- Unemployment claims remain in very favorable shape
- U.S. PPI expected to be stable as inflation cools a bit
- Treasury sells 30-year T-bonds after lackluster 10-year auction
- Crude oil prices rally sharply on large EIA drawdown
Unemployment claims remain in very favorable shape — Both the initial and continuing unemployment claims series remain in very favorable shape and indicate continued strength in the U.S. labor market. The initial claims series is only +11,000 above the 44-1/4 year low of 227,000 posted in February and the continuing claims series last week fell to a new 17-year low.
The market consensus is for today’s initial claims report to show an increase of +7,000 to 245,000, reversing part of last week’s -19,000 decline to 238,000. The consensus is for today’s continuing claims report to show a +16,000 increase to 1.980, reversing part of last week’s -23,000 decline.
Last Friday’s April payroll report of +211,000 went a long way toward relieving market worries about the weak March payroll report of +79,000, which was mainly due to weather issues. The market was also relieved by Tuesday’s news that March JOLTS job openings rose by +61,000 to an 8-month high of 5.743 million, which indicated that businesses plan to continue to hire at a strong clip. The strong labor market is the key factor behind the Fed’s hawkish stance.
U.S. PPI expected to be stable as inflation cools a bit — The market consensus is for today’s April final-demand PPI index to ease slightly to +2.2% y/y from March’s +2.3% and for the April core PPI to be unchanged from March at +1.6% y/y. The headline PPI in March posted a 5-year high of +2.3% y/y. However, that strength was due in part to energy prices since the core PPI was tamer at +1.6% y/y.
The Fed believes that its inflation policy goal has largely been met although the PCE deflator, the Fed’s preferred inflation measure, is currently below the Fed’s +2.0% inflation target. The PCE deflator rose to a 5-year high of +2.1% y/y in February but then dropped back to +1.8% in March. The core PCE deflator in February matched the 5-year high of +1.8% y/y but then dropped back to +1.6% in April.
The market in recent weeks has scaled back inflation expectations due to the sharp sell-off in oil and commodity prices and reduced optimism about the Republican growth agenda. The 10-year breakeven inflation expectations rate has eased to 1.87% from the post-election peak of +2.09% seen in January. However, the breakeven rate is still +13 bp above the 1.74% level seen before the November election.
The nearby chart shows the loose correlation between the 10-year breakeven rate and crude oil prices. Over the last 52 weeks, the 10-year breakeven rate and spot crude oil prices have shown a correlation of 0.15, illustrating how crude oil prices are at least a partial driver of inflation expectations.
Even though the inflation statistics cooled a bit in March, the Fed is not likely to let up its inflation guard since the March inflation weakness was likely temporary. The U.S. economy is expected to recover in Q2 from Q1’s weakness and the tight labor market means that wages are likely to move higher in coming months and put new upward pressure on inflation.
Treasury sells 30-year T-bonds after lackluster 10-year auction — The Treasury today will sell $15 billion of 30-year T-bonds, concluding this week’s $62 billion quarterly refunding operation. Today’s 30-year T-bond will be a new issue as opposed to a reopening of an existing issue. The benchmark 30-year bond late yesterday was trading at 3.04%, which translates to an inflation-adjusted yield of 1.05% against the current 30-year breakeven inflation expectations rate of 1.99%.
The 12-auction averages for the 30-year are as follows: 2.30 bid cover ratio, $8 million in non-competitive bids, 6.0 bp tail to the median yield, 19.0 bp tail to the low yield, and 48% taken at the high yield. The 30-year is mildly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 62.9% of the last twelve 30-year T-bond auctions, which is mildly above the average of 59.8% for all recent Treasury coupon auctions.
The results of Wednesday’s 10-year T-note auction were mildly disappointing. The bid cover ratio of 2.33 was well below the 12-auction average of 2.47 and indicated light bidding. In addition, foreign participation was lighter than usual with indirect bidders taking 60.7% of the auction, well below the 12-auction average of 64.6%.
Crude oil prices rally sharply on large EIA drawdown — June WTI crude oil prices on Wednesday rallied sharply by +$1.45 to $47.33 (+3.16%) due to the unexpectedly large -5.2 million bbl draw-down in EIA U.S. crude oil inventories. U.S. crude oil inventories have now fallen for five consecutive weeks by a total of -13.0 million bbls (-2.4%). U.S. crude oil inventories typically fall at this time of year as refineries ramp up their operations to produce summer gasoline. However, this year’s decline started earlier than normal and that has helped bring crude oil inventories down to +27.2% above the 5-year seasonal average, which is much tighter than +34.8% above-average seen before the 5-week inventory decline began. That is the closest that U.S. crude oil inventories have fallen to the 5-year seasonal average in 1-1/3 years.
On the bearish side, however, U.S. oil production rose by another +0.2% to post a new 1-3/4 year high of 9.314 million. Since OPEC reached its 1.2 million bpd production cut agreement on November 30, 2016, U.S. oil production has risen by +615,000 bpd (+7.1%), offsetting about half of the OPEC production cut.
