Select Page


  • Fed’s Beige Book will provide some indication of whether U.S. economic momentum is improving
  • U.S. import prices expected to rebound further 
  • 30-year T-bond auction to yield near 2.23%
  • Weekly EIA report expected to show a large seasonal decline in crude oil inventories

Fed’s Beige Book will provide some indication of whether U.S. economic momentum is improving — The Fed today will release its Beige Book report on the regional performance of the U.S. economy.  The Fed’s last Beige Book said that the 12 Fed districts as of the report’s June 1 date had reported “modest economic growth.” Today’s report should show modestly better economic news considering that U.S. GDP improved in Q2 from the weak Q1 pace of +1.3%.  The Atlanta Fed’s GDPNow is currently forecasting Q2 GDP at +2.3%, better than the Q1 level but down from last Wednesday’s Q2 forecast of +2.4% and the late-May forecast of +2.9%.

As for Fed policy, the market has turned substantially more hawkish in the past week because Brexit has had little impact and because of last Friday’s much stronger-than-expected June payroll report of +287,000.  The federal funds futures curve since last Thursday has risen by +6 bp for the Dec 2016 contract, +12 bp for the Dec 2017 contract, and +13 bp for the Dec 2018 contract.  Despite that rise, the federal funds futures contract is still down by 4-19 bp from the pre-Brexit level, indicating that the market is still more dovish than it was before the Brexit vote.

The market is now discounting a 6% chance of a Fed rate hike at the next FOMC meeting on July 26-27, up slightly from zero in the two weeks after the Brexit vote.  The odds for a rate hike at the following meeting on Sep 20-21 have risen to 18% from zero after the Brexit vote.  The odds for a rate hike by the end of the year have risen to 38% from zero after the Brexit vote.

U.S. import prices expected to rebound further — The market is expecting today’s June U.S. import price index to show a +0.5% m/m increase, adding to May’s sharp increase of +1.4% m/m.  On a year-on-year basis, however, June import prices are expected to improve to only -4.6% y/y from -5.0%  in May.  U.S. import prices have risen by a total of +2.1% in the past three reporting months (March-May) due to rising oil prices and the weaker dollar seen at the beginning of the year.  Import prices ex-petroleum showed a +0.4% m/m increase in May, which was the first monthly increase seen in about two years.  Still, May import prices ex-petroleum were down -1.9% y/y.  

The recent monthly uptick in import prices will put some upward pressure on the overall U.S. inflation indexes.  However, U.S. inflation remains relatively tame and is not putting any immediate pressure on the Fed to raise interest rates.  The Fed’s preferred inflation measure, the PCE deflator, rose by only +0.9% y/y in May and the core PCE deflator was up by +1.6% y/y.
 

30-year T-bond auction to yield near 2.23% — The Treasury today will conclude this week’s $56 billion coupon package by selling $12 billion of 30-year T-bonds in the second and last reopening of the 2-1/2% bond of May 2046.  Today’s 30-year T-bond issue was trading at 2.23% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.62% against the 30-year breakeven inflation expectations rate of 1.61%.

The 12-auction averages for the 30-year are as follows:  2.34 bid cover ratio, $10 million in non-competitive bids, 5.4 bp tail to the median yield, 16.0 bp tail to the low yield, and 57% taken at the high yield.  The 30-year is the fourth most popular security among foreign investors and central banks behind the 10-year TIPS, the 10-year T-note, and the 30-year TIPS.  Indirect bidders, a proxy for foreign buying, have taken an average of 59.6% of the last twelve 30-year T-bond auctions, which is moderately above the average of 57.4% for all recent Treasury coupon auctions.

Weekly EIA report expected to show a large seasonal decline in crude oil inventories — The market consensus for today’s weekly EIA report is for a -3.5 million bbl decline in U.S. crude oil inventories, a -62,000 bbl decline in Cushing crude oil inventories, a -1.0 million bbl decline in gasoline inventories, unchanged distillate inventories, and a +0.5 point rise in the refinery utilization rate to 93.0%.

U.S. crude oil inventories have fallen in the last seven consecutive weeks by a total of -16.9 million bpd (-3.1%) as refineries use a large amount of crude oil to produce summer gasoline.  However, the current decline in U.S. crude oil inventories is in line with normal seasonal trends and U.S. crude oil inventories remain in a massive glut at +34.0% above the 5-year seasonal average.  Meanwhile, product inventories are more than ample with gasoline inventories at +11.5% above the 5-year seasonal average and distillate inventories at +15.8% above average.

On the production front, the markets will be watching to see if U.S. oil production stops falling and starts to slowly rise again due to the recent increase in the number of active oil rigs.  The number of active U.S. oil rigs has risen by +21 rigs (+6.4%) in the past two reporting weeks to 351 rigs and is up a total of 35 rigs (+11.1%) from the 6-3/4 year low of 316 rigs seen in late May.  

U.S. oil production has fallen in the last four weeks by a total of -3.6% and posted a 1-3/4 year low of 8.428 million bpd in the week ended July 1.  However, U.S. oil production is soon likely to bottom out and start to turn higher due to the recent increase in active rigs.

 

 

 

CCSTrade
Share This