- Unemployment claims expected to remain favorable
- U.S. consumer credit expected to show a below-trend increase
- FOMC minutes result in slightly earlier Fed rate-hike expectations
Unemployment claims expected to remain favorable — The U.S. unemployment claims data remains in favorable shape and indicates that U.S. businesses are holding on to their employees and are engaging in a very small amount of layoffs. Furthermore, not only are U.S. businesses laying off very few people, but they are also still hiring at a relatively strong rate, indicating that U.S. businesses have not been shaken by the stock market correction and Chinese turmoil seen at the beginning of the year. Payroll growth in the first three months of 2016 averaged a respectable +209,000.
The initial claims series is currently only +23,000 above the 43-year low of 253,000 posted in the first week of March. The continuing claims series is only +2,000 above the 15-1/2 year low of 2.171 million posted in Oct 2015. The market is expecting today’s initial unemployment claims report to show a decline of -6,000 to 270,000, reversing about one-half of last week’s +11,000 increase to 276,000. Meanwhile, the market is expecting today’s continuing claims report to show a -3,000 decline to 2.170 million, adding to last week’s -7,000 decline to 2.173 million.
U.S. consumer credit expected to show a below-trend increase — The market is expecting today’s Feb consumer credit report to show a +$14.9 billion increase, strengthening from the +$10.5 billion increase seen in January but remaining below the 12-month trend increase of +$18.0 billion. U.S. consumer credit growth in January remained relatively strong at +6.5% y/y.
Regarding the consumer credit segments, U.S. credit card debt (revolving credit) over the last year has been gaining momentum and reached a 7-1/2 year high of +5.3% y/y in January. That illustrates that consumers are confident enough about their household finances to boost their credit card debt, although that is also a somewhat negative longer-term development since consumers are once again going down the road of boosting their debt levels. Meanwhile, installment debt remained strong at +6.9% y/y in January, although that was down from the +7.9% y/y growth rate seen as recently as Oct 2015. U.S. consumers are still taking on a relatively large amount of debt to pay for cars and school.
FOMC minutes result in slightly earlier Fed rate-hike expectations — Yesterday’s release of the minutes from the March 15-16 FOMC meeting caused the federal funds futures curve to rise by 2-3 bp for the 2017-18 time frame mainly because of the news that “some” FOMC participants indicated that a rate hike at the April FOMC meeting “might well be warranted” if the economic data comes in as expected. The markets were a bit surprised to see that a small hawkish contingent of the FOMC was lobbying for a rate hike for as soon as April.
However, the FOMC as a whole remains dovish, led by Fed Chair Yellen, whose comments last week about the need for caution on a rate hike caused the market to substantially defer market expectations for the Fed’s next rate hike. The overall dovish tone of the March FOMC meeting was highlighted by the sentence in the minutes saying that, “Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook.”
The FOMC’s phrase that the global downside risks are “appreciable” highlights why the FOMC is delaying its next rate hike. Based solely on domestic considerations, the Fed has less justification to slow its rate-hike regime since the U.S. labor market is approaching full employment and the inflation statistics are rising.
Given that the Chinese situation has calmed down somewhat, the main overseas risk now is the Brexit vote on June 23. The FOMC will hold two meetings before the Brexit vote and the market is discounting a zero chance of a rate hike at the April 26-27 meeting and only an 18% chance of a rate hike at the June 14-15 meeting. It seems unlikely that the FOMC would implement a rate hike on June 14-15 just a week before the Brexit vote since a UK vote to exit the EU could revive fears about an eventual collapse of the Eurozone and its banking system. Europe remains under serious pressure due to banking system weakness and the political challenges caused by fiscal austerity and refugees.
Still, if the UK on June 23 votes to remain in the EU, or if the fallout is mild from a UK vote to leave the EU, then a FOMC rate hike will be back on the front burner starting in July if the U.S. economy data holds up. The market at present is discounting only a 32% chance of a Fed rate hike by July, but those odds will go up quickly if Europe can get past the Brexit vote relatively unscathed and if China doesn’t pose any fresh turmoil.
After July, the market is currently discounting the chances of a Fed rate hike at 46% by September, 60% by November, and 70% by December. The market is not discounting a 100% chance of a Fed rate hike until June 2017.
