- Yellen turns more neutral following last Friday’s weak payroll report
- Q1 productivity expected to be revised a bit higher but not by enough to impress U.S. businesses
- Consumer credit expected to show a trend increase
- 3-year T-note auction to yield near 0.96%
- Weekly EIA report
Yellen turns more neutral following last Friday’s weak payroll report — Fed Chair Yellen yesterday turned more neutral about a rate hike, saying that she still thinks that rates will need to “rise gradually over time” but dropping her comment from just a week earlier that a rate hike would likely be appropriate in “coming months.” Ms. Yellen called last Friday’s payroll report of +38,000 (+72,000 ex-Verizon strike) “disappointing” and she also cataloged ongoing overseas risks such as Brexit and the slowing Chinese GDP growth rate.
Ms. Yellen’s appearance yesterday will be the last schedule appearance by any Fed official before next week’s 2-day FOMC meeting, meaning FOMC hawks will not be able to somehow continue to argue that next week’s meeting is “live” for a rate hike. The chances for a rate hike at next week’s FOMC meeting are back to near-zero after last Friday’s weak payroll report and after weekend reports of new UK public opinion polls showing that the “Leave” vote may be gaining momentum. Specifically, the federal funds futures market is discounting the odds of a rate hike at only 2% for next week’s FOMC meeting and at only 22% for a rate hike at the following meeting on July 26-27.
Q1 productivity expected to be revised a bit higher but not by enough to impress U.S. businesses — The market is expecting today’s final-Q1 non-farm productivity report to show an upward revision to -0.6% from the preliminary report of -1.0%. The upward revision is expected to result from the recent upward revision in Q1 GDP to +0.8% from +0.5%, which boosted the numerator in the productivity ratio. Meanwhile, the market is expecting Q1 unit labor costs to be revised slightly lower to +4.0% from +4.1%.
Today’s productivity report highlights two reasons why businesses are curbing their hiring. First, the low level of productivity means that businesses are not getting much bang for their buck out of their current employee staffing levels, which means businesses don’t have much incentive to keep hiring more people. Second, labor costs are rising during a time of weaker corporate profits, putting companies under pressure to light up on their employee head counts.
Consumer credit expected to show a trend increase — The market is expecting today’s April U.S. consumer credit report to show an increase of +$18.0 billion, falling back after March’s surge of +$29.674 billion. Today’s expected +$18.0 billion increase would be just mildly below the 12-month average trend increase of +$18.6 billion.
A year ago, U.S. consumer credit growth was dominated by strength in installment loans for school and vehicles. Specifically, a year ago in March 2015, U.S. installment loan growth was up strongly by +8.3% y/y whereas revolving credit (credit cards) growth was up by only +3.7% y/y. However, consumers have been relying more on credit cards in recent months and revolving credit was most recently reported at a much stronger +6.2% y/y, while installment credit growth decelerated to +6.8% y/y. The increase in revolving credit may indicate that consumers are once again getting themselves out on a limb and may need to curb their spending.
3-year T-note auction to yield near 0.96% — The Treasury today will sell $24 billion of 3-year T-notes. The Treasury will then continue this week’s $56 billion coupon package by selling $20 billion of 10-year T-notes on Wednesday and $12 billion of 30-year T-bonds on Thursday. The 10-year and 30-year auctions will be reopenings of the securities that the Treasury first sold in May.
Today’s 3-year T-note issue was quoted at 0.96% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of -0.51% against the current 3-year breakeven inflation expectations rate of 1.47%. Buyers of today’s 3-year T-note yield can therefore expect to lose -0.51% annually over the course of their investment on an inflation-adjusted basis if actual inflation turns out to match the current 3-year inflation expectations rate of 1.47%.
The 3-year T-note yield rose sharply in mid-May after hawkish comments by various Fed officials and the hawkish April 26-27 FOMC minutes. However, the 3-year T-note yield then fell sharply last Friday on the very weak payroll report of +38,000. The current 3-year T-note yield of 0.93% is down by -16 bp from the 2-1/2 month high of 1.09% posted on May 25, which will make today’s 3-year auction a little less attractive to investors and could put a dent in demand from domestic investors. However, foreign demand for today’s 3-year T-note auction is likely to remain strong due the favorable yields on U.S. Treasury securities compared with negative yields in Europe and Japan.
The 12-auction averages for the 3-year are as follows: 3.02 bid cover ratio, $60 million in non-competitive bids to mostly retail investors, 3.9 bp tail to the median yield, 20.8 bp tail to the low yield, and 36% taken at the high yield. The 3-year is one of the least popular securities among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 50.5% of the last twelve 3-year T-note auctions, well below the average of 56.7% for all recent Treasury coupon auctions.
Weekly EIA report — The market consensus for Wednesday’s weekly EIA report is for a -3.0 million bbl drop in U.S. crude oil inventories, a -500,000 bbl drop in gasoline inventories, a -500,000 bbl drop in distillate inventories, and a +0.7 point increase in the refinery utilization rate to 90.5%.