- Zero chance of a rate hike at the 2-day FOMC meeting that begins today
- April U.S. consumer confidence expected to edge lower
- CaseShiller U.S. home price index is expected to show another solid gain
- Durable goods orders expected to show an improvement in line with ISM report
- 5-year T-note auction to yield near 1.38%
Zero chance of a rate hike at the 2-day FOMC meeting that begins today — The federal funds futures market is discounting a zero chance of a rate hike at the 2-day FOMC meeting that begins today. Even though the Chinese turmoil has died down for the time being, the Fed will be on hold this week due to soft U.S. Q1 GDP growth near +0.7% and caution ahead of the Brexit vote on June 23. The next FOMC meeting on June 14-15 comes just a week before the Brexit vote, meaning the Fed is unlikely to implement a rate hike at that meeting. The market is discounting only an 18% chance for a rate hike at that June meeting. The chances for a Fed rate hike then ramp up as the year wears on to 36% by July, 56% by Sep, 74% by Nov, and 88% by Dec. The market is not discounting a 100% chance of a rate hike until Feb 2017. We expect one 25 bp rate by the end of the year assuming China doesn’t fall apart and there are no other major external shocks to the global economy.
April U.S. consumer confidence expected to edge lower — The market is expecting today’s Conference Board April U.S. consumer confidence index to show a small -0.3 point decline to 95.9, reversing part of March’s +2.2 point increase to 96.2. The index posted an 8-1/2 year high of 103.8 in Ja n 2015 and has been bouncing around below that high over the past year. The March level of 96.2 was -7.6 points below that 8-1/2 year high. The University of Michigan has already reported that its U.S. consumer sentiment index for early April showed a -1.3 point decline to 89.7, which did not bode well for today’s Conference Board report.
U.S. consumer sentiment so far this year has been undercut by the financial market turmoil at the beginning of the year, the dysfunctional presidential campaign, weak GDP data, and the rise in gasoline prices from the February lows. However, the Q1 dip in consumer sentiment was mild and the market is hoping for an improvement in consumer sentiment as spring arrives. Supportive factors for consumer sentiment at present include continued strong U.S. labor market data, rising wages, rising home prices, the recovery in the stock market from the early-year losses, and the fact that gasoline prices remains at historically low levels even after the recent 40-cent rise.
CaseShiller U.S. home price index is expected to show another solid gain — The market is expecting today’s Feb S&P/CaseShiller composite-20 home price index to show a solid +0.8% m/m increase, matching Jan’s +0.8% increase. Expectations for a +0.8% increase today are much better than the already-released news that the FHFA U.S. home price index rose by +0.4% in February.
Housing prices are likely to continue rising due to the relatively tight supply of homes and continued strong sales. U.S. existing home sales in March rose by +5.1% m/m to 5.33 million units, which was only -2.7% below the 9-year high of 5.48 million units posted in July 2015. Furthermore, the supply of existing homes on the market is relatively tight at 4.4 months, just mildly above the 11-year low of 3.9 months posted in Dec 2015 and well below the long-term average of 7.0 months.
Durable goods orders expected to show an improvement in line with ISM report — The market is expecting today’s March durable goods orders report to show increases of +1.8% headline and +0.5% ex-transportation. That would be a substantial improvement from Feb’s poor report of -3.0% headline and -1.3% ex-transportation. The market is expecting today’s March capital spending report (i.e., capital goods new orders nondefense ex-aircraft) to show an increase of +0.6%, reversing about a fourth of Feb’s decline of -2.5%.
The manufacturing sector is expecting a significant pickup in orders in March based on the sharp +6.8 point increase in the March ISM manufacturing new orders sub-index to a 1-1/3 year high of 58.3. The manufacturing sector seems to be recovering somewhat from the sharp hit it took last year from the strong dollar, weak overseas economic growth, and the recessions in the petroleum and mining industries.
5-year T-note auction to yield near 1.38% — The Treasury today will sell $34 billion of 5-year T-notes. The Treasury will then conclude this week’s $103 billion T-note package on Thursday by selling $28 billion of 7-year T-notes and $15 billion of 2-year floating rates.
Today’s 5-year T-note issue was trading at 1.38% late yesterday afternoon. That translates to an inflation-adjusted yield of -0.17% against the current 5-year breakeven inflation expectations rate of 1.55%. Buyers of today’s 5-year T-note can therefore expect to lose money on the note on an inflation-adjusted basis if inflation turns out to match current expectations.
The 12-auction averages for the 5-year are as follows: 2.45 bid cover ratio, $46 million in non-competitive bids to mostly retail investors, 4.3 bp tail to the median yield, 14.1 bp tail to the low yield, and 38% taken at the high yield. The 5-year is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 58.4% of the last twelve 5-year T-note auctions, which is moderately above the average of 55.9% for all recent Treasury coupon auctions.
