- March 15-16 FOMC minutes may provide some color on whether other FOMC members are as dovish as Yellen
- MBA mortgage applications remain in decent shape
- Weekly EIA report expected to show a new record high in crude oil inventories
March 15-16 FOMC minutes may provide some color on whether other FOMC members are as dovish as Yellen — The FOMC today will release the minutes from its March 15-16 meeting. The March 15-16 FOMC meeting was considered dovish since the FOMC in its post-meeting statement cited overseas risks as a cautionary factor. In addition, the updated set of Fed dots forecasted only two rate hikes in 2016 rather than the previous four rate hikes. The FOMC also kept its balance of risk assessment suspended while it awaited further developments. The FOMC reduced its GDP forecasts to +2.2% from +2.4% for 2016 and to +2.1% from +2.2% for 2017.
Fed Chair Yellen’s subsequent comments last Tuesday had a more dovish impact on the markets than the FOMC meeting with the federal funds futures curve last week falling by as much as 10-15 bp. Ms. Yellen last Tuesday said the Fed needs to “proceed cautiously” in raising interest rates due to heightened risks from the global economy.
Following last Tuesday’s dovish Yellen comments, the market is now discounting the chances for a rate hike at zero for the next FOMC meeting in three weeks on April 26-27. The market is then discounting the chances at only 16% for a Fed rate hike at the following meeting on June 14-15, which is the next meeting at which Ms. Yellen will hold a press conference. The chances for a Fed rate hike then slowly ramp up during the year to 28% by July, 42% by September, 56% by November, and 64% by December. The federal funds futures market is not discounting a 100% chance of a Fed rate hike until July 2017, which is more than a year away.
The recent U.S. economic data has improved and the stock market has regained almost all of the sharp sell-off that started the year. Based solely on U.S. considerations, the Fed would be leaning towards raising interest rates another notch soon. However, there are still significant overseas risks that are preventing the Fed from raising interest rates. The most serious risk at present is the Brexit vote on June 23, which could stir systemic worries in Europe. The Brexit vote is too close to call at this point and if Britain does in fact vote to leave the EU, it will encourage Euroskeptic politics in other EU countries and make it even more difficult for the EU and its banking system to stay intact.
The other major risk is China, but the situation there has calmed down in the past several weeks. The Chinese yuan has mildly appreciated in the past two months and rose to a 3-month high. The more stable yuan has given the Chinese stock market a 16% boost in the past month to a new 3-month high from the 1-1/3 year low posted in January.
The Chinese economic data has also shown some improvement, thus reducing concerns that the Chinese economy might be about to fall apart. Last Thursday’s Chinese March manufacturing PMI report from the National Bureau of Statistics rose by +1.2 points to 50.2, which was stronger than market expectations for a +0.4 point increase to 49.4. Separately, China’s March Caixin manufacturing PMI index showed an even stronger increase and rose by +1.7 points to 49.7, which was stronger than market expectations of +0.3 to 48.3. China’s non-manufacturing PMI from the National Bureau of Statistics rose by +1.1 points to 53.8.
MBA mortgage applications remain in decent shape — The MBA mortgage purchase sub-index remains in relatively good shape, well above last year’s average, which points to continue strength in home sales going into the spring selling season. Meanwhile, the refinancing index has fallen from Feb’s 1-year high but refinancing activity is still on a decent pace thanks to continued low mortgage rates. The 30-year mortgage rate last week was unchanged at 3.71%, only 9 bp above the 1-1/4 year low of 3.62% posted in Feb.
Weekly EIA report expected to show a new record high in crude oil inventories — The market consensus for today’s weekly EIA report is for a +3.0 million bbl rise in U.S. crude oil inventories, a -1.0 million bbl decline in gasoline inventories, a -1.0 million bbl decline in distillate inventories, and a +0.3 point increase in the U.S. refinery utilization rate to 90.7%. The API reported yesterday that crude oil inventories last week fell by -4.3 million bbls, Cushing crude oil inventories rose by +620,000 bbls, gasoline inventories fell by -116,000, and distillate inventories rose by +2.7 million bbls.
There has been no let-up in the surge in U.S. oil inventories despite declining U.S. oil production. U.S. oil inventories last week rose by another +0.4% to post a new record high of 534.834 million bbls, which is +36.4% above the 5-year seasonal average. Oil inventories at Cushing, the hub where WTI crude oil futures are priced, posted a record high of 67.491 million bbl three weeks ago, but then fell by -2.3% in the past two reporting weeks. U.S. oil inventories based on seasonal patterns are likely to continue rising for at least another month due to low demand from U.S. refineries, some of which are shut down for maintenance and/or the switch-over to producing summer fuels. Product inventories are also bulging. U.S. gasoline inventories are +9.7% above the 5-year average and distillates are +25.5% above average.
Meanwhile, U.S. oil production since mid-January has been falling due to the renewed plunge in oil prices in Jan-Feb, which caused more oil companies to give up hope and close down more oil rigs. Yet production on a year-to-date basis has so far fallen by only -2.0% even though another 166 rigs (-31%) have been shut down so far this year. The grand total decline in oil production so far is only -6.1% from the 43-year high of 9.610 million bpd posted in June 2015.
