- U.S. ISM manufacturing index expected to show back-to-back decline and remain just mildly above the boom-bust level of 50.0
- Fed Beige Book likely to show continued modest-to-moderate U.S. economic growth
- Vehicle sales expected to be little changed
- MBA mortgage applications remain generally strong
- Weekly EIA report expected to show a -2.5 million bbl decline in oil inventories as seasonal decline picks up speed
U.S. ISM manufacturing index expected to show back-to-back decline and remain just mildly above the boom-bust level of 50.0 — The market is expecting today’s May U.S. ISM manufacturing index to show a -0.5 point decline to 50.3, adding to April’s -1.0 point decline and leaving the index just +0.3 points above the expansion-contraction level of 50.0. The ISM manufacturing index showed a +3.8 point upward rebound in Jan-March to a 9-month high of 51.8, but then fell by -1.0 points in April. The ISM manufacturing new orders index rose by +9.5 points in Jan-March to a 1-1/2 year high of 58.3 but then fell by -2.5 points to 55.8 in April.
Confidence in the U.S. manufacturing sector showed an upward rebound in Jan-March as the dollar backed off and as oil prices recovered. The -7.9% decline in the dollar index in Feb-April helped boost overseas manufacturing exports somewhat. However, the dollar index in May recovered by +4.3%, thus keeping worries alive about the competitiveness of U.S. exports and hurting manufacturer confidence.
Meanwhile, the market is expecting today’s final-May Markit U.S. manufacturing PMI to be left unrevised from the preliminary-May figure of -0.3 to 50.5. The preliminary-May decline in the Markit U.S. manufacturing PMI was a negative leading indicator for today’s ISM report.
Fed Beige Book likely to show continued modest-to-moderate U.S. economic growth — The Fed today will release its Beige Book survey of the regional U.S. economy ahead of the FOMC meeting in two weeks (June 14-15). The FOMC’s last Beige Book report, released on April 13, found mixed conditions across the U.S. and said that “economic growth was in the modest to moderate range and that contacts expected growth to remain in that range going forward.” The report found that, “Labor market conditions continued to strengthen and business spending generally expanded across most Districts.” The report said, “Manufacturing activity increased in most Districts.”
The federal funds futures market as of yesterday was discounting only a 24% chance of a rate hike at the upcoming June 14-15 meeting. Fed officials have stepped up their hawkish warnings of a rate hike, but the Fed may not raise rates at their June 14-15 meeting since that would be just a week before the June 23 Brexit vote. A rate hike at the following meeting on July 26-27 is more likely at 62%, according to the federal funds futures market.
Vehicle sales expected to be little changed — The market is expecting today’s May total vehicle sales report to ease slightly to 17.30 million from 17.32 million in April. Vehicle sales dropped sharply by -5.6% to 16.46 million units in March but then recovered most of that loss in April by rising back up to 17.32 million units. The latest vehicle sales level of 17.32 million units is just mildly below the 12-month trend average of 17.49 million units.
U.S. vehicle sales remain generally strong and near levels seen in 2001-06 before the Great Recession emerged. The strength in vehicle sales illustrates consumers’ willingness to spend money and also illustrates the boost that the U.S. manufacturing sector is receiving from the strong vehicle sector.
The strength in vehicle sales may start to fade, however, since all the recent strength in vehicle sales has been tied to strong truck sales, which now look less attractive with the +62-cent rise in retail gasoline prices over the past three months to the current level of $2.32 per gallon from the Feb’s low of $1.70. Gasoline prices are still at historically low levels, but not as low as in February, making it more expensive to fill up a large truck gas tank. Truck sales over the past two years have soared by +12.0% y/y whereas auto sales have fallen by -6.8% y/y.
MBA mortgage applications remain generally strong — U.S. purchase mortgage activity remains in good shape, which is a positive leading indicator for continued strength in home sales. The MBA purchase sub-index last week rose by +4.8% and is only modestly below the recent 6-year high. The strength in mortgage activity indicates that a large number of people are still out trying to get approved for a mortgage for a home purchase. U.S. existing home sales have risen by +7.4% in the past two reporting months (March-April) to 5.45 million units, which is just slightly below the 9-year high of 5.48 million units posted last summer.
Meanwhile, refinancing activity remains relatively strong since mortgage rates are still low. The 30-year mortgage rate last week rose by +6 bp to 3.64%, but that was still only +7 bp above the 3-year low of 3.57% posted in mid-May.
Weekly EIA report expected to show a -2.5 million bbl decline in oil inventories as seasonal decline picks up speed — The market consensus for Thursday’s weekly EIA report, postponed by a day due to Monday’s holiday, is for a -2.5 million bbl decline in U.S. crude oil inventories, a -750,000 bbl decline in Cushing crude oil inventories, a -350,000 bbl decline in gasoline inventories, a -920,000 decline in distillate inventories, and a +0.5 point gain to 90.2% in the U.S. refinery utilization rate. U.S. crude oil inventories typically fall at this time of year as refiner demand picks up since refineries are operating at full tilt to produce summer gasoline.