- Unemployment claims expected to decline
- Philadelphia Fed index expected to halt its 4-month dive
- 10-year TIPS auction to yield near 0.63%
- Crude oil prices resume decline in response to Iranian oil deluge
- EIA report expected to show another increase in U.S. crude oil inventories
Unemployment claims expected to decline — Both the U.S. initial and continuing unemployment claims series are currently at elevated levels, but that should not cause any concern at this point due to distortions over the holidays. In addition, the market is expecting today’s initial claims report to show a decline of -6,000 and continuing claims to show a decline of -13,000. The initial claims series is currently +29,000 above the 42-year low of 255,000 posted in July 2015 and the continuing claims series is +117,000 above the 15-year low posted in Oct 2015.
On the labor front, the markets were impressed by the recent Dec payroll report of +292,000 and the +41,000 upward revision for Nov to 252,000. Payrolls in the last three reporting months of Oct-Dec showed a strong monthly average increase of +284,000. In addition, the Dec unemployment rate was unchanged at the 8-year low of 5.0% posted in Oct-Nov. The unemployment rate must fall by only another -0.3 points before it hits the FOMC’s mid-point forecast of 4.7% for the unemployment rate in 2016-18, meaning that the unemployment rate has nearly met one of the FOMC’s key labor market targets.
Yet despite the strength in the labor market in the last three months of 2015, the markets are currently worried about whether some businesses will be getting cold feet about hiring in 2016 due to the shaky start to the new year with the Chinese turmoil and the downward correction in the U.S. stock market. The markets will therefore be carefully watching the unemployment claims data over the next few weeks as holiday distortions fade away.
Philadelphia Fed index expected to halt its 4-month dive — The market is expecting today’s Jan Philadelphia Fed business outlook index to show a +4.3 increase to -5.9, reversing the -4.5 point decline to -10.2 seen in December. The Philadelphia Fed’s index has plunged by -13.6 points in the past four months to post a 3-year low of -10.2 in December. The index has been below the boom-bust level in three of the last four months, suggesting that the Philadelphia Fed’s business area is contracting.
The only regional business confidence index released thus far for January is the Empire index, which fell sharply by -13.16 points to a 6-3/4 year low of -19.37. Business confidence is likely to drop in virtually all of various reports for January given the sharp downward correction in the U.S. stock market and the worries about the global economy.
10-year TIPS auction to yield near 0.63% — The Treasury today will sell $15 billion of 10-year TIPS. Today’s auction will be of a new 10-year TIPS security. The Treasury will then reopen today’s new TIPS issue with auctions in March and May. The benchmark 10-year TIPS note late yesterday afternoon was trading at 0.628%.
The 12-auction averages for the 10-year TIPS are as follows: 2.43 bid cover ratio, $28 million in non-competitive bids from mostly retail investors, 5.9 bp tail to the median yield, 14.1 bp tail to the low yield, and 48% taken at the high yield. The 10-year TIPS is the most popular Treasury coupon among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 62.1% of the last twelve 10-year TIPS auctions, well above the average of 54.7% for all recent Treasury coupon auctions.
Crude oil prices resume decline in response to Iranian oil deluge — Feb WTI crude oil futures prices on Wednesday were down as much as -8% on the low and posted a new 12-2/3 year nearest-futures low of $27.10, finally closing the day down -$1.91 (-6.71%) at 26.55. Wednesday was the last day of trading for the Feb WTI crude futures contract, which led to more than the usual amount of volatility as traders bailed out of expiring Feb futures contracts. The March WTI futures contract fared a little better but still closed the day sharply lower by -$1.22 (-4.13%) at $28.35.
Crude oil prices continue to sink as Iran is contacting potential buyers and undercutting market prices to try to get its stored oil sold. The IEA says that Iran has 12 million barrels of crude oil and 24 million barrels of condensates in floating storage. Iran is undoubtedly trying to get that floating oil sold very quickly since it is expensive to store it on tankers. After the market absorbs Iran’s floating storage, the market will then have to deal with Iran’s intention to ramp up its production by 500,000 bpd as quickly as possible. With oil producers falling all over each other to get their oil sold, oil prices can only go lower. The weakness in oil prices will continue until high-cost producers are forced out of the market and there is at least a small uptick in demand from lower prices.
EIA report expected to show another increase in U.S. crude oil inventories — The market consensus for today’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.
