Today’s Economic & #Commodity Perspectives #Futures

Unemployment claims are back at favorable levels — The initial unemployment claims series in late April and early May rose sharply by +46,000 to a 1-1/4 year high of 294,000 due in part to an upward spike in New York tied to a Verizon strike and school holidays.  However, the initial claims series then fell by -26,000 in the past two reporting weeks, leaving the series only +20,000 above the 42-2/3 year low of 248,000 posted in mid-April.  The low level of initial claims indicates that businesses are holding on to their employees and are engaging in a very low level of layoffs.  The continuing claims series is currently only +39,000 above the 15-1/2 year low of 2.124 million posted in mid-April.

The market consensus is for today’s initial unemployment claims report to show a small +2,000 increase to 270,000 following last week’s -10,000 decline to 268,000.  Meanwhile, the consensus is for today’s continuing claims report to show a -13,000 decline to 2.150 million, more than reversing last week’s +10,000 increase to 2.163 million.

ADP report expected to show downshift in hiring — The market is expecting today’s May ADP employment report to show an increase of +174,000, improving from the weak April report of +156,000 but remaining well below the 12-month moving average of +203,000.  A fundamental downshift in hiring would not be surprising given (1) the ongoing profit recession and the need for businesses to reduce expenses, (2) poor labor productivity, (3) rising employee costs, and (4) continued business doubts about the health of the U.S. and overseas economies.

The market is also expecting a relatively weak report tomorrow for May payrolls of +160,000, thus matching April’s report.  Private payrolls (ex-govt) are expected to be even weaker at +150,000 after April’s report of +171,000.  A sustained downward shift in payroll growth would take away some of the Fed’s recent professed urgency about raising interest rates, particularly at the next meeting on June 14-15 just a week ahead of the June 23 Brexit vote.  Tomorrow’s payroll report, in fact, could be the deciding factor for whether the FOMC will seriously consider a rate hike at its meeting in two weeks.

The market consensus is for tomorrow’s May unemployment rate to remain unchanged for the third straight month at 5.0%, which would be just +0.1 point above the 8-year low of 4.9% posted in Jan-Feb.  The current unemployment rate of 5.0% is just 0.4-0.5 points above the FOMC’s forecast that the unemployment rate will settle at +4.6% in 2017 and 4.5% in 2018, meaning that the labor market by one measure is getting close to full employment.

ECB expected to leave policy unchanged as its corporate-bond-buying binge is about to begin — The market consensus is that the ECB at its regular policy meeting today will leave its monetary policy unchanged as it waits for its existing stimulus measures to kick in more fully.  The ECB in March cut its refinancing rate by -5 bp to zero and cut its deposit rate by -10 bp to -0.40%.  The ECB in March also announced a boost in the size of its QE program to 80 billion euros per month from 60 billion euros per month.  The ECB in March also announced that beginning in June it would add non-financial corporate bonds to its QE asset-purchase program, thus expanding its purchase universe and seeking to dampen corporate bond yields.  The ECB is under less pressure for more stimulus measures in the wake of the recent Eurozone Q1 GDP of a relatively strong +2.0% (q/q annualized).  The 3-month surge in oil prices is also underpinning the Eurozone inflation statistics.

OPEC is reportedly talking about reinstating a production quota but there will not be any actual cuts in production — OPEC members are reportedly talking about the possibility of reinstating the cartel’s 32 million bpd production target.  However, even if that production target is reinstated, it will not affect actual production levels since Saudi Arabia will continue its refusal to consider even a production freeze agreement if Iran will not go along.  Iran’s oil production has so far recovered by 700,000 bp to 3.50 million bpd in April from 2.8 mln bpd in December.  There is little actual pressure for OPEC to cut production at present given the sharp 88% upward rebound in WTI oil prices to $48.92 seen over the past three months from Feb’s 13-year low of $26.05.

This will be the first OPEC meeting for Saudi Arabia’s new oil minister, Khalid Al-Falih.  Mr. Al-Falih may try to put a friendlier face on Saudi Arabia’s policy of preserving its market share at any cost, but there should be no mistake about the fact that he was installed in that post to enforce Saudi Arabia’s new oil policy, not to explore compromises with Iran or other major oil producers. 

 

Weekly EIA report expected to show a -2.5 million bbl decline in oil inventories as seasonal decline picks up speed — The market consensus for today’s weekly EIA report, postponed by a day due to Monday’s holiday, is for a -2.5 million bbl decline in U.S. crude oil inventories, a -750,000 bbl decline in Cushing crude oil inventories, a -350,000 bbl decline in gasoline inventories, a -920,000 decline in distillate inventories, and a +0.5 point gain to 90.2% in the U.S. refinery utilization rate.  U.S. crude oil inventories typically fall at this time of year as refiner demand picks up since refineries are operating at full tilt to produce summer gasoline.  U.S. oil production in last week’s EIA report fell for the eleventh consecutive week to post a new 1-3/4 year low of 8.676 million bpd, down by a total of -843,000 bpd (-8.4%) from the 43-year high of 9.610 million bpd posted in June 2015.  Active oil rigs last week fell to a new 6-1/2  year low of 316 rigs, down by 1,293 rigs (-80%) from the record high of 1,609 rigs posted in Oct 2014.