- U.S. vehicle sales expected to recover from March’s sharp drop
- Dollar falls to a new 15-1/2 month low as Fed rate hike chances remain dim
- Crude oil falls -2.5% as OPEC production rises in March to a new record high
U.S. vehicle sales expected to recover from March’s sharp drop — The market is expecting today’s April total vehicle sales report to improve substantially to 17.4 million units from 16.46 million units in March. That would fully recover the -5.6% drop in vehicle sales seen in March. U.S. vehicle sales posted a 10-3/4 year high of 18.12 million units in Oct 2015 but has since been bouncing around below that high and in March fell to a 13-month low. Strong vehicle sales have recently been one of the few bright spots for the U.S. manufacturing sector and a recovery in today’s vehicle sales report would revive some optimism among U.S. manufacturing executives.
Truck sales have weakened in recent months along with auto sales, but truck sales continue to hold up the overall U.S. vehicle sales series. U.S. truck sales posted a 10-3/4 year high of 10.52 million units in Nov 2015 and were up +14.8% y/y in that month. Truck sales in March fell to 9.75 million units and were up by only +2.7% y/y, but that was much better than the auto sales series which fell by -11.4% y/y in March. Truck sales last year surged due to low gasoline prices as people who wanted to buy a new truck were attracted by the new below-$100 gasoline fill-up price. The recent 40-cent upward rebound in gasoline prices is a negative factor for truck sales, but gasoline prices are still historically low and are still conducive to truck sales.
Dollar falls to a new 15-1/2 month low as Fed rate hike chances remains dim — The dollar index yesterday fell to a new 15-1/2 month low of 92.537, edging below the previous low of 92.621 posted last summer in August 2015. The dollar index has been falling since the beginning of year as the market deferred expectations for the Fed’s next rate hike based on overseas turmoil early in the year and now on weak U.S. economic data as Q1 GDP eased to a paltry +0.5% (q/q annualized). Meanwhile, Europe’s GDP growth rate in Q1 beat the U.S. by showing a +2.0% gain (q/q annualized).
The dollar index is sinking as the market settles in for what is likely to be a long wait for the Fed’s next rate hike. The federal funds futures market is not fully discounting the Fed’s next rate hike until April 2017, although a rate hike by year-end still seems fairly likely if the U.S. economy can regain its balance and there are no new overseas shocks. In the meantime, bulls are bailing out of their long dollar positions as the technical situation deteriorates with yesterday’s new 15-1/2 month low. Even after yesterday’s 15-1/2 month low, the dollar index has retraced only 37% of the +21.604 point (+27.4%) rally seen from May 2014 to the 13-year high of 100.51 posted in Nov 2015. The dollar index could fall even farther on a technical correction and the 2014/15 bull market could still be considered to be in force.
We look for the downside correction in the dollar index to last at least through summer as long liquidation pressure continues while the Fed is in neutral mode. However, we remain long-term bullish on the dollar since the Fed will likely raise its funds rate target either once or twice within the next year while the ECB and BOJ will still be engaged in QE and expanding their balance sheets. In addition, the U.S. economy remain in much better shape overall than the European and Japanese economies, thus attracting capital inflows and putting upward pressure on monetary policy.
Crude oil falls -2.5% as OPEC production rises in March to a new record high — June WTI crude oil prices on Monday fell sharply by -2.5% after reports that OPEC’s production in April rose to a new record high. According to Bloomberg estimates, OPEC oil production in April rose by +1.5% to a new record high of 33.217 million bpd. The increase in production in April was led by Iran with a +9.4% m/m increase in production to 3.500 million bpd from 3.2 million bpd in March. Meanwhile, Iraq’s April production rose by +3.9% to 4.31 million bpd and Saudi Arabia’s production rose by +0.8% to 10.270 million bpd from 10.190 million bpd in March.
The new record high in OPEC production in April probably would have occurred anyway even if major oil producers in April managed to reach a production freeze agreement since Iran would not have been part of that agreement and would have gone ahead with its 300,000 bpd (+9.4%) production surge in April. Still, Saudi Arabia boosted production in April and proved that it will show no particular restraint on its production as it intends to maintain its market share at all costs and also boost production over the summer to meet increased electricity demand for air conditioning.
Iran has now increased its production by a total of +700,000 bpd (+25%) to 3.500 million bpd in April from 2.8 million bpd as recently as December. Iran has therefore made good on its promise to increase its post-sanctions production by +600,000 bpd within a matter of months and keep pushing for an overall increase of at least 1 million bpd. Iran has only another +400,000 bpd to get back to average production level of about 3.9 million bpd seen in 2004-2008 before sanctions were imposed for Iran’s nuclear program. With all the acrimony, there is little to suggest that Iran will stop raising production until it meets the capacity limits of its current oil infrastructure. Iran’s production reached a record high of 4.080 million bpd in August 2005. It is unlikely that Iran can reach that level immediately, but there is little doubt that with some additional time and investment, Iran could easily reach that production level and perhaps even higher. At some point, OPEC producers are going to be forced to sit down and stop the production competition between Iran and Saudi Arabia, but that may only happen after oil prices show a new free-fall.
