- Zero chance of a rate hike at the 2-day FOMC meeting that ends today
- U.S. pending home sales expected to show a small increase
- MBA mortgage applications remain generally strong
- Weekly EIA report expected to show another increase in crude oil inventories
Zero chance of a rate hike at the 2-day FOMC meeting that ends today — The FOMC today will conclude its 2-day meeting. This is an “FOMC light” meeting where there will be no release of updated macroeconomic forecasts and no press conference from Fed Chair Yellen. Any volatility from the meeting’s outcome will therefore depend solely on the wording of the post-meeting statement. Given the soft U.S. economy and continued concern about overseas factors, the Fed has little basis for adopting more hawkish language in today’s post-meeting statement.
The federal funds futures market is discounting a zero chance of a rate hike at today’s FOMC meeting. Even though the Chinese turmoil has died down for the time being, the Fed will be on hold today due to soft U.S. Q1 GDP growth near +0.7% and caution ahead of the Brexit vote on June 23. The next FOMC meeting on June 14-15 comes just a week before the Brexit vote, meaning the Fed is unlikely to implement a rate hike at that meeting if the Fed is worried about the systemic effects on Europe if British citizens do in fact vote to exit the EU. Moreover, even by June, the FOMC would be hard-pressed to convince the markets that a rate hike is a good idea when the last U.S. GDP print will be Thursday’s expected Q1 GDP report of +0.6%. The market is discounting only an 18% chance for a rate hike at that June meeting.
However, going into summer, the chances start to increase for a Fed rate hike if the U.S. economy can regain some upside momentum, if there is no melt-down in Europe over Brexit, and if China can remain stable. The chances for a Fed rate hike, based on the federal funds futures market, ramp up to 36% by July, 56% by Sep, 74% by Nov, and 88% by Dec. The market is not discounting a 100% chance of a rate hike until Feb 2017. We expect one 25 bp rate by the end of the year assuming China doesn’t fall apart and there are no other major external shocks to the global economy.
U.S. pending home sales expected to show a small increase — The market is expecting today’s March pending home sales report to show an increase of +0.5% m/m, adding to Feb’s fairly strong increase of +3.5%. On a year-on-year basis, March pending home sales are expected to sag to +0.8% y/y from +5.1% in Feb. The pending home sales series is in relatively strong shape at only -1.9% below the 5-3/4 year high of 111.2 posted a year ago in April 2015.
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 the existing home sales series. U.S. existing home sales in March rose by +5.1% to 5.33 million units where the series was only -2.7% below the 9-year high of 5.48 million units posted last summer in July 2015. U.S. home sales are generally strong but are being crimped to some extent by tight supplies and high home prices.
MBA mortgage applications remain generally strong — The MBA mortgage applications data is in relatively good shape, both from the standpoint of refinancing and new home purchases. The MBA purchase sub-index is near the highest level since 2010, excluding the artificial spike in late 2015 tied to the change in mortgage disclosure rules. As mentioned earlier, U.S. home sales are currently in good shape at only -2.7% below last summer’s 9-year high. The fact that people are out applying for mortgages to buy a new home is a good leading indicator for closed home purchases in the next few months.
Meanwhile, the refinancing sub-index is also in relatively good shape due to the low level of mortgage rates. Last week’s 30-year mortgage rate of 3.59% was only 1 bp above the previous week’s 10-month low. Higher refinancing activity is good for the economy since it means that at least some consumers are freeing up disposable cash by refinancing into a lower monthly mortgage payment.
Weekly EIA report expected to show another increase in crude oil inventories — The market consensus for today’s weekly EIA report is for a +1.75 million bbl rise in U.S. crude oil inventories, a +235,000 bbl increase in Cushing crude oil inventories, a -1.0 million bbl decline in gasoline inventories, a -750,000 bbl decline in distillate inventories, and a +0.5 point increase in the refinery utilization rate to 89.9%. Yesterday’s API report showed a -1.07 million bbl decline in U.S. crude oil inventories, a +1.9 million bbl rise in Cushing crude oil inventories, a -400,000 bbl decline in gasoline inventories, and a -1.02 million bbl decline in distillate inventories.
U.S. crude oil inventories last week rose by +0.4% to post a new record high of 538.611 million bbls. Crude oil remains in a massive glut at +33.9% above the 5-year seasonal average. Product inventories are also plentiful with gasoline inventories at +11.4% above average and distillate inventories at +26.0% above average.
Meanwhile, U.S. oil production since mid-January has been falling due to the plunge in oil prices in Jan-Feb, which caused more oil companies to give up hope and close down more oil rigs. Production on a year-to-date basis has so far fallen by -2.7% ytd as another 195 rigs (-36% ytd) have been shut down so far this year. The grand total decline in oil production is now 657,000 bpd (-6.6%) to 8.953 million bpd from the 43-year high of 9.610 million bpd posted in June 2015.
