Low U.S. Wholesale Inventories Expected to Hit Fourth Quarter GDP

As businesses increased efforts to reduce stockpiles of unsold merchandise, U.S. wholesale inventories recorded a significant drop in October. According to experts, resulting low inventories could be a drag on economic growth in the fourth quarter.

The Commerce Department recently reported that wholesale inventories fell 0.1 percent as stocks of both durable and nondurable goods decreased. This fall followed a 0.2 percent decrease in September. This performance came after economists polled by Reuters previously forecast a 0.1 percent increase in wholesale inventories for October, as well as a 0.5 percent increase for the previous month.

This sluggish performance could have a considerable impact on the gross domestic product, because wholesale inventories are a major portion of the calculation of GDP. The portion of inventories used to calculate GDP also recorded a 0.1 percent dip.

Recent drops in production follow record back-to-back increases in inventories during the first two quarters of 2015. These increases left warehouses overflowing with unsold merchandise and businesses with minimal incentive to continue producing new stock. As a result, inventories subtracted 0.56 percent from GDP growth in the third quarter, and that restriction is expected to lead to a 2.1 percent annualized rate.

Current estimates call for a fourth-quarter growth estimate of roughly two percent, but the drop in inventories will likely prompt economists to trim their forecasts. Just last week, new data showed manufacturing inventories fell for a fourth straight month in October, but new retail data set to be released on Friday could shed additional light on the magnitude of the anticipated drag to close out the year.

As inventories wavered, sales at wholesalers remained unchanged in October after increasing by 0.5 percent in September. Overall, sales have remained relatively soft since last August as a result of the negative impact of lower oil prices on the value of petroleum product sales. If this sales pace continues, it would take just over 1.3 months to clear shelves, suggesting that businesses are unlikely to ramp up their pace of inventory accumulation in the foreseeable future.

U.S. Crude Oil Supplies Drop for First Time in 11 Weeks

Oil futures continue to climb after a report by the U.S. Energy Information Administration (EIA) revealed that domestic crude supplies fell for the first time in nearly three months. This report helped ease concerns about a growing inventory, which has led to declines in oil prices over each of the last three trading sessions. On Friday, the Organization of the Petroleum Exporting Countries (OPEC) compounded these concerns when it announced plans to continue producing oil at high levels.

According to the EIA report, crude supplies dropped by roughly 3.6 million barrels for the week ended December 4. Previously, the American Petroleum Institute reported a 1.9 million barrel decline and analysts polled by Platts forecast a 1.2 million barrel decrease. Despite dropping reserves, imported oil recorded a 274,000 barrel per day increase from the previous week. In total, the EIA estimated that more than 8 million barrels were imported each day.

Gulf Coast refineries did their part to alleviate supply pressures, cranking out a significant rise in total production. Gasoline supplies rose by 800,000 barrels last week and distillate stockpiles jumped by approximately five million barrels. Total refinery utilization rose to 94.5 percent of capacity, up from 93.1 percent the previous week.

Following the report, Nymex's January gasoline increased by 3.2 cents (2.6 percent) to $1.235 per gallon, while January heating oil fell less than half a cent to $1.257. January natural gas added 1.7 cents to $2.087 per million British thermal units, but EIA's weekly update, which is due on Thursday, could play a role in promoting additional movement.

According to Colin Cieszynski, chief market strategist at CMC Markets, the crude supply drop is a "reflection of an improving supply/demand balance in the U.S." Cieszynski went on to tell Marketwire the following: "With no end in sight to the supply war, it may end up taking an increase in demand to shore up oil prices."

A positive outlook for the U.S. and euro zone economies is expected to improve oil demand, but analysts look to China for additional support. While China's November crude imports grew 7.6 percent year-over-year to 27.3 million tons, many market watchers suggest that the fresh supplies are likely headed to the strategic reserve rather than commercial use, so they'll have minimal impact on pricing.

Additionally, as China continues to ramp up its refined product exports, the Asian nation could play a role in pushing the prices of oil products further south.

Investors Remain Cautious as Gold Rises

Softness in the dollar and European shares led to a one percent increase in gold prices on Wednesday, but investors remained cautious as a result of next week's anticipated Federal Reserve rate hike. The U.S. central bank is widely expected to raise interest rates for the first time in nearly a decade at its policy meeting beginning December 15.

A rate increase will likely dent demand for non-interest-paying gold, which has already dropped by more than nine percent this year and is on track for yet another loss. Spot gold rose to a session high of $1,085.20 an ounce before settling at $1,075.46, up approximately $35 from the previous week. Last week, the metal reached a near-six-year low. Gold futures remained flat at $1,073 an ounce.

The main driver for gold as the calendar flips to 2016 will be the speed of the Fed's impending rate cycle. While continued downward pressure is expected for gold through next year, the dollar could be positioned for moderate gains as the market begins to price in more rate hikes.

Oil prices are also affecting gold investors. On Tuesday, crude dropped to its lowest point in nearly seven years, signaling concerns about deflation. Gold is often used as a hedge against oil-led inflation.

In general, gold traders chose to cover short positions on the dollar's recent weakness. Net short positions in COMEX gold futures and options achieved a record high during the week to December 1, according to the most recent data. Investors continue to double down on the bet that gold will drop below $1,000 an ounce before next week's Fed meeting.

After reaching its lowest points since August 2009 on Monday, Silver recorded a one percent increase to $14.29 an ounce. Platinum gained 1.5 percent to $858.55 an ounce, while palladium rose 1.1 percent to $551.73 an ounce.

Weakness in China and an impending rate hike combine to form a rather dreary outlook for industrially-biased precious metals. According to reports, they are unlikely to emerge unscathed.

Treasury Yields Fall Following Sale

U.S. sovereign bond yields fell on Wednesday after the Treasury Department auctioned off $21 billion in 9-year 11-month notes at a yield of 2.233 percent. The bid-to-cover ratio, which is commonly used as an indicator of demand, was 2.64. Major central banks and other indirect bidders were awarded 62 percent of the auctioned notes, while domestic money managers and other direct bidders were awarded 12.1 percent.

Following the auction, bond yields tumbled as whipsawing oil prices heightened the anxiety of investors ahead of the Federal Reserve's meeting next week. U.S. crude fell below $37 per barrel and Brent dropped below $40 on Tuesday, marking the first time it has hit the milestone since early 2009. As a result, investors moved into the safe haven of U.S. Treasurys.

Yields on 10-year Treasurys were at 2.2094 percent on Wednesday, down from 2.238 percent on Tuesday. Similarly, 30-year bond yields fell to 2.9624 percent after ending at 2.975 percent in the previous session.

Oil briefly rose following the release of a report by the Energy Information Administration that showed the first drop in crude stockpiles in nearly three months, but it reversed and went negative before the markets closed. U.S. West Texas Intermediate (WTI) crude futures settled at 0.9 percent, or 35 cents, lower than the previous day at $37.16 per barrel on Wednesday. Internationally traded Brent futures also recorded a drop, falling seven cents a barrel.

Bond yields are currently 10 basis points higher than they were a week ago, outperforming Japanese government bond yields, which are lower than they were previously. While these yield levels aren't expected to persist moving forward, a 10-year note auction has analysts intrigued.

Overall, analysts are expecting a relatively quiet close to this week as traders continue to await the Fed's rate decision next week. The Fed is expected to raise its fed funds target rate by 0.25 percent, the first hike in nine years.

Dollar Falls as Commodity Currencies Rebound

The dollar fell on Wednesday as commodity-based currencies reversed the steep losses driven by Tuesday's drop in oil prices. The euro, on the other hand, rose, as investors shifted back into the single currency.

As oil edged upward on Wednesday, the Canadian dollar and Norwegian crown followed suit. On Tuesday, the currencies fell to 11- and 13-years lows, respectively, against the U.S. dollar. After the rise, the crown added one percent against the dollar and the loonie gained 0.35 percent. Both countries' economies rely heavily on the oil and gas industries.

The euro and yen both reached one-month highs versus the dollar as traders reversed course. Previously, the greenback had climbed to multi-month highs against both currencies prior to a recent meeting by the European Central Bank. Following the meeting, the euro recorded its biggest one-day percentage climb since March 2009, 3.1 percent.

The dollar has since recovered from this meeting in anticipation of a resurgence to its recent strength. Many speculators have increased long positions in the U.S. currency to their highest in eight months, according to Reuters. As a result, analysts expect the dollar to rise in the coming weeks.

According to economists, Wednesday's shift is likely a result of cautious investors awaiting next week's Federal Reserve meeting, which is widely expected to signal the first interest rate hike in nearly a decade. As a result, the dollar fell below 122 yen per dollar for the first time since November 6.