Today’s Economic & #Commodity Perspectives #Futures

Weekly U.S. market focus — This week’s U.S. economic calendar is busy with the key reports impacting Fed policy including today’s April PCE deflator (expected +1.7% y/y vs March’s +1.8%) and Friday’s May payroll report (expected +185,000).  The U.S. stock market was encouraged by last Friday’s upward revision in Q1 GDP to +1.2% from +0.7%.  There are five Fed speaking engagements this week that could include comments on the Fed’s balance sheet.

Congress is on recess this week but will return to Washington next week to face key issues including the 2018 budget, a debt ceiling increase by October, health care legislation, and tax legislation.  The Senate next week will focus on health care even though Senate Majority Leader McConnell has already expressed doubts about whether Republican Senators will be able to agree on a health care bill.  If not, then Congressional Republicans will have to move on to tax reform.

The White House will be under close scrutiny to see how President Trump deals with the worsening Russian situation.  The White House is reportedly setting up a war room to deal with the Russian situation while the rest of the administration tries to stay on track with pushing its legislative and regulatory agenda.  There is a distinct possibility that any further Russian revelations could spook the stock market.

The markets will be watching to see if oil prices settle down following last Thursday’s extension of the 1.8 million bpd production cut agreement by OPEC and non-OPEC countries.  July crude oil prices plunged by -4.79% last Thursday on some disappointment that the meeting produced nothing more than the expected 9-month extension, but oil prices then partially recovered by +1.84% on Friday.  If U.S. oil production doesn’t start to peak soon, then oil prices will likely have difficulty holding above $50.

The overseas focus is mainly on China after Moody’s last week downgraded China’s credit rating, which attracted renewed attention to China’s debt problems.  However, the Shanghai Composite stock index rallied sharply late last week after surviving a test of the mid-May 7-1/2 month low.  The markets are also watching UK politics ahead of the June 8 general election since the Conservatives’ lead has dwindled, putting some downward pressure on sterling.

 

June FOMC meeting could bring balance sheet details – The markets are still discounting the odds at more than 90% for a rate hike at the next FOMC meeting in two weeks on June 13-14.  However, there is now a chance that the FOMC at the June meeting could also announce some details of its balance sheet roll-off plan.  Last week’s May 2-3 FOMC meeting minutes revealed that FOMC members generally approved of a balance sheet roll-off plan proposed by the Fed staff that would start out slowly with a capped monthly roll-off amount that increases every three months until the full phase-in is reached.

The markets last week were pleased with the idea of a slow start to the roll-off plan, but were a bit surprised at how quickly the Fed’s balance sheet discussions seem to be moving.  The Fed now plans to start reducing its balance sheet later this year, probably in Q4 but perhaps as early as September.  In any case, the FOMC at its June meeting could release some key details about its balance sheet roll-off plan, potentially causing some market nervousness in the T-note market leading up to that meeting. 

U.S. PCE deflator expected to ease slightly — The market consensus is for today’s Apr PCE deflator, the Fed’s preferred inflation measure, to ease to +1.7% y/y from March’s +1.8% and for the core deflator to ease to +1.5% y/y from March’s +1.6%.  The cooler inflation picture since Feb’s peak of +2.1% y/y (+1.8% core) takes some of the pressure off the Fed for more aggressive rate hikes.  On the more hawkish side, today’s April personal income and spending reports are both expected to show increases of +0.4%, illustrating an improved consumer outlook going into Q2.

U.S. home prices expected to show another sharp increase — The consensus is for today’s March S&P CoreLogic Composite-20 Home Price index to show a sharp increase of +0.8% m/m, adding to Feb’s +0.69% increase.  The FHFA has already reported that its U.S. home price index rose sharply by +0.6% in March, which supported expectations for a strong Composite-20 report today.  The Composite-20 index is up sharply by +5.8% year-on-year and +43.5% from its housing-bust low.  U.S. home prices are seeing an upward squeeze as a result of both strong demand and tight supplies.

U.S. consumer confidence expect to fade a bit — The consensus is for today’s May Conference Board U.S. consumer confidence index to show a -0.5 decline to 119.8, adding to April’s -4.6 decline to 120.3.  The index has so far faded just mildly after soaring to a 16-year high of 124.9 in March.  U.S. consumer confidence has recently been strong due to the firm U.S. labor market, rising consumer income and wealth, record highs in the stock market, generally low gasoline price, and hopes for personal tax cuts.

U.S. stocks remain buoyant — The S&P 500 index last week rallied to a new record high after the markets were pleased to see in Wednesday’s May 2-3 FOMC meeting minutes that the Fed will start its balance sheet roll-off program slowly.  The U.S. stock market was also pleased to see the Shanghai Composite index rebound sharply higher later in the week. U.S. stocks continue to see strong underlying support from strong earnings growth, the solid U.S. economy, and improving global economic growth.  Risks include White House political uncertainty, any speed-up in the Fed’s tightening process, and high valuations that make the market vulnerable to any bad news.