- March U.S. consumer confidence expected to improve
- U.S. metropolitan home prices expected to show another strong increase
- 5-year T-note auction to yield near 1.38%
- Weaker-than-expected core PCE deflator reduces Fed rate-hike concerns
- U.S. crude oil inventories expected to rise to another new record high in Wed’s EIA report
March U.S. consumer confidence expected to improve — The market is expecting today’s March U.S. consumer confidence index from the Conference Board to show a +1.8 point increase to 94.0, reversing part of February’s sharp -5.6 point drop to a 7-month low of 92.2. U.S. consumer confidence took a hit at the beginning of the year due to the downward stock market correction and the Chinese turmoil. However, the stock market has since recovered and that has provided some support for consumer confidence.
Still, there are reasons for consumers to remain cautious such as the rise in gasoline prices from the lows and questions about the U.S. economy given the weak Q4 U.S. GDP report of +1.4%. Indeed, the University of Michigan’s U.S. consumer sentiment index for early March, which has already been released, fell by -1.7 points to a 6-month low of 90.0 for the third consecutive monthly drop, which did not bode well for today’s Conference Board report.
U.S. metropolitan home prices expected to show another strong increase — The market is expecting today’s Jan S&P/CaseShiller composite-20 home price index to show another solid increase of +0.7% m/m, adding to Dec’s +0.8% increase. The CaseShiller index, which measures home prices in the top 20 U.S. metropolitan areas, showed some weakness early last year (Apr-July 2015) with an overall drop of -0.4% but then showed a strong combined gain of +3.3% in the last five months of 2015. The CaseShiller index has now risen by a total of +34.4% from its Jan-2012 housing bust low and is up +5.8% y/y.
U.S. home prices continue to rise due to relatively strong home sales demand, a tight supply of homes on the market, and low mortgage rates. However, home prices have now risen sharply from the housing bust lows and at some point the rise in home prices should slow as potential buyers resist higher prices.
5-year T-note auction to yield near 1.38% — The Treasury today will sell $34 billion of 5-year T-notes. The Treasury will then conclude this week’s $88 billion T-note package by selling $28 billion of 7-year T-notes on Wednesday. Today’s 5-year T-note issue was trading at 1.38% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of -0.05% against the current 5-year breakeven inflation expectations rate of 1.43%. Buyers of today’s 5-year T-note can expect to lose -0.05% per year on their investment in after-inflation dollars if inflation over the next five years turns out to match current expectations of +1.43%.
The 12-auction averages for the 5-year are as follows: 2.45 bid cover ratio, $44 million in non-competitive bids to mostly retail investors, 4.1 bp tail to the median yield, 14.0 bp tail to the low yield, and 40% taken at the high yield. The 5-year is a popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 58.5% of the last twelve 5-year T-note auctions, moderately above the average of 55.4% for all recent Treasury coupon auctions.
Weaker-than-expected core PCE deflator reduces Fed rate-hike concerns — Yesterday’s report that the Feb core PCE deflator of +1.7% y/y was weaker than expectations of +1.8%, and was unchanged from January, reduced market concerns about a near-term Fed rate hike. The U.S. inflation statistics in the past several months have risen fairly sharply with the core CPI posting a 3-3/4 year high of +2.3% y/y and the core PCE deflator in Jan-Feb posting a 3-1/4 year high of +1.7% y/y. In addition, the 10-year breakeven inflation expectations rate in the past 6 weeks rose sharply by +47 bp from 1.20% in mid-Feb to a 7-month high of 1.67% last Monday (March 21). That sharp rise in the 10-year breakeven rate was caused by the recovery in oil prices and the uptick in the U.S. inflation statistics. However, the 10-year breakeven rate in the past week has settled back to 1.56% due to the dip in oil prices late last week.
U.S. crude oil inventories expected to rise to another new record high in Wed’s EIA report — The market consensus for Wednesday’s weekly EIA report is for a +3.0 million bbl rise in U.S. crude oil inventories, a -2.5 million bbl decline in gasoline inventories, a -300,000 bbl decline in distillate inventories, and a +0.2 point increase in the refinery utilization rate to 88.6%.
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 +1.8% to post a new record high of 532.535 million bbls, which is +37.0% above the 5-year seasonal average. Oil inventories at Cushing, the hub where WTI crude oil futures are prices, posted a record high of 67.491 million bbl two weeks ago, but then fell by -1.9% last week. 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. Meanwhile, product inventories are also bulging in a bearish factor for gasoline and heating oil prices. U.S. gasoline inventories are a hefty +9.6% above the 5-year seasonal average and distillates are in a glut at +26.2% above average.
Meanwhile, 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 -1.8% even though another 166 rigs (-31%) have been shut down so far this year. The grand total decline in oil production so far is only -6.0% from the 43-year high of 9.610 million bpd posted in June 2015.
