- U.S. retail sales expected to show another weak increase that will threaten Q1 GDP
- U.S. PPI expected to rise slightly but lag CPI and PCE deflator
- Business inventories expected to show a small decline
- Fed Beige Book likely to show continued lackluster U.S. economic growth
- 10-year T-note auction to yield near 1.78%
- EIA report expected to show +1.0 million bbl rise in U.S. crude oil inventories
U.S. retail sales expected to show another weak increase that will threaten Q1 GDP — The market is expecting today’s Mar retail sales report to show a small overall increase of +0.1% m/m, but a larger +0.4% increase after excluding the weak March vehicle sales report of -5.6% to 16.46 million units from 17.43 million units in February.
U.S. retail sales in the first two months of Q1 were weak at -0.4% m/m in January and -0.1% in February. Another weak report today would be negative for Q1 GDP, which is already in bad shape given the underlying data for Q1 that has been released thus far. Q1 GDP estimates are already as low as +0.5%, which is particularly alarming after the weak +1.4% pace seen in Q4. The course of the U.S. economy depends heavily on consumer spending because of the weakness in the other components of GDP including business investment, net exports, government spending, and high inventories. The Fed will certainly not be raising interest rates in two weeks since US GDP is currently performing poorly.
U.S. PPI expected to rise slightly but lag CPI and PCE deflator — The market consensus for today’s March final-demand PPI index is for a mild increase to +0.3% y/y from Feb’s unchanged and for the March core PPI to rise to +1.3% y/y from Feb’s +1.2%. The PPI has been lagging the CPI and PCE deflator, which means it is not surprising that the PPI will do some catching up today.
The U.S. inflation statistics have moved higher in the past several months, which is in line with the Fed’s intentions. The core CPI in Feb matched a 7-1/2 year high of +2.3% y/y and the headline CPI in Jan posted a 1-1/3 year high of +1.3% before backing off to +1.0% in Feb. Meanwhile, the PCE deflator is also on the march higher with the core PCE deflator posting a 3-1/4 year high of +1.7% in Jan-Feb. The core PCE deflator of +1.7% y/y is now only mildly below the Fed’s +2.0% inflation target. However, the Fed has already essentially said that it is willing to overshoot its inflation target since it wants to make sure that the U.S. economy has traction before it takes any overly aggressive actions.
Business inventories expected to show a small decline — The market is expecting today’s Feb business inventories report to show a small decline of -0.1%, reversing Jan’s +0.1% increase. The U.S. economy is still in need of an inventory correction since inventories have not yet fallen back to more normal levels after the buildup seen in the first half of 2015. The business inventories-to-sales ratio in Jan rose to a 6-3/4 year high of 1.40 months, sharply higher than the average of 1.30 months seen in 2013-14.
Fed Beige Book likely to show continued lackluster U.S. economic growth — The Fed today will release its Beige Book report ahead of the FOMC meeting in two weeks on April 26-27. The Fed’s last Beige Book report, which was released in March, indicated lackluster economic conditions. The report found that economic growth was “moderate” in San the Francisco and Richmond districts and “modest” in the Cleveland, Atlanta, Chicago and Minneapolis districts. The report said there was a “slight increase” in economic activity in the Philadelphia district, mixed conditions in the St. Louis and Boston districts, “flat” economic activity in New York and Dallas, and a “modest decline” in the Kansas City district.
10-year T-note auction to yield near 1.78% — The Treasury today will sell $20 billion of 10-year T-notes in the second and final reopening of the 1-5/8% 10-year T-note of Feb 2026 that the Treasury first sold in February. The Treasury will conclude this week’s $56 billion coupon auction by selling $12 billion of 30-year T-bonds on Thursday. Today’s 10-year T-note auction was trading at 1.78% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of just 0.21% against the 10-year breakeven inflation expectations rate of 1.57%.
The 12-auction averages for the 10-year are as follows: 2.63 bid cover ratio, $26 million in non-competitive bids from mostly retail investors, 4.2 bp tail to the median yield, 11.3 bp tail to the low yield, and 47% taken at the high yield. The 10-year is the second most popular security among foreign investors and central banks behind the 10-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.6% of the last twelve 10-year T-note auctions, well above the average of 55.7% for all recent Treasury coupon auctions.
EIA report expected to show +1.0 million bbl rise in U.S. crude oil inventories — The market consensus for Wednesday’s weekly EIA report is for a +1.0 million bbl rise in crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a +100,000 bbl rise in distillate inventories, and an unchanged refinery utilization rate of 91.4%. The API reported yesterday that U.S. crude oil inventories rose by +6.2 million bbls, Cushing crude oil inventories fell by -1.9 million bbls, gasoline inventories fell by -1.6 million bbls, and distillate inventories fell by -500,000 bbls. U.S. crude oil inventories remain in a massive glut at +33.8% above the 5-year seasonal average. Product inventories are also plentiful with gasoline inventories at +10.8% above average and distillate inventories at +26.9% 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 -2.1% even though another 184 rigs (-34%) have been shut down so far this year. The grand total decline in oil production so far is only -6.3% from the 43-year high of 9.610 million bpd posted in June 2015.