Repeat:US Credit Mkt WkAhd:Traders Eye 2/5/7Y Aucns, Fed, Jobs

By Sheila Mullan

     NEW YORK (MNI) - Traders in the U.S. Treasuries market next week will once

again watch a host of issues: a quick start to the Treasury 2/5/7-year note

auction process, thoughts about the next Federal Reserve policy moves, and

watching European markets and the North Korea situation.

     Treasuries late Friday held around session high prices after relief buying

occurred as Fed Chair Janet Yellen did not touch on U.S. economics or monetary

policy, spurring some relief as she largely stuck to regulatory topics.

     "We now return you to our regularly scheduled march to 2.0% 10-year yield,"

quipped one trader after the Yellen speech. (The current 10-year note is at

2.168.)

     However the market did react to Dallas Fed President Robert Kaplan comments

that the US federal funds rate "terminal" rate would be closer to 2.5% than

3.0%; he also said that a correction of high asset valuations are not a systemic

risk and may even be "healthy"; he added that he was watching the risks from the

debt buildup.

     Glen Capelo, head of rates at Academy Securities, noted the

Treasuries-bullish "price action should continue, and added that it is now

possible that "trade wars" could loom. "Recent price action should continue its

push: watch the dollar, with its weakening trend intact, expect most dollar

assets to do better," he added.

     That may be good news for the U.S. Treasury: it will sell a slew of U.S.

government debt auctions early next week: the $33 billion 26-week bill auction

Monday at 11:30 a.m. ET, as well as the $26 billion 2-year note auction at the

same time. Then it will have more supply at 1:00 p.m. ET that day: the $39

billion 13-week T-bill auction and also the $34 billion 5-year note auction.

     Tuesday will be comparatively quiet, with only the $28 billion 7-year note

auction to be done at 1:00 p.m. ET.

     Treasuries should continue to see foreign exchange-tied buying if the U.S.

dollar weakens against the Japanese yen, as had occurred Friday; and there will

be related reverse selling if the U.S. dollar firms up vs. the Japanese yen.

     Academy's Capelo eyed "recent chatter/questions" about "why are all the

global asset (market) correlations breaking down? We have seen this breakdown

speed up over the last few weeks. This is a possible red flag," as "it has

signaled the end to economic expansions in the past."

     Thus he warned the "bottom line" is that "until something actually

positive/policy getting passed comes out of Washington, we will continue the

recent moves in the market," as in a "weaker U.S. dollar, lower U.S. rates,

higher gold, and sideways to possibly lower stocks."

     He also viewed "on the horizon" some "brewing trade wars, think NAFTA and

China," which "could be a game changer."

     North Korea has been pretty quiet lately. But South Korea and U.S. military

forces Friday had been only half through ten days of large military drills next

week. However traders believe China's influence should keep North Korea

relatively quiet near-term.

     Looking at U.S. economic data, the market anticipated Friday's key 8:30

a.m. ET August U.S. nonfarm payroll employment report. The MNI economist poll

had a 180,000 median estimate for the jobs report and a 179,000 private payrolls

median estimate and a 4.3% jobless rate, and 0.2% average hourly earnings gain.

     TD economists expect August payrolls "to moderate to 175,000, led by a

deceleration in private services (up a strong 183k in July). We look for an

unchanged unemployment rate and a 0.2% m/m rise in hourly earnings, taking into

account calendar effects that bias the figure downward. That should still leave

wages higher to 2.6% year/year."

     They added "the combination of near-consensus job growth and an

on-consensus pickup in wages argues for a hawkish reaction, given how much wages

have disappointed the last four months. However, the market response will be

tempered by inflation concerns and near-term political risks."

     Barclays economist Michael Gapen expected US August employment report to

show "another month of solid growth in employment." He expects "nonfarm payrolls

to rise by 200,000 and for private sector payrolls to rise by 190,000. Factors

that underlie our forecast are initial and continuing claims, which point to

subdued rates of separation in the labor market, and the rebound in the

employment diffusion index over the past two months, which indicates employment

growth has been more broad-based across industries."

     He added "the labor force participation rate has moved higher by two-tenths

in recent months to 62.9% and has yet to move above 63.0% since March 2014. As a

result, we look for solid employment and lack of further near-term upward

momentum in participation to lead to a one-tenth decline in the unemployment

rate to 4.2%. Elsewhere in the report, we look for average hourly earnings to

rise by 0.3% m/m (2.7% y/y) and for average weekly hours to remain unchanged at

34.5."

     Economists at TD project next Thursday's 8:30am ET US July PCE inflation

"should reflect another subpar 0.1% print on the core index, in line with the

CPI report. That would leave core inflation stable at 1.5% y/y, with downside

risk given the potential for healthcare services prices to underperform the

recorded rise in the CPI."

     They also "expect solid 0.4% gains in spending and incomes, but the

markets' focus on inflation suggests that the inflation readings will ultimately

drive the reaction."

     Other traders eyed the groceries' aisle and food costs as ReCode said

Amazon will chop food prices at Whole Food grocery stores starting Monday, the

day Amazon's $13.7 billion acquisition of Whole Foods closes.

     Traders expected the overnight repo market next week will see tight

conditions in the 2-year Treasury note and 5-year note too amid pre-auction

shorts

     Traders also eyed the Fed's expected potential guidance at its September

19-20 FOMC meeting on its balance sheet rundown, which could start to be

implemented in October. The Fed could unveil its balance sheet reduction

strategy -- letting Treasuries and/or MBS run off its portfolio -- at the

September FOMC meeting for an October start date, said traders.

     Once tapering begins, the U.S. Treasury would have to figure out how to

slice its debt issuance to cope with such a runoff of Treasuries. Traders also

eyed a potential December 2017 rate hike but that is way off, with months of

inflation data ahead.

     Traders expected some corporate rate-lock hedging action next week, in case

of heavy US high-grade corporate bond issuance in early September. 

     Have a happy end of summer week! 

     -- Questions? sheila.mullan@marketnews.com 212-669-6432; story also

reflects contributions from Giovanny Guerrero of MNI/New York.

     -- A calendar of market events (data, Fed speakers) is below:

     Date/Time ET Prior Data/And MNI Econ Poll Median Estimates

---------------------------------------------------------------------

26-Aug-KC Fed Econ Symp:"Fostering Dynamic Globl Econ" Jackson Hole, WY

28-Aug 0830 ** Jul advance goods trade gap -$63.9/-- b USD

28-Aug 0830 ** Jul advance wholesale inventories +0.7%/-- %

28-Aug 0830 ** Jul advance retail inventories +0.6%/-- %

28-Aug 1030 ** Aug Dallas Fed manufacturing index 16.8/--

28-Aug 1130am ET US Tsy $33.0B 26-Week Bill auction

28-Aug 1130am ET US Tsy $26.0B 2-Year Note auction

28-Aug 1300pm ET US Tsy $34.0B 5-Year Note auction

28-Aug 1300pm ET US Tsy $39.0B 13-Week Bill auction

29-Aug 0855 ** 26-Aug Redbook retail sales m/m -0.2%/-- %

29-Aug 0900 ** Jun Case-Shiller Home Price Index +0.1/--

29-Aug 1000 *** Aug Conference Board confidence 121.1/121.7

29-Aug 1030 ** Aug Dallas Fed services index 10.5/--

29-Aug 1300pm ET US Tsy $28.0B 7-Year Note auction

30-Aug 0700 ** 25-Aug MBA Mortgage Applications -0.5%/-- %

30-Aug 0815 *** Jul ADP private payrolls 178K/--K

30-Aug 0830 *** Q2 GDP (2nd) 2.6%/2.7%

30-Aug 0830 *** Q2 GDP Price Index 1.0%/1.0%

30-Aug 0915 Fed Gov Powell: Big Fincl Firms' Board at conf Chicago Q/A

30-Aug 1000 * Aug help-wanted online ratio 1.18/--

30-Aug 1030 ** 25-Aug crude oil stocks ex. SPR w/w -3.3M/--M bbl

30-Aug 1500 * Jul farm prices -0.1%/-- %

31-Aug 0730 * Jul challenger layoff plans -37.6%/--%

31-Aug 0830 ** 26-Aug weekly initial jobless claims --/236Kk

31-Aug 0830 ** Jul personal income 0.0%/0.3%

31-Aug 0830 ** Jul current dollar PCE 0.1%/0.4%

31-Aug 0830 ** Jul total PCE price index 0.0%/-- %

31-Aug 0830 ** Jul core PCE price index 0.1%/0.1%

31-Aug 0900 * Aug ISM-Milwaukee Mfg Index 56.98/--

31-Aug 0945 ** Aug MNI Chicago PMI 58.9/59.8

31-Aug 0945 * 27-Aug Bloomberg comfort index --/--

31-Aug 1000 ** Jul NAR pending home sales index 110.2/--

31-Aug 1030 ** 25-Aug natural gas stocks w/w --/-- Bcf

31-Aug 1630 ** 30-Aug Fed weekly securities holdings --/-- t USD

01-Sep - *** Aug NA-made light vehicle sales SAAR 12.9M/16.6M

01-Sep 0830 *** Aug nonfarm payrolls 209K/180K

01-Sep 0830 *** Aug private payrolls 205K/179K

01-Sep 0830 *** Aug unemployment rate 4.3%/4.3%

01-Sep 0830 *** Aug average hourly earnings 0.3%/0.2%

01-Sep 0830 *** Aug average workweek, all workers 34.5/34.5 hrs

01-Sep 0945 *** Aug Markit Mfg Index (final) 52.5/--

01-Sep 1000 *** Aug ISM Manufacturing Index 56.3/56.6

01-Sep 1000 * Jul construction spending -1.3%/+0.4%

01-Sep 1000 *** Sep Michigan sentiment index (f) 97.6/97.4

01-Sep 1100 ** Q3 St. Louis Fed Real GDP Nowcast --/-- %

01-Sep 1115 ** Q3 NY Fed GDP Nowcast --/-- %

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

[TOPICS: MTABLE,M$U$$$,M$$FI$]