- FOMC at this week’s meeting will leave rates unchanged but will not back off its intent to slowly raise interest rates
- U.S. retail sales report will show whether April’s surge in retail sales was just a flash in the pan
- U.S. import prices expected to show third monthly rise
- U.S. inventories remain at alarmingly high levels
- EIA report expected to show another drop in crude oil inventories
FOMC at this week’s meeting will leave rates unchanged but will not back off its intent to slowly raise interest rates — The 2-day FOMC meeting begins today. The FOMC tomorrow will release its usual post-meeting statement as well as updated macroeconomic forecasts and a new set of Fed dots. Fed Chair Yellen tomorrow will hold a press conference after the FOMC meeting.
Just two weeks ago, FOMC hawks were loudly proclaiming that the June 14-15 meeting would be a “live” meeting for a rate hike and the April 26-27 FOMC minutes indicated that a majority of FOMC members were leaning toward a near-term rate hike. However, the June 3 May payroll report of only +38,000 (+73,000 ex-Verizon strike) then surprised the FOMC and caused the markets to reduce the chances for a rate hike at the June meeting to zero from 22% before the payroll report. U.S. payroll growth progressively weakened to +186,00 in March, +123,000 in April, and +73,000 (ex-Verizon strike) in May, raising the possibility of a sustained slowdown in hiring that would hurt consumer confidence and spending.
The slowdown in hiring may be only a lagged and temporary reaction to the weak GDP growth seen in Q4 (+1.4%) and Q1 (+0.8%) and hiring could pick back up with expectations for a recovery in GDP growth to at least +2.5% in Q2. However, the Fed cannot count on that recovery in job growth and therefore has no real choice but to leave rates unchanged this week and hope for an improvement. The FOMC is also under pressure to leave rates unchanged this week since a rate hike would grease the skids for an even bigger sell-off in global stocks next week if UK citizens end up voting to leave the EU in the June 23 Brexit vote.
After this week’s FOMC meeting, the federal funds market is discounting the odds for a rate hike at the next FOMC meeting on July 26-27 at only 14%, down from 62% before the June 3 May payroll report. The odds for a July rate hike are still relatively low because the FOMC by that meeting will have only one additional payroll report (i.e., June) to assess the labor market. After that, the odds for a rate hike rise to 28% for the next meeting on Sep 20-21.
The Fed’s rate-hike path depends to a significant degree on next Thursday’s Brexit vote. If UK citizens vote to leave the EU and the global markets plunge on a sustained basis, then the Fed’s rate-hike regime will obviously be further delayed. However, if UK citizens vote to remain in the EU, or if the fall-out from a Leave vote is limited, then the chances will rise for a near-term Fed rate hike.
U.S. retail sales report will show whether April’s surge in retail sales was just a flash in the pan — The April retail sales report, reported a month ago, surged by +1.3% and +0.8% ex-autos and almost single-handedly revived the nearly dormant U.S. economic outlook. Retail sales during Q1 fell by a net -0.5%, helping to produce the paltry Q1 GDP report of +0.8%. However, the April retail sales report of +1.3%, along with other data, then helped boost the Q2 GDP prospects to at least +2.5%.
However, today’s May retail sales report will show whether the April report was just a flash in the pan or whether consumer spending is improving on a sustained basis. The market consensus is that today’s May retail sales report will increase by +0.3% headline and +0.4% ex-autos following April’s report of +1.3% and +0.8%, respectively. There is a case to be made for a resumption of weak consumer spending due to the poor jobs figures seen in the past three months along with other negative factors such as rising gasoline prices, the toxic presidential campaign, and safety concerns after the weekend Orlando mass shooting.
U.S. import prices expected to show third monthly rise — The market is expecting today’s May import price index to show an increase of +0.7% m/m, adding to the increases of +0.3% seen in both March and April. On a year-on-year basis, the market is expecting April import prices to weaken slightly to -5.9% y/y from -5.7% y/y in April. U.S. import prices in the past two reporting months have stabilized and moved a bit higher due to rising oil prices and also due to an increase in non-petroleum import prices, which rose in April for the first time in two years. In addition, the weaker dollar seen this year has also been putting some upward pressure on import prices. The incipient rise in import prices will put some upward pressure on the overall U.S. inflation statistics.
U.S. inventories remain at alarmingly high levels — The market is expecting today’s April U.S. business inventories report to show an increase of +0.2%, adding to March’s increase of +0.4%. The U.S. economy has made no progress on working down the excessive level of inventories, which means businesses are still under pressure to cut their inventories and minimize new orders. The U.S. business inventories-to-sales ratio has been at an 8-1/4 year high of 1.41 months for the last three reporting months (Jan-March). An inventory correction, which has further to go, has already cut U.S. GDP growth by a total of -1.13 percentage points over the last three quarters (Q3 -0.71 points, Q4 -0.22 points, Q1 -0.20 points).
EIA report expected to show another drop in crude oil inventories — The market consensus for Wednesday’s weekly EIA report is for a -2.45 million bbl drop in U.S. oil inventories, a -740,000 bbl drop in Cushing oil inventories, a -200,000 bbl drop in gasoline inventories, an unchanged level of distillate inventories and a +0.5 point rise in the refinery utilization rate to 91.4%