- U.S. new home sales expected to edge back up towards 8-year high
- Richmond Fed manufacturing index expected to show a back-to-back decline but remain solidly positive
- 2-year T-note auction to yield near 0.92%
- Weekly EIA report expected to show a decline in U.S. oil inventories
U.S. new home sales expected to edge back up towards 8-year high — The market consensus for today’s April new home sales report is for a +2.2% increase to 522,000, more than recovering the -1.5% decline to 511,000 seen in March. New home sales have fallen for the last three months (Jan-March) by a total of -4.9% to March’s level of 511,000. However, the March new home sales level was still relatively strong and was only -6.2% below the 8-year high of 545,000 posted in Feb 2015.
U.S. consumer confidence and spending flagged during Q1 and that was one reason why new home sales were weak. However, retail sales surged by +1.3% in April and that may mean that more U.S. consumers are now more willing to go out and buy a home. There were 246,000 new homes on the market in March, the highest number of homes in 6-1/2 years. That means that new home buyers should have plenty of options in finding a new home to buy.
One caveat for new home sales is that new homes are currently fairly expensive with a median price of $288,000, which may put off some potential buyers. That is well above the 5-year average of $265,000 and only -9.1% below the record high of $317,000 posted in Nov 2015.
Richmond Fed manufacturing index expected to show a back-to-back decline but remain solidly positive — The market is expecting today’s May Richmond Fed manufacturing index to show a -6 point decline to 8, adding to April’s -8 point decline to 14. The Richmond index soared by +26 points to 22 in March but is now giving back some of that surge with the -8 point decline seen in April and today’s expected decline of -6 points for May. Despite the expected back-to-back decline in March-April, the expected report of 14 would still be in solidly positive territory and would indicate that the Richmond-area manufacturing sector is expanding.
The business confidence data released so far for May has been weak. The May Empire index fell by -18.58 to 9.02 and the May Philadelphia Fed index fell by -0.2 points to -1.8. Meanwhile, the preliminary-May Markit U.S. manufacturing PMI was reported yesterday as down -0.3 to a 6-3/4 year low of 50.5, which was weaker than market expectations for a +0.2 point gain to 51.0.
2-year T-note auction to yield near 0.92% — The Treasury today will sell $26 billion of 2-year T-notes. The Treasury will then continue this week’s $101 billion T-note package by selling $13 billion of 2-year floating rate notes and $34 billion of 5-year T-notes on Wednesday and $28 billion of 7-year T-notes on Thursday.
Today’s 2-year T-note auction was trading at 0.92% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of -0.57% against the current 2-year breakeven inflation expectations rate of 1.49%. That means that buyers of today’s 2-year T-note auction can expect to lose -0.57% annually over their 2-year investment on an inflation-adjusted basis if it turns out that actual inflation matches the current inflation expectations rate of 1.49%.
Today’s 2-year T-note could see a little better overall demand due to its more attractive yield since the 2-year yield has risen sharply by +24 bp to the current level of 0.92% from the 3-month low of 0.68% seen in early-May. The 2-year T-note yield has risen sharply in the past two weeks due to expectations for an acceleration of the Fed’s next rate hike due to the improved U.S. economic data, generally calm overseas conditions, the hawkish comments by several Fed officials, and the hawkish April 26-27 FOMC minutes.
The 12-auction averages for the 2-year are as follows: 3.04 bid cover ratio, $147 million in non-competitive bids, 3.3 bp tail to the median yield, 11.5 bp tail to the low yield, and 50% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 47.6% of the last twelve 2-year T-note auctions, which is far below the average of 56.1% for all recent Treasury coupon auctions.
Weekly EIA report expected to show a decline in U.S. oil inventories — The market consensus for Wednesday’s weekly EIA report is for a -2.0 million decline in U.S. crude oil inventories, a -500,000 bbl decline in Cushing crude oil inventories, a -1.5 million bbl decline in gasoline inventories, a -1.0 million decline in distillate inventories, and a +0.5 point increase in the U.S. refinery utilization rate to 91.0%.
U.S. crude oil inventories at this time of year should be falling as refineries ramp up operations to produce summer gasoline, thereby using more crude oil. The markets, however, will be watching for a quicker ramp-up in the refinery utilization rate than has been seen thus far. The refinery utilization rate in the past five weeks has been choppy and has seen a net increase of only +1.3 points.
