- FHFA U.S. home price index is expected to extend the +28.8% recovery from the housing-bust low
- U.S. Markit U.S. services PMI expected to show third consecutive monthly rise
- 5-year T-note auction to yield near 1.41%
- Weekly EIA report expected to show a decline in U.S. oil inventories
FHFA U.S. home price index is expected to extend the +28.8% recovery from the housing-bust low — The market is expecting today’s March FHFA U.S. house price index to show a +0.5% m/m increase, adding to Feb’s increase of +0.4% m/m. The FHFA index has risen steadily in the past four years and has not shown a monthly decline since early 2012. The FHFA index in February was up +5.6% y/y and was up by an overall +28.8% from the housing-bust low seen in March 2011.
U.S. home prices over the near-term could get a new head of steam if housing demand builds on its recent strength. U.S. existing homes in March-April rose by a total of +7.4% to post a 9-month high of 5.45 million units, which was just slightly below the 9-year high of 5.48 million units posted last summer in July 2015. Meanwhile, April new home sales yesterday soared by +16.6% to a new 8-1/3 year high of 619,000 units. Even though home prices have soared by +28.8% in the past five years, U.S. home buyers do not seem to be deterred by higher prices and were buying homes at a strong rate in April.
U.S. Markit U.S. services PMI expected to show third consecutive monthly rise — The market is expecting today’s preliminary-May Markit U.S. services PMI to show a +0.2 point increase to 53.0, adding to April’s +1.5 point increase to 52.8. The services PMI posted a 2-1/4 year low of 53.4 in February but then showed an overall gain of +2.3 points in March-April to post a 4-month high of 55.7, indicating a moderate improvement in business confidence in the non-manufacturing sectors of the U.S. economy. Still, the index remains well below the 10-3/4 year high of 59.6 posted last summer in July 2015.
The markets will be watching the business confidence measures more closely than usual over the near-term since the weak April payroll report of +160,000 could have indicated that business confidence is flagging and that businesses are therefore cutting back a bit on hiring.
5-year T-note auction to yield near 1.41% — The Treasury today will sell $13 billion of 2-year floating rate notes and $34 billion of 5-year T-notes. The Treasury will then conclude this week’s $101 billion T-note package by selling $28 billion of 7-year T-notes on Thursday.
Today’s 5-year T-note issue was trading at 1.41% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of -0.10% against the current 5-year breakeven inflation expectations rate of 1.51%. That means that buyers of today’s 5-year T-note auction can expect to lose -0.10% annually over their 5-year investment on an inflation-adjusted basis if it turns out that actual inflation matches the current inflation expectations rate of 1.51%.
Today’s 5-year T-note could see a little better overall demand due to its more attractive yield since the 5-year yield has risen sharply by +26 bp to the current level of 1.41% from the 1-1/2 month low of 1.15% seen in early May. The 5-year T-note yield has risen sharply in the past several 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, hawkish comments by several Fed officials, and the hawkish April 26-27 FOMC minutes.
The 12-auction averages for the 5-year are as follows: 2.44 bid cover ratio, $47 million in non-competitive bids, 4.4 bp tail to the median yield, 15.1 bp tail to the low yield, and 39% taken at the high yield. The 5-year is mildly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 58.5% of the last twelve 5-year T-note auctions, which is mildly above the average of 56.3% for all recent Treasury coupon auctions.
Weekly EIA report expected to show a decline in U.S. oil inventories — The market consensus for today’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%. Yesterday’s weekly API report showed a sharp -5.14 million bbl drop in U.S. crude oil inventories, a -189,000 bbl drop in Cushing inventories, a +3.61 million rise in gasoline inventories, and a -2.92 million bbl drop in distillate inventories.
U.S. crude oil inventories at this time of year normally fall as refineries ramp up operations to produce summer gasoline, thereby using more crude oil. The refinery utilization rate in the past five weeks has been choppy and has seen a net increase of only +1.3 points. However, the refinery utilization rate should rise more quickly over the next few weeks, indicating a stronger use of crude oil and a draw down of inventories.
