Today’s Economic & #Commodity Perspectives #Futures

Weekly market focus — The market this week will focus on (1) this week’s busy U.S. economic schedule that culminates with Friday’s May payroll report (expected +160,000), (2) Fed policy as the next FOMC meeting (June 14-15) is now only two weeks away and as the Fed releases its Beige Book report on Wednesday, (3) whether the U.S. stock market can extend last week’s rally or whether caution starts to set in ahead of the FOMC meeting in two weeks and the June 23 Brexit vote in three weeks, (4) whether the month-long rally in the dollar index continues based on the more hawkish view of Fed policy, (5) whether oil prices can continue their steady 3-month advance in the face of Thursday’s OPEC meeting where OPEC is not expected to produce any agreement to curb production, (6) Thursday’s ECB meeting that is likely to produce an unchanged policy, and (7) tonight’s release of the Chinese May manufacturing PMI reports, which are expected to show small declines.

Yellen doesn’t specifically address June rate hike but does say a rate hike is likely in “coming months” — Fed Chair Yellen last Friday said, “It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time.  Probably in the coming months such a move would be appropriate.”

Ms. Yellen in Friday’s comments managed to avoid specifically addressing the odds for a June 14-15 rate hike while still validating recent hawkish comments by various Fed officials.  Ms. Yellen’s comments on Friday had a slightly hawkish market impact, causing the federal funds futures curve on a yield basis to rise slightly by 1 bp for the 2016 contracts and by 2 bp for the 2017-18 contracts.  The federal funds futures market is now discounting the odds at 30% for a Fed rate hike at the FOMC meeting on June 14-15 (vs 4% as of mid-May) and at 64% for a rate hike at the following FOMC meeting on July 26-27 (vs 18% as of mid-May).

The chances for a rate hike at the June meeting are reduced by the fact that the June 23 Brexit vote comes only a week after the FOMC meeting, which means the Fed might want to avoid greasing the skids for the markets ahead of the Brexit vote.  The odds for a July meeting are higher after the Brexit situation is over and the Fed has another month’s worth of U.S. economic data to assess.

April U.S. consumer confidence expected to show a moderate increase — The market is expecting today’s May U.S. consumer confidence index from the Conference Board to show a +2.1 point increase to 96.3, more than overcoming the -1.9 point decline to 94.2 seen in April.  Expectations for an increase in today’s April Conference Board U.S. consumer confidence index are based in part on last Friday’s news that the final-April U.S. consumer sentiment index from the University of Michigan rose by +5.7 points to a 1-year high of 94.7, overcoming its 4-month slide of -3.6 points seen in Jan-April.  The Conference Board’s April U.S. consumer confidence level of 94.2 was far below the 8-3/4 year high of 103.8 posted in Jan 2015.

U.S. consumer confidence improved in April due to the generally strong stock market, the continued rise in home prices (which boosts household wealth), historically low gasoline prices, and rising incomes.  The question remains whether the jump in April consumer sentiment will be sustainable due to the weaker April U.S. labor market, the upward creep in gasoline prices, and the toxic presidential campaign.

U.S. personal income and spending expected to show solid increases — The market is expecting today’s April personal spending report to show a sharp increase of +0.7% after the small increases of 0.1%-0.2% seen the previous four months of Dec-March.  The recent April retail sales report of +1.3% indicated that U.S. consumer spending revived sharply after consumers hibernated over the winter.  Meanwhile, the market is expecting today’s April personal income report to show a solid increase of +0.4%, matching April’s +0.4% increase.  The increase in income is giving consumers the underlying confidence to spend more money.

U.S. core PCE deflator expected to be unchanged at +1.6% — The market is expecting today’s April PCE deflator index to rise to +1.1% y/y from +0.8% in March.  The headline PCE deflator is moving higher thanks mainly to the steady rally in crude oil and gasoline prices over the past several months.  By contrast, the market is expecting today’s Apr core PCE deflator to be unchanged from March at +1.6% y/y.  The fact that the Fed’s preferred measure of inflation remains comfortably below the Fed’s +2.0% inflation target means that the Fed is not under any imminent pressure to raise interest rates based on the inflation outlook.

U.S. home prices expected to show a strong increase — The market is expecting today’s March S&P/CaseShiller composite-20 home price index to show another sharp increase of +0.7% m/m, matching Feb’s increase.  U.S. home prices continue to see a steady increase due to strong home sales and below-normal supplies.  The FHFA’s March home price index has already been reported at +0.6%, which supports forecasts for a strong CaseShilller report today.

Chicago PMI expected to stabilize after April’s sharp drop — The market is expecting today’s May Chicago PMI to show a slight +0.1 point increase to 50.5, stabilizing after April’s sharp -3.2 point decline to 50.4.  On the national manufacturing confidence front, the market is expecting tomorrow’s May U.S. ISM manufacturing index to show a -0.4 point decline to 50.4, adding to April’s -1.0 point decline and pushing the index down closer to the expansion-contraction level of 50.0.