Rates Eye Fed Chair Pick

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Published Date 10/30/2017

This week is huge for markets; economic releases, with October employment rounding out the week on Friday. In the meantime, a number of key measurements beginning this morning with September personal income and spending. On Wednesday, according to the latest comments from Republicans, they will release the specific details on the tax cuts. The same day, the FOMC policy statement, on Thursday or Friday according to Trump last week, he will announce his choice for the Fed Chair.

At 8:30 AM EDT this morning, September personal income and spending; income +0.4 % as expected, spending +1.0%, slightly better than 0.9% but close enough to call it in line. The more critical ingredient, the personal consumption expenditures (PCE), Janet Yellen’s and the Fed’s favorite inflation measurement, was expected +0.4% overall and as reported +0.4%, the core (excluding food and energy) expected 0.1% also as expected up 0.1%. Inflation still not showing up; yr./yr. core unchanged from August +1.3%. Spending at +1.0%, the biggest increase month/month in eight years due to replacements from the two hurricanes in Texas and Florida. Last Friday the advance Q3 GDP showed consumer spending growth slowing to a 2.4% annualized rate after 3.3% in the second quarter.

Early trading had MBS prices +16 bps from Friday’s increase of 28 bps. The 10 yr. note last week rose to test a key support at 2.40%/2.42%, it held and ended Friday at 2.42%. This morning after, the PCE data trading at 2.39%.

The Russian probe is finally getting some sunlight; Paul Manafort, a former campaign manager for Trump, surrendered to federal authorities, according to reports, following a special counsel investigation of possible Russian meddling in the election. Indicted on 12 counts, including engaging in a conspiracy against the US government.

Of everything markets have to navigate this week, it is the tax cut bill that, according to Republican leaders, will be released on Wednesday. No doubt it will not meet with enthusiasm, and it is the first look at details that so far have been rumors only. Going to be a lot of talk, both positive and negative, when the specifics appear. No Democrat will vote for any tax cut bill; Republicans in the Senate have a two-vote majority, but Senators McCain, Corker, and Flake are likely to make it a close call when the vote occurs. The plan, according to reports: have the bill ready for a vote by the Thanksgiving recess, then on the President’s desk by the end of the year. Whatever bill actually evolves, it will increase the US deficit by as much as $5 trillion or as low as $1.5 trillion, the bookends for the estimate. Someday, not too long from now, the US debt will cause economic stress; but as is the case, the deficit is one of the coming events that keeps getting kicked down the road for others to swallow.

The recent chatter from pundits in NY: Trump is leaning toward Jerome Powell to replace Yellen when her term expires next February. Powell is presently on the Board of Governors of the Fed and generally considered a moderate on policy support from the Fed. Inflation isn’t a pressure point now. If he is the one Trump picks he won’t be the leader when the FOMC meets in December when markets believe that the Fed will increase the fedarl funds rate once again, but his opinion and input likely to carry the weight in any decision.

Call your attention to the economic calendar below. Full of key economic data. The October employment report on Friday, based on the present estimates is for a nice increase in jobs. Jobs important, but the average hourly earnings tops the interest level. The FOMC meeting concludes Wednesday with no change in rates, but the tone of the policy statement always important.

This Week’s Calendar:

Today
- September personal income, spending and PCE (income expected +0.4%, spending +0.9%, PCE +0.4%, the core PCE +0.1%, PCE yr./yr. +1.3%; as released
Tuesday
- 8:30 am October employment cost index (+0.7%)
- 9:45 am October Chicago purchasing mgrs. index (62.0 from 65.2)
- 10:00 am October consumer confidence index (121 from 119.8) FOMC meeting begins
Wednesday
- 8:15 am October ADP private jobs (222K from 135K in Sept)
- 9:45 am October PMI manufacturing index (54.5 from 53.1 in September)
- 10:00 am October ISM manufacturing index (59.5 from 60.8 in September) September construction spending (+0.1%)
- 2:00 PM FOMC policy statement
Thursday
- 8:30 am weekly jobless claims (235K +2 K Q3 prelim productivity and unit labor costs (productivity +2.4%, unit labor costs +0.6% up from +0.6% in Q2)
Friday
- 8:30 October employment data: (unemployment 4.3% from 4.2% in September, non-farm jobs 323K, private jobs 320K, labor participation rate 63.0% from 63.1% in Sept, average hourly earnings +0.2% from +0.5% in September yr./yr. +2.7% from +2.9% in September.
  September US trade deficit (-$43.4B)
- 9:45 am October PMI services sector index (55.9 from 55.3 in September)
- 10:00 am October ISM services sector index (58.7 from 59.8) Sept factory orders (+1.2%)

Source: TBWS

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