- U.S. initial unemployment claims expected to rebound mildly higher from 44-year low
- Strong U.S. import prices expected to put upward pressure on U.S. inflation data
- 30-year T-bond auction to yield near 3.15%
U.S. initial unemployment claims expected to rebound mildly higher from 44-year low — The market consensus is that today’s weekly initial unemployment claims report will rebound upward by +15,000 to 238,000, reversing most of last week’s -19,000 decline to a 44-year low of 223,000. The fact that layoffs by U.S. businesses are at their lowest level in more than four decades is another sign of the strength in the U.S. labor market.
Meanwhile, the consensus is for today’s continuing claims report to show a small -3,000 decline to 2.063 million, reversing last week’s small +3,000 increase to 2.066 million. The continuing claims series is also in very favorable shape at only +83,000 above the 16-3/4 year low of 1.983 million posted in November 2016.
ADP surge suggests possible FOMC tilt next week towards more aggressive tightening plan — Wednesday’s Feb ADP report of +298,000 was much stronger than market expectations of +189,000 and was the fourth straight report above +200,000. The 4-month average is now a very strong +247,000. In the wake of the ADP report, the market is now expecting Friday’s Feb payroll report to be substantially stronger than the recent consensus of +190,000.
The markets are waiting to see if the FOMC at its meeting next week provides any indication that it is accelerating its rate-hike ideas for the next three years. The FOMC next week will provide an updated set of Fed dots, which will give FOMC members the opportunity to indicate whether they have raised their forecasts for how high interest rates might need to go over the next three years. The last set of Fed dots from December showed a median forecast for three Fed rate hikes in 2017 followed by a rise in the federal funds rate to 2.1% by the end of 2018 and to 2.9% by the end of 2019.
Fed Chair Yellen next Wednesday will also give a press conference, giving her an opportunity to calibrate market expectations for rate hikes in 2017-19.
Other than a firm payroll report, Friday’s Feb unemployment report is expected to give the Fed fuel for its rate-hike inclinations with an expected increase in Feb average hourly wages to +2.8% from +2.5% in Jan, thus matching the 7-1/2 year high of +2.8% posted on two recent occasions. In addition, Friday’s Feb unemployment rate is expected to fall by -0.1 point to 4.7%, leaving it only +0.1 point above the 9-3/4 year low of 4.6% posted in Nov 2016. January’s unemployment rate of 4.8% was already in line with the Fed’s long-term forecast for the unemployment rate and was just +0.3 points above the FOMC’s forecast of 4.5% for 2017-2019.
The market is now discounting a 100% chance of a 25 bp rate hike at next week’s FOMC meeting on Tue-Wed. The market is then discounting a 100% chance for a second rate hike by the Sep 19-20 meeting and a 74% chance for a third rate hike by the December 12-13 meeting. The market is expecting an overall rate hike over the next two years of +115 bp from the current level. That represents a +26 bp increase in rate-hike expectations just in the past two weeks. On Feb 24, before the Fed last week began its campaign to pre-announce next week’s rate hike, the markets were expecting an overall rate hike of +89 bp during 2017-18.
Strong U.S. import prices expected to put upward pressure on U.S. inflation data — The market is expecting today’s Feb import price index to rise to +4.3% y/y from Jan’s +3.7%, thus posting a new 5-year high. Import prices have been pushed higher in part by the rise in oil prices seen after the Nov 30 OPEC production cut agreement. However, non-petroleum import prices have also been rising, which illustrates the upward pressure that import prices are putting even on the core U.S. CPI and PCE deflator. Import prices ex-petroleum in January rose to a 2-1/3 year high of +0.3% y/y from levels as weak as -3.7% y/y just a year earlier.
The general strength in the dollar seen in the past three years should theoretically be putting downward pressure on import prices. However, the fact that import prices are rising despite the strong dollar indicates that some price pressures are bubbling below the surface.
30-year T-bond auction to yield near 3.15% — The Treasury today will sell $12 billion of 30-year bonds, thus concluding this week’s $56 billion coupon package. Today’s 30-year auction will be the first reopening of the 3% 30-year bond of February 2047 that the Treasury first sold in February. Today’s 30-year T-bond issue was trading at 3.15% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 1.06% against the current 30-year breakeven inflation expectations rate of 2.09%.
The 12-auction averages for the 30-year are as follows: 2.31 bid cover ratio, $8 million in non-competitive bids, 5.6 bp tail to the median yield, 19.3 bp tail to the low yield, and 52% taken at the high yield. The 30-year T-bond is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.9% of the last twelve 30-year T-bond auctions, which is moderately above the average of 59.2% of all recent Treasury coupon auctions.
Wednesday’s 10-year T-note auction produced good results, particularly in light of the bearish tone caused by the strong ADP report. The 10-year auction’s bid cover of 2.66 was well above the 12-auction average of 2.48. In addition, indirect bidders took 65.8% of the auction, well above the 12-auction average of 63.4%.
