10-year T-note yield posts new 4-year high after FOMC minutes
Unemployment claims remain in favorable shape
LEI expected to show another very strong report
Today’s 7-year T-note sale concludes this week’s auction deluge
European PMIs show some retrenchment
10-year T-note yield posts new 4-year high after FOMC minutes — The 10-year T-note yield on Wednesday rose to a new 4-year high of 2.954% after the release of the mildly hawkish minutes from the Jan 30-31 FOMC meeting. The minutes showed that FOMC officials “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further.” The minutes also said that members were increasingly optimistic about achieving their 2% inflation target.
The FOMC minutes also sparked a tightening of the federal funds futures curve. The curve tightened up by +3 bp for the end-2018, +8 bp for end-2019, and +6 bp for end-2020. The market is now expecting a total of 70 bp of rate hikes in 2018 (2.8 rate hikes), which is the highest expectation yet. The market is expecting an additional 42 bp of rate hikes in 2019 (1.7 rate hikes), which also the highest expectation yet. The market continues to discount a 100% chance of a Fed rate hike at the next FOMC meeting on March 20-21.
Unemployment claims remain in favorable shape — Unemployment claims remain in favorable shape, illustrating that businesses are holding on tightly to their employees. The initial claims series is only +14,000 above the 45-year low of 216,000 posted in January and the continuing claims series is only +74,000 above the 44-year low of 1.868 million posted in November.
The consensus is for today’s initial claims report to be unchanged at 230,000 following last week’s report of +7,000 to 230,000. The consensus is for today’s continuing claims report to show a -7,000 decline to 1.935 million, reversing part of last week’s +15,000 rise to 1.942 million.
LEI expected to show another very strong report — Today’s Jan leading indicators report is expected to show another strong increase of +0.7%, adding to December’s +0.6% increase. The LEI is in very strong shape and grew at a +5.7% y/y rate in Nov-Dec, which was the fastest rate in three years.
The consensus is for Q1 GDP to show strong growth of +2.7%, improving from +2.6% in Q4. On an annual basis, the consensus is for strong +2.7% growth in 2018 after +2.3% growth in 2017, which are both substantially stronger than the Fed’s estimate of U.S. GDP potential of +1.8%.
U.S. GDP is being boosted by (1) firm consumer spending, (2) improved business investment, (3) fiscal stimulus from tax cuts and spending increases, and (4) strong overseas sales due to the strong global economy and the weak dollar. U.S. GDP is seeing a boost from the increased cash available from the Jan 1 business and personal tax cuts and from the tax provision that allows businesses to fully deduct equipment investment over the next five years.
Today’s 7-year T-note sale concludes this week’s auction deluge — The Treasury today will sell $29 billion of 7-year T-notes, concluding this week’s $107 billion T-note auction package. The $29 billion size of today’s 7-year auction is $1 billion larger than the $28 billion size seen over the last two years. Today’s 7-year T-note issue was trading at 2.86% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.71% against the current 7-year breakeven inflation expectations rate of 2.15%. The 7-year T-note yield on Wednesday closed at a new 6-3/4 year high of 2.86% and has now risen sharply by 65 bp since last November.
The 12-auction averages for the 7-year are as follows: 2.53 bid cover ratio, $11 million in non-competitive bids to mostly retail investors, 4.6 bp tail to the median yield, 21.0 bp tail to the low yield, and 46% taken at the high yield. The 7-year T-note is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 67.6% of the last twelve 7-year T-note auctions, which is moderately above the average of 63.4% for all recent Treasury coupon auctions.
European PMIs show some retrenchment — Wednesday’s European PMI reports showed some retrenchment but remained in generally strong territory. The Markit Eurozone manufacturing PMI fell by -1.1 points to 58.5, which was weaker than market expectations of -0.4 to 59.2. The services PMI fell by -1.3 points to 56.7, which was weaker than market expectations of -0.4 to 57.6. The national German and French PMI reports were also weaker than expected.
Despite the weaker PMI reports, the market is still expecting the Eurozone economy to remain strong over the near-term, which should support the euro and European stocks and convince the ECB to end its QE program late this year. The consensus is for Eurozone GDP growth to remain strong at +2.3% in 2018 after +2.5% growth in 2017.
Weekly EIA report — The market consensus is for today’s weekly EIA report to show a +3.0 million bbl rise in U.S. crude oil inventories, a +1.5 million bbl rise in gasoline inventories, a -1.0 million bbl decline in distillate inventories, and a -0.9 point decline in the refinery utilization rate to 88.9%. WTI crude oil prices this week have seen some weakness on expectations for today’s EIA report to show the third consecutive weekly rise in U.S. crude oil inventories. Despite last week’s rise, however, U.S. crude oil inventories eased to +3.6% above the 5-year seasonal average, which is the tightest such level in more than three years. Crude oil prices have also seen weakness after last week’s EIA report showed a +0.2% w/w rise in U.S. oil production to a new record high of 10.271 million bpd.