- Cold snap causes continued energy havoc
- FOMC provides reassurance that QE tapering won’t happen for “some time”
- U.S. unemployment claims expected to show improvement
- U.S. housing starts expected to remain strong
- 30-year TIPS auction
Cold snap causes continued energy havoc — The cold snap that extended south into Texas continued to wreak havoc with the energy markets on Wednesday. There were still millions of people without power in Texas and other mid-central South areas on Wednesday.
The situation should improve over the next few days as forecasts call for warmer temperatures. The forecasts indicate that temperatures in Midland, Texas, will increase to 45 degrees Fahrenheit on Friday and 56 degrees on Saturday, which will help thaw out equipment. The temperature in Midland, which is in the Permian shale production area, fell to a 30-year low of -2 degrees Fahrenheit on Monday.
March nat-gas on Wednesday rallied by another +2.88%, adding to Tuesday’s surge of +7.45%. Nat-gas prices have soared due to to massive heating demand, combined with supply disruptions due to the cold weather. U.S. lower-48 nat-gas production on Wednesday was sharply lower by -25% y/y at a 4-year low of 70.398 bcf/day, according to Bloomberg data.
Natural gas prices for next-day delivery at the Oneok Gas Transportation hub Oklahoma soared to $1,250 per mbtu on Wednesday, up from $9 a week ago. Texas Governor Greg Abbott on Wednesday took the drastic action of banning the sale of nat-gas outside the Texas borders.
Meanwhile, March WTI crude oil prices on Wednesday rallied by another +1.82%, adding to Tuesday’s rise of +0.98%. The cold snap has shut down about 40% of total U.S. oil production and up to 65% of production in the Texas Permian basin.
March gasoline prices on Wednesday rallied by another +2.12% on tight supplies, adding to Tuesday’s surge of +4.75%. Gasoline supplies have been slashed by transportation delays and the shut-down of some refineries due to power outages and freeze-ups.
FOMC provides reassurance that QE tapering won’t happen for “some time” — The FOMC in Wednesday’s minutes from its Jan 26-27 meeting continued its effort to reassure market participants that they don’t need to worry about QE tapering.
The 10-year Treasury yield has already surged by 42 bp so far this year to yesterday’s 1-year high of 1.33%, up from 0.91% at the end of 2020. The Fed is doing what it can with its guidance to prevent an even sharper rise in Treasury yields that could threaten the economic recovery or the stock market.
The FOMC in the minutes said, “With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved.” Fed Chair Powell last week said that the U.S. is “very far from a strong labor market whose benefits are broadly shared.” Payrolls are still down by 10 million jobs from last February’s pre-pandemic record high.
Fed Chair Powell next week will appear before Congressional committees in the semi-annual hearings on Fed policy. Mr. Powell is likely to reiterate the Fed’s recent themes, with the main goal being to avoid rocking the boat.
The Eurodollar futures curve on a yield basis has moved sharply higher since the end of 2020 due to (1) expectations for the pandemic to end by year-end thanks to vaccinations, and (2) the massive fiscal stimulus plans by Democrats. The Eurodollar futures curve is now showing expectations for an overall 225 bp Fed rate hike by 2029, which is 75 bp more than expectations as of the end of 2020 for a 150 bp rate hike by 2029.
U.S. unemployment claims expected to show improvement — Today’s unemployment claims report is expected to show a continued slow improvement in the labor market. Initial unemployment claims are expected to drop -23,000 to 770,000, adding to last week’s -19,000 decline. Continuing claims are expected to fall -145,000 to 4.400 million, adding to last week’s -145,000 decline. Despite expectations for declines in today’s report, unemployment claims remain far above pre-pandemic levels by 576,00 for initial claims and by 2.8 million for continuing claims.
U.S. housing starts expected to remain strong — The consensus is for today’s Jan housing starts report to show a small -0.5% decline to 1.660 million, falling back slightly after December’s +5.8% surge to 1.669 million. Housing starts in December rose to a 14-year high as U.S. homebuilders tried to keep up with strong pandemic-related home demand. The strength in single-family home starts has covered up weakness in multi-family starts. Single-family home starts in December rose to a 14-year high of 1.338 million, while the multi-family start level of 331,00 in December was less than half of the pre-pandemic level.
30-year TIPS auction — The Treasury today will auction $9 billion of new 30-year TIPS. The $9 billion size of today’s auction is up by $1 billion from the $8 billion size seen last February in the last comparable 30-year TIPS sale. The benchmark 30-year TIPS yield yesterday closed at -0.15%.
The 12-auction averages for the 30-year TIPS are as follows: 2.48 bid cover ratio, $11 million in non-competitive bids, 6.4 bp tail to the median yield, 20.5 bp tail to the low yield, and 58% taken at the high yield. The 30-year TIPS is the most popular coupon security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 75.5% of the last twelve 30-year TIPS auctions, which is well above the median of 63.6% for all recent Treasury coupon auctions.
