- No FOMC rate hike today but markets will be watching for balance sheet discussions
- ADP report expected to show that U.S. job growth remains firm
- U.S. ISM non-manufacturing index expected to recover part of March’s decline
- Weekly EIA report expected to show a fairly large decline in U.S. oil inventories
No FOMC rate hike today but markets will be watching for balance sheet discussions — The FOMC at its 2-day meeting that concludes today is expected to leave its funds rate target range unchanged at 0.75%-1.00%. There will be no Yellen press conference today or updated Fed dots. The markets will therefore have to rely on today’s post-meeting statement to note any shifts in Fed policy along with speaking engagements this Friday by Fed Chair Yellen, Fed Vice Chair Fischer, and regional Fed presidents Williams, Evans, and Rosengren.
The odds for a Fed rate hike today are remote at 13%, according to the federal funds futures market. A rate hike today would be far too aggressive since the FOMC just raised its funds rate target by +25 bp to 0.75%-1.00% at its last meeting on March 14-15. In addition, the Fed needs to be cautious about whether U.S. consumer spending will recover after flat-lining in Feb-March and about the outcome of this Sunday’s French presidential election.
However, the odds for a Fed rate hike at its next meeting on June 13-14 are substantially higher at 70%. The Fed appears willing to write off the weak Q1 GDP report of +0.7% as the result of transitory factors and expects U.S. economic growth to return to normal in Q2. That would likely keep the Fed on its plan to raise interest rates two more times in 2017. Yet, the market is discounting only 1-1/2 more Fed rate hikes in 2017.
The market still doubts the FOMC will come close to the rate-hike regime outlined in the Fed-dot forecasts. The Fed-dot median forecast is for three rate hikes per year in 2017, 2018, and 2019, which would bring the funds rate to 3.00% by the end of 2019. However, the market is expecting a total of only about four more rate hikes to 1.81% through the end of 2019, which would be almost five rate hikes short of the Fed’s plan to push the funds rate up to 3.00% by the end of 2019.
ADP report expected to show that U.S. job growth remains firm — The consensus for today’s April ADP employment report is for an increase of +178,000, which would be mildly below the 12-month trend increase near +200,000. The market is expecting a below-trend report today on some payback from particularly strong reports seen in Jan-March (Jan +249,000, Feb +245,000, Mar +263,000).
The markets will be watching to see if today’s March ADP report of +264,000 is revised lower to bring it more in line with the weak March payroll report of +98,000. If today’s March ADP report is not revised lower, and if today’s April ADP report at least hits the consensus of +178,000, that would bode well for this Friday’s payroll report to show a nice recovery.
Looking ahead, the consensus for this Friday’s April payroll report is for an increase of +190,000, thereby returning to trend after March’s very weak report of +98,000. The March payroll report raised some concerns about whether the U.S. labor market might be seeing some emerging weakness. However, the March payroll report was likely caused by temporary weather-related factors such as (1) the fact that snowstorm Stella hit the Northeastern U.S. during the March payroll survey week, and (2) some payback after construction jobs were boosted in Jan-Feb by warmer than normal weather. Payrolls were strong at +216,000 in Jan and +219,000 in Feb, before falling to the weak mark of only +98,000 in March.
U.S. ISM non-manufacturing index expected to recover part of March’s decline — The consensus is for today’s Apr ISM non-manufacturing index to show a +0.6 point increase to 55.8, recovering one-quarter of March’s fairly sharp -2.4 point drop to 55.2. Even after March’s -2.4 point drop to 55.2, the ISM non-manufacturing index was at a relatively high level that indicated solid optimism in the non-manufacturing sectors of the U.S. economy.
However, the Markit U.S. services PMI is weaker than the ISM index and in early April fell by -0.3 points to 52.5, which did not bode well for today’s ISM report. The consensus is for the today’s final-April Markit U.S. services PMI to be left unrevised from early April at 52.5.
Monday’s April ISM manufacturing index of -2.4 points to 54.8 was disappointing and showed a decline in confidence in the manufacturing sector. The ISM manufacturing new orders sub-index took an even larger hit of -7.0 points to 57.5. The ISM manufacturing report did not bode well for today’s ISM non-manufacturing report. The report suggested that American business people are becoming less optimistic about the prospects for the economy because of the slow-moving Republican agenda and the weakness seen in consumer spending in Q1.
Weekly EIA report expected to show a fairly large decline in U.S. oil inventories — The market consensus for today’s weekly EIA report is for a -3.25 million bbl decline in U.S. crude oil inventories, a +1.0 million bbl rise in gasoline inventories, a +1.5 million bbl rise in distillate inventories, and a -0.1 point decline in the refinery utilization rate to 94.0%. U.S. oil production last week rose by +0.1% w/w to a new 1-3/4 year high of 9.265 million bpd. U.S. crude oil inventories have recently declined sooner than is normal for this time of year. That decline has helped cut the glut to +29.8% above the 5-year seasonal average versus the +40.7% glut seen as recently as February. However, that crude oil glut has just moved to some extent into the product inventories. Gasoline inventories are now +9.1% above the 5-year seasonal average, the highest level since October, and distillate inventories are +17.4% above average.
