- FOMC adopts more dovish language that allows it to go on hold if the situation further deteriorates
- Unemployment claims so far remain elevated
- Durable goods orders expected to show continued weakness
- Pending home sales expected to stabilize
- 7-year T-note auction to yield near 1.76%
FOMC adopts more dovish language that allows it to go on hold if the situation further deteriorates — The FOMC in its post-meeting statement yesterday adopted more dovish language, as the market had hoped, virtually eliminating the chance of a rate hike at the next FOMC meeting on March 15-16. The federal funds futures curve showed little movement in reaction to yesterday’s FOMC results. The federal funds futures market is currently discounting only a 20% chance of a 25 bp rate hike at the next FOMC meeting on March 15-16. The federal funds futures market is not fully discounting a 25 bp rate hike until December and is not fully discounting the following 25 bp rate hike until September 2017.
The stock market sank after the FOMC’s post-meeting statement was released on apparent disappointment that the Fed did not move to an even more dovish post-meeting posture. The key sentence in the post-meeting statement was that “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” The FOMC dropped its previous language that the risks are balanced, meaning that the FOMC is now considering whether the risks are risks are tilted to the downside.
On inflation, the FOMC did not give up its insistence that inflation will move up to its 2% target over the medium-term, meaning that the Fed is still generally on its path of raising interest rates. The FOMC said that it expects inflation “to remain low in the near-term, in part because of the further declines in energy prices, but to rise to 2% over the medium term as the transitory effects of declines in energy and import priced dissipate and the labor market strengthens further.”
The bottom line is that the FOMC is now essentially on hold as it waits to see how things shake out for the Chinese economy and the financial markets, whether the U.S. stock market continues to correct downward, and whether oil prices continue to fall and create even more stress for the world petroleum sector.
Unemployment claims so far remain elevated — The market remains a little concerned about the elevated level of the U.S. unemployment claims series, which could indicate a fundamental pickup in U.S. layoffs. However, seasonal distortions have yet to subside since today’s initial claims report will be for the week ended Jan 22, which included the Martin Luther King holiday. The initial claims series is currently +38,000 above the 42-year low of 255,000 posted in July 2015. The continuing claims series is currently +62,000 above the 15-year low of 2.146 million posted in Oct 2015. The market is expecting today’s initial claims report for the week ended Jan 22 to fall by -12,000 to 281,000. However, the market is expecting today’s continuing claims report for the week ended Jan 15 to show a +10,000 increase to 2.218 million after last week’s -56,000 decline.
Durable goods orders expected to show continued weakness — The market is expecting today’s Dec durable goods orders report to show continued weakness with a headline decline of -0.7% and a -0.1% decline ex-transportation. That would follow November’s report of unchanged for both the headline and ex-transportation figures. Moreover, the picture continues to look weak for capital spending with the market expecting today’s Dec capital goods orders non-defense ex-aircraft report to show a decline of -0.2%, adding to Nov’s decline of -0.3%.
The U.S. manufacturing sector continues to show weakness due to the petroleum recession and poor overseas demand for U.S. manufacturing goods exports. The ISM manufacturing index has fallen for the last six consecutive months by a total of -5.3 points to post a new 6-1/2 year low of 48.2 in December. Meanwhile, the ISM manufacturing new orders index in December rose slightly by +0.3 points to 49.2 but remained below the expansion-contraction level of 50.0 for the second straight month.
Pending home sales expected to stabilize — The market is expecting today’s Dec pending home sales report to show an increase of +0.9% m/m, exactly reversing November’s -0.9% decline. The U.S. pending home sales index posted a 9-year high of 112.3 in May 2015 but has since slid by a total of -4.8% to Nov’s level of 106.9. The slide in pending home sales is a negative leading indicator for existing home sales. Indeed, existing home sales posted a 9-year high of 5.58 million units in July 2015 but have since fallen back. Still, U.S. existing home sales were fairly strong at 5.46 million units in December, which was only -2.2% below last July’s 9-year high.
7-year T-note auction to yield near 1.76% — The Treasury today will sell $29 billion of 7-year T-notes, concluding this week’s $105 billion T-note package. Today’s 7-year T-note issue was trading at 1.76% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.55% against the current 7-year breakeven inflation expectations rate of 1.21%.
The 12-auction averages for the 7-year are as follows: 2.45 bid cover ratio, $15 million in non-competitive bids from mostly retail investors, 4.2 bp tail to the median yield, 12.8 bp tail to the low yield, and 50% taken at the high yield. The 7-year T-note is slightly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 54.2% of the last twelve 7-year T-note auctions, slightly below the average of 55.0% for all recent Treasury coupon auctions.
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