Initial unemployment claims expected to edge lower but remain elevated — The market is expecting today’s weekly initial unemployment claims report to show a decline of -3,000 to 275,000, adding to last week’s decline of -16,000 to 278,000. Meanwhile, today’s continuing claims report is expected to show a -12,000 decline to 2.140 million, adding to last week’s -13,000 decline to 2.152 million.
The initial claims series remains elevated at +30,000 above the 42-1/2 year low of 248,000 posted in mid-April. Part of the recent rise in initial claims was due to technical factors in New York tied to the Verizon strike and holiday vacations. However, if the initial claims series does not fall back towards the recent 42-1/2 year low fairly quickly, the implication will be that there has been at least a mild pickup in layoffs by companies. The recent April payroll report of +160,000 was weak and indicated reduced hiring. The markets will remain on guard in the event that companies are lightening up a bit on their labor forces due to weak Q1 GDP growth, poor labor productivity, and rising employee costs.
Durable goods orders expected to show some further improvement — The market is expecting today’s April durable goods orders report to show an increase of +0.5% headline and +0.3% ex-transportation. That would follow March’s mixed report of +0.8% headline and -0.2% ex-transportation. Meanwhile, the market is expecting today’s report to show only a small increase in capital spending with April capital goods orders non-defense ex-aircraft expected up by +0.3% after March’s +0.1% increase. Durable goods orders on a year-on-year basis remained negative in March at -2.5% y/y headline and -1.4% y/y ex-transportation.
The U.S. manufacturing sector needs to see an improvement in order flow after the weakness seen over the last year caused by the strong dollar, weak overseas growth, and the recessions in the petroleum and mining industries. The ISM manufacturing new orders sub-index showed a strong +6.8 point increase to 58.3 in March but then fell by -2.5 points to 55.8 in April. Confidence in the manufacturing sector has improved so far this year but is still lackluster with the ISM manufacturing index in April at only 50.8. The recent improvement in the U.S. economic data is a step in the right direction, but if businesses don’t start to see a substantial increase in orders, then they will remain conservative about their hiring and capital investment plans.
Pending home sales index expected to point to continued strength in home sales — The market is expecting today’s April pending home sales report to show an increase of +0.7% m/m, adding to the strong overall +4.8% increase seen in March-April. The recent strength in the pending home sales index is a positive leading indicator for home sales over the next few months since the pending home sales series leads the closed home sales reports by 1-2 months.
Additional strength in home sales in May and beyond would be helpful for the housing sector and the overall economy. Existing home sales showed strength in March-April with an overall increase of +7.4% to 5.45 million units, which was just slightly below the 9-year high of 5.48 million units posted last summer. Meanwhile, the April new home sales report, released earlier this week, soared by +16.6% to a new 8-1/3 year high of 619,000 units.
7-year T-note auction to yield near 1.69% — The Treasury today will conclude this week’s $101 billion T-note package by selling $28 billion of 7-year T-notes. Today’s 7-year T-note issue was trading at 1.69% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.16% against the current 7-year breakeven inflation expectations rate of 1.53%. That means that buyers of today’s 7-year T-note auction can expect to earn a paltry 0.16% annually over their 7-year investment on an inflation-adjusted basis if it turns out that actual inflation matches the current inflation expectations rate of 1.53%.
Today’s 7-year T-note could see a little better overall demand due to its more attractive yield since the 7-year yield has risen fairly sharply by +22 bp to the current level of 1.69% from the 1-1/2 month low of 1.47% seen in early May. The 7-year T-note yield has risen sharply in the past several weeks because of expectations for an acceleration of the Fed’s next rate hike due to the improved U.S. economic data, generally calm overseas conditions, hawkish comments by several Fed officials, and the hawkish April 26-27 FOMC minutes.
The 12-auction averages for the 7-year are as follows: 2.49 bid cover ratio, $18 million in non-competitive bids, 4.1 bp tail to the median yield, 13.7 bp tail to the low yield, and 48% taken at the high yield. The 7-year is slightly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 57.0% of the last twelve 7-year T-note auctions, which is slightly above the average of 56.7% for all recent Treasury coupon auctions.
