE deflator expected to keep creeping higher towards Fed’s target — The market is expecting today’s Feb PCE deflator to ease to +1.0% y/y from +1.3% in January. However, the market is expecting the Feb core PCE deflator to edge higher to +1.8% y/y from +1.7% in January. The U.S. inflation statistics have all been creeping higher in the past several months, which is forcing the Fed to keep its finger on the rate-hike trigger. The core PCE deflator, which was at a 5-year low of +1.3% y/y during most of last year, rose sharply in the space of just three months to January’s 3-1/4 year high of +1.7% y/y. The core CPI showed a similar rise and posted a 3-3/4 year high of +2.3% y/y in February.
Pending home sales expected to recover modestly after Jan’s decline — The market is expecting today’s Feb pending home sales report to show an increase of +1.1% m/m, recovering some of January’s -2.5% decline to a 1-year low of 106.0. The pending home sales series measures the change in home sales contracts and generally leads to existing home sales within one to two months, thus providing some leading information on existing home sales. The -2.5% decline in the Jan pending home sales report had negative implications for home sales in Feb/March. Indeed, existing home sales in February fell by -7.1% from Jan’s level of 5.47 million units, which was just shade below the 8-3/4 year high of 5.48 million units.
However, U.S. home sales remain strong in general due to low mortgage rates and firm consumer confidence. People continue to buy homes at a decent pace despite tight home availability and higher prices. The housing markets are hoping for an improvement in home sales going into spring, assuming the U.S. stock market remains stable and there are no new external shocks for the U.S. economy.
2-year T-note auction to yield near 0.89% — The Treasury today will sell $26 billion of 2-year T-notes. The Treasury will then continue this week’s $88 billion T-note package by selling $34 billion of 5-year T-notes on Tuesday and $28 billion of 7-year T-notes on Wednesday. Today’s 2-year T-note issue was trading at 0.89% in when-issued trading late last Thursday afternoon. That translates to an inflation-adjusted yield of -0.70% against the current 2-year breakeven inflation expectations rate of 1.59%.
The 12-auction averages for the 2-year are as follows: 3.17 bid cover ratio, $149 million in non-competitive bids to mostly retail investors, 3.2 bp tail to the median yield, 11.7 bp tail to the low yield, and 52% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 46.7% of the last twelve 2-year T-note auctions, well below the average of 55.4% of all recent Treasury coupon auctions.
