- Weekly unemployment claims remain favorable
- U.S. CPI expected to remain near recent multi-year highs
- Inflation expectations remain near the recent 7-month high on higher crude oil prices and uptick in U.S. inflation statistics
- 30-year T-bond auction to yield near 2.58%
Weekly unemployment claims remain favorable — The U.S. unemployment claims data remains in favorable shape and indicates that U.S. businesses are holding on to their employees and are engaging in a very small number of layoffs. Furthermore, not only are U.S. businesses laying off very few people, but they are also still hiring at a relatively strong rate, indicating that U.S. businesses have not been shaken by the stock market correction and Chinese turmoil seen at the beginning of the year. Payroll growth in the first three months of 2016 averaged a respectable +209,000.
The initial claims series is currently only +14,000 above the 43-year low of 253,000 posted in the first week of March. The continuing claims series is only +20,000 above the 15-1/2 year low of 2.171 million posted in Oct 2015. The market is expecting today’s initial unemployment claims report to show a small +3,000 increase to 270,000, reversing part of last week’s -9,000 decline to 267,000. Meanwhile, the market is expecting today’s continuing claims report to show a -8,000 decline to 2.183 million, reversing part of last week’s +19,000 increase to 2.191 million.
U.S. CPI expected to remain near recent multi-year highs — The market is expecting today’s March CPI report to edge higher to +1.1% y/y from +1.0% in February and the March core CPI to remain unchanged from Feb’s +2.3% y/y. The U.S. inflation statistics have moved higher in the past several months, putting some pressure on the Fed to continue its hawkish tone even if there is no imminent threat of a rate hike.
Specifically, the core CPI in Feb matched a 7-1/2 year high of +2.3% y/y. 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 showing strength with the core PCE deflator posting a 3-1/4 year high of +1.7% in Jan-Feb, which is just mildly below the Fed’s +2.0% inflation target.
Inflation expectations remain near the recent 7-month high on higher crude oil prices and uptick in U.S. inflation statistics — The 10-year breakeven inflation expectations rate several weeks ago posted a 7-month high of 1.67%, up sharply by +55 bp from the 7-year low of 1.12% posted in mid-February when crude oil hit bottom. The 10-year breakeven rate has since fallen by -10 bp to the current level of 1.57%. The breakeven inflation expectations rate is defined as the nominal 10-year T-note yield minus the 10-year TIPS yield.
The current 10-year breakeven inflation expectations rate of 1.57%, while sharply higher from February, is still relatively mild and is well below the Fed’s +2.0% inflation target. That is one reason why the Fed is not under any imminent pressure to raise interest rates despite the recent uptick in the U.S. inflation statistics.
U.S. inflation expectations have been pushed higher by the sharp recovery in crude oil prices as well as by the higher U.S. inflation statistics. June crude oil prices have rallied sharply by +42% from Feb’s low of $30.79 to yesterday’s 4-month high of $43.69.
The 52-week rolling correlation between the 10-year inflation expectations rate and the front-month WTI crude oil futures contract is currently at 0.49, which is high but down from the record high of 0.61 posted in early March (the series has data back to 1998). The continued high correlation between inflation expectations and crude oil prices illustrates how crude oil prices continue to have a strong influence on inflation expectations and by extension T-note yields, stocks, and the dollar.
30-year T-bond auction to yield near 2.58% — The Treasury today will conclude this week’s $56 billion coupon auction by selling $12 billion of 30-year T-bonds. Today’s 30-year auction will be the second and final reopening of the 2-1/2% 30-year bond of Feb 2046 that the Treasury first sold in February. Today’s 30-year bond issue was trading at 2.58% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.86% against the 30-year breakeven inflation expectations rate of 1.72%.
The 12-auction averages for the 30-year are as follows: 2.33 bid cover ratio, $10 million in non-competitive bids from mostly retail investors, 5.6 bp tail to the median yield, 14.5 bp tail to the low yield, and 54% taken at the high yield. The 30-year is mildly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 56.6% of the last twelve 30-year T-bond auctions, which is mildly above the average of 55.7% for all recent Treasury coupon auctions.
