Today’s Economic Preview & Perspectives #Futures

CPI expected to move slightly higher but Fed’s focus is on the much-weaker PCE deflator and inflation expectations — The market is expecting today’s Dec CPI report to move mildly higher to +0.8% y/y from November’s +0.5% and the Dec core CPI to increase slightly to +2.1% y/y from November’s +2.0%.

Today’s expected rise in the Dec core CPI to +2.1% y/y is of little consequence since the Fed’s preferred inflation measure is the PCE deflator, which continues to trade on a very weak basis compared with the CPI.  In November, the PCE deflator was at only +0.4% y/y and the core PCE deflator was at only +1.3% y/y, thus matching the 4-1/2 year low seen all during 2015.  The core PCE deflator figure of +1.3% is far below the Fed’s inflation target of +2.0%.  Moreover, the core inflation figures are unlikely to move higher over the near-term given the continued downward pressure on prices from falling oil and commodity prices and weak global demand.

Meanwhile, market expectations for inflation continue to fall due to the sharp drop in oil prices seen so far this year and generally weak global economic growth.  The 10-year breakeven inflation expectations rate, which measures the difference between nominal and TIPS yields, closed at 1.40% yesterday, just 1 bp above last Friday’s 3-1/2 month low of 1.39% and just 2 bp above last September’s 6-2/3 year low of 1.38%.

 

U.S. housing starts expected to remain generally strong — The market is expecting today’s Dec housing starts report to show an increase of +2.3% to 1.200 million, adding to November’s sharp increase of +10.5% to 1.173 million.  In a mildly negative indicator for housing starts in early 2015, however, the market is expecting today’s Dec building permits report to show a decline of -6.4% to 1.200 million, reversing more than half of November’s +10.4% increase to 1.282 million.

Housing starts in general remain in strong shape.  U.S. housing starts posted an 8-year high of 1.211 million units in June 2015 and have since been bouncing around below that high.  November’s housing starts figure of 1.173 million units was only -3.1% below last June’s 8-year high of 1.211 million units.  Confidence among U.S. home builders remains generally strong due to decent home sales, strong new home prices, and the tight inventory of new homes on the market.  The median price of a new home in November was $305,000, just mildly below the record high of $310,400 posted in Sep 2015.  The U.S. National Home Builders Association’s confidence index in January was unchanged at 60, which was just -5 points below the 10-year high of 65 posted in Oct 2015.  The question is whether the U.S. housing market will start to see some weakness in January due to the downward stock market correction and the overseas turmoil.

Chinese stock market on Tuesday closes higher despite slightly weaker-than-expected Q4 GDP report — The Shanghai Composite index on Tuesday closed +3.22% higher despite the fact that the Chinese Q4 GDP report of +6.8% y/y was slightly below expectations of +6.9% and posted a new 6-3/4 year low.  The markets were relieved that Q4 GDP was not any weaker than +6.8%.  An economy growing at a +6.8% rate would be cause for celebration in almost any other country other than China.  As long as the official Chinese GDP growth rate does not fall any lower than +6.5% in coming quarters, the markets will not panic.  Yet there continues to be a risk of a hard landing in China, which would be defined as an official GDP growth rate of less than about +3%. 

Crude oil prices stabilize as markets wait to assess the extent of Iranian oil flood — March Brent crude oil futures prices on Tuesday traded higher during most of the day but then faded to close the day only +35 cents higher (+1.23%) at $28.90.  March Brent crude oil futures prices on Tuesday were able to remain above Monday’s 12-year low of 27.70 on the nearest-futures chart.  The oil market continues to assess the weekend news that sanctions against Iran were dropped, thus allowing Iran to produce and export as much oil as it would like.  The Iranian government immediately ordered an increase in oil production by 500,000 bpd as soon as possible.  Iran has claimed that it can boost production by +500,000 bpd within weeks of sanctions being lifted and by 1.0 million bp within a year.  The markets are expecting a less aggressive ramp-up with a 100,000 bpd increase in the first month after sanctions are lifted, a 400,000 bpd increase after 6 months, and a 700,000 bpd increase after 1 year.  The markets are watching comments out of Iran and OPEC carefully to see if there will be any coordination in increasing Iran’s oil production and exports to reduce the negative effect on oil prices.

EIA report expected to show another increase in U.S. crude oil inventories — The market consensus for Thursday’s weekly EIA report (delayed by a day due to Monday’s holiday) is for a +2.75 million bbl rise in U.S. crude oil inventories, a +1.5 million bbl rise in gasoline inventories, a +750,000 bbl rise in distillate inventories, and a -1.3 point drop in the refinery utilization rate to 89.9%.  

U.S. crude oil inventories remain in an epic glut at +36.9% (130 million bbls) above the 5-year seasonal average.  Crude oil inventories at the Cushing hub, where Nymex WTI futures are priced, have risen for 10 consecutive weeks and in last week’s report rose by +0.2% to a new record high of 64.007 million bbls.  Meanwhile, product inventories are ample with gasoline inventories +4.0% above the 5-year seasonal average and distillate inventories +14.1% above average.