- April 26-27 FOMC minutes take a back seat to hawkish talk by some Fed officials
- MBA mortgage applications likely to get a boost from 3-year low in mortgage rates
- Crude oil inventories expected to fall in weekly EIA report
- U.S. rig continues to drop and put downward pressure on U.S. oil production
April 26-27 FOMC minutes take a back seat to hawkish talk by some Fed officials — The markets will be watching today’s release of the April 26-27 FOMC minutes for some color on the Fed’s internal debate at that meeting. The markets in particular are interested in hearing about the backdrop to the FOMC’s decision at that meeting to drop the warning about overseas risks. In addition, the markets would like to know whether the Fed plans to reinstate its balance of risk assessment in coming meetings if it gets a better handle on the U.S. and overseas outlooks. The Fed dropped its balance of risk assessment in January when Chinese turmoil helped spark the sharp sell-off in the U.S. stock market.
Stock and T-note prices fell yesterday after two Fed officials issued a warning that the markets are underestimating the likelihood of Fed rate hikes this year. Atlanta Fed President Dennis Lockhart yesterday said, “Currently my assumption is two, possibly three” rate hikes this year. Meanwhile, San Francisco Fed President John Williams said that “gradual means two to three rates increases this year.” The markets were a little taken aback to hear about three rate hikes this year when the federal funds futures market isn’t even fully discounting one rate hike this year. Mr. Lockhart added, “My view is June is a live meeting.” While Mr. Lockhart and Mr. Williams were vocal in lobbying for a near-term rate hike, neither is a voting member on the FOMC at present, which means they can only jawbone for a rate hike and not vote in favor of a rate hike.
The federal funds futures market yesterday boosted the odds for a rate hike at the upcoming June 14-15 FOMC meeting to 12% from 4% on Monday thanks to strong U.S. economic and CPI data and the hawkish Fed comments, particularly the mention about three rate hikes this year. The federal funds futures market sharply boosted the odds for a rate hike by year-end to 92% from 74% on Monday.
While the drumbeat for a rate hike is growing, we still view a rate hike at the upcoming June 14-15 as extremely unlikely in part because the meeting comes only a week before the June 23 Brexit vote in Britain. The FOMC presumably would not want to grease the skids only a week before UK citizens vote on whether to leave the EU, an event that could result in a sharp sell-off in the UK and European markets. In addition, the recent U.S. April retail sales report of +1.3% was very encouraging but the fact remains that the last U.S. GDP figure was a barely-positive +0.5% in Q1. The Fed in our view needs to wait longer to ensure that the U.S. economy is regaining upside momentum before it pulls the trigger on a rate hike.
However, the chances for a rate hike start to rise substantially in July if overseas risks are contained and the U.S. economy is in fact regaining upside momentum. If the Fed wants to raise interest rates twice in 2016, then it can’t delay the next rate hike much past July.
MBA mortgage applications likely to get a boost from 3-year low in mortgage rates — Today’s MBA mortgage applications report for last week should get a boost from the fact that the 30-year mortgage rate last week fell by -4 bp to a new 3-year low of 3.57%. The low level of interest rates should boost mortgage refinancing and encourage more people to go out and apply for a mortgage to buy a home. The MBA purchase sub-index is near a 6-year high and is well above the levels seen in 2011-2015. Meanwhile, the MBA refinancing sub-index is also near the upper end of the recent range as low mortgage rates encourage homeowners to refinance for perhaps one last time before the Fed moves ahead with its rate-hike regime.
Crude oil inventories expected to fall in weekly EIA report — The market consensus for today’s weekly EIA report is for a -3.5 million bbl drop in U.S. crude oil inventories, a -550,000 bbl drop in Cushing crude oil inventories, a -1.25 million bbl drop in gasoline inventories, a -1.0 million drop in distillate inventories, and a +1.0 point rise in the U.S. refinery utilization rate. The API yesterday reported that inventories last week fell by -1.14 million bbls for U.S. crude oil, -1.9 million bbls for gasoline, and -2.0 million bbls for distillates.
U.S. crude oil inventories last week fell by -0.6% and another drop today would confirm that the usual May-Sep seasonal decline in inventories has begun. Crude oil inventories typically fall in late spring through summer as U.S. refineries boost their usage of crude oil to produce summer gasoline. Still, a sustained decline in crude oil inventories through September is an expected event and won’t boost crude oil prices unless the decline in inventories is sharper than normal and brings inventories quickly down to more normal levels. U.S. crude oil inventories in last week’s report were just -0.6% below the previous week’s record high of 543.394 million bbls and were a massive +33.0% above the 5-year seasonal average. Meanwhile. product inventories remain plentiful with gasoline inventories at +12.4% above the 5-year seasonal average and distillate inventories at +24.1% above average.
U.S. rig continues to drop and put downward pressure on U.S. oil production — The upward rebound in oil prices seen in the past three months has not halted pessimism in the U.S. oil industry where the number of oil rigs has fallen for the last eight consecutive weeks. The number of active U.S. oil rigs has fallen by -220 rigs (-41%) so far this year to a 6-1/2 year low of 318 rigs. Meanwhile, U.S. oil production last week fell by -0.3% to a new 1-3/4 year low of 8.802 million bpd, down by a total of 808,000 bpd (-8.4%) from the 43-1/2 year high of 9.610 million bpd posted in June 2015.
