- Zero chance for a Fed rate hike today but FOMC may adopt more conciliatory language
- Nov U.S. home sales expected to show a small gain
- 5-year T-note auction to yield near 1.44%
- EIA report expected to show a large 4.0 million bbl rise in U.S. crude oil inventories
Zero chance for a Fed rate hike today but FOMC may adopt more conciliatory language — The chances that the FOMC will raise interest rates another notch at its 2-day meeting that ends today are essentially zero. The FOMC just implemented its first rate hike to a mid-point funds target of 0.375% in December and the markets have since been very volatile because of turmoil in China, the plunge in oil prices, and uncertainty about how tighter Fed liquidity will affect the markets going forward. Given this turmoil, the FOMC today will not spring a surprise rate hike on the global markets that could cause a stock market meltdown.
In fact, for all of this year, the federal funds futures market is now discounting only one 25 bp rate hike by December. That is more dovish than expectations in Dec 2015 (i.e,. before the January turmoil) for two 25 bp rate hikes in 2016. The market is far more dovish than the last set of “Fed dots” in December, which forecast an improbable four rate hikes in 2016.
The FOMC today will not release updated macroeconomic projections and Fed Chair Yellen is not scheduled to appear at a press conference after today’s meeting. That means that the Fed’s only official communication tool following today’s meeting will be the post-meeting statement. The stock market today would be pleased if the FOMC in its post-meeting statement adopts a more dovish tone, possibly by mentioning increased overseas risks with the fresh Chinese financial market turmoil.
The stock market would also receive a boost if the Fed in its post-meeting statement mentions reduced inflation expectations in the wake of January’s plunge in oil prices. The Fed has already made clear that its decision about further rate hikes is dependent on whether it believes inflation will rise to its 2% target over the medium-term. If the Fed today should reduce its inflation expectations, then the day for the Fed’s next rate hike would be that much farther away. The Fed was already stretching credulity in its last post-meeting statement when it said that it “is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”
With the plunge in oil prices to new lows in January, the Fed’s “reasonable confidence” that inflation will rise to 2% over the medium-term looks increasingly out of touch. Indeed, the 10-year breakeven inflation expectations rate, which measures the difference between nominal and TIPS 10-year T-notes, fell to a 6-3/4 year low of 1.29% last Friday but rebounded higher to 1.35% by yesterday.
Nov U.S. home sales expected to show a small gain — The market is expecting today’s Dec new home sales report to show a +2.0% gain to 500,000, adding to November’s +4.3% gain to 490,000. There should be some strength in today’s new home sales for Dec as mortgage companies catch up on doing closings after the delays in November caused by new mortgage paperwork requirements. The Dec existing home sales series took a -10.5% hit in November due to the delayed paperwork, but then recovered by +14.7% in December as mortgage companies caught up on their paperwork.
In the bigger picture, new home sales remain relatively strong at only 11% below the 7-3/4 year high of 545,000 units posted in Feb 2015. Some potential home buyers may be getting cold feet from January’s financial market turbulence and from relatively high new home prices, but new home sales should remain fairly steady given decent consumer confidence and very affordable mortgage rates. The median price of a new home in November of $305,000 was only -1.7% below the record high of $310,400 posted in Sep 2015.
5-year T-note auction to yield near 1.44% — The Treasury today will sell $35 billion of 5-year T-notes and $15 billion of 2-year floating rate notes. The Treasury will then conclude this week’s $105 billion T-note package by selling $29 billion of 7-year T-notes on Thursday. Today’s 5-year T-note issue was trading at 1.44% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.30% against the current 5-year breakeven inflation expectations rate of 1.14%%.
The 12-auction averages for the 5-year are as follows: 2.46 bid cover ratio, $44 million in non-competitive bids from mostly retail investors, 3.8 bp tail to the median yield, 12.3 bp tail to the low yield, and 43% taken at the high yield. The 5-year T-note is the third most popular coupon security among foreign investors and central banks behind the 10-year TIPS and the 10-year T-note. Indirect bidders, a proxy for foreign buying, have taken an average of 58.7% of the last twelve 5-year T-note auctions, well above the average of 55.0% for all recent Treasury coupon auctions.
EIA report expected to show a large 4.0 million bbl rise in U.S. crude oil inventories — The market consensus for today’s weekly EIA report is for a large +4.0 million bbl rise in U.S. crude oil inventories, a +500,000 bbl rise in gasoline inventories, a -2.0 million bbl decline in distillate inventories, and a -1.0 point decline in the refinery utilization rate to 89.6%. U.S. oil inventories remain in a major glut at 36.1% (129.0 million bbls) above the 5-year seasonal average. Meanwhile, gasoline inventories are ample at +5.2% above average and distillates are approaching glut territory at +16.8% above average. U.S. crude oil production has so far fallen by only -3.9% to 9.235 million bpd from the 43-year high of 9.610 million bpd posted in June 2015 despite the fact that the number of active U.S. oil rigs has plunged by 68% (1,099 rigs) to a 5-3/4 year low of 510 rigs.
