REPEAT: US Credit Mkt WkAhd: Traders Eye Fed, Taper, Tame CPI

Repeats Story Initially Transmitted at 19:19 GMT Oct 13/15:19 EST Oct 13

--Traders Also Eyed Expected FOMC Taper Start in October

By Sheila Mullan

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

consider how the latest U.S. economic data including tame 0.1% Core Consumer

Price index fits in with the Fed's hoped-for December U.S. tightening schedule.

     And meanwhile back at the ranch, the Fed will begin its tapering, or

gradual reduction of its $4.5 trillion balance sheet, which has $4.2 trillion in

U.S. Treasuries and in Agency MBS.

     BMO analyst Ian Lyngen said in the "week ahead, we'll lean bullishly on the

Treasury market as the realities of the data cycle continue to contrast with the

Fed's insistence that all is 'right' with the domestic economy. To be fair, the

FOMC hasn't completely turned a blind-eye to the conspicuous absence of

inflation, but rather has instead chosen to characterize it is an enigma that,

while worth monitoring, shouldn't impact the near-term direction of monetary

policy."

     He added that "a quick glance at the futures market shows the January Fed

funds contract pricing in 18 bp of tightening by year-end, or a 72% probability

of a December move. While this is slightly off the peaks, the market is still

effectively pricing in a move, barring a more disastrous turn in the data."

     Lyngen added that the Fed's "year-to-date track record makes it difficult

to fade the Committee's insistence on the appropriateness of a move in December

and the market has been unwilling to attempt doing so. After all, at the

beginning of this year, the Fed (via the dot plot) communicated a plan of 3

hikes and a taper and as it currently stands, that appears to be exactly what

will be delivered."

     He said "the chorus of Fed-speakers looking for a return of inflation to 2%

by the end of 2018 has contributed to investors' confidence" in FOMC's

"commitment to hike in December, even if the realized inflation numbers tell a

different story."

     And BMO's Lyngen said that "at the end of the day, we suspect that easy

financial conditions will be used as the rationalization for another move, and

we're certainly sympathetic to the objective of taking some of the air out of

any potential bubble in risk assets (record high stocks and tight credit spreads

have been driving financial conditions)."

     "If the goal of monetary policy is to engineer a soft landing in risk

assets, gradual rate hikes (regardless of the data) is the most obvious course,"

he said. "That said, policymakers have historically struggled to strike the

needed balance to achieve a turbulence-free removal of 'irrational exuberance',

but we digress."

     Meanwhile SocGen economist Omair Sharif also argued the US 0.5% CPI/0.1%

Core CPI was "still just good enough for a December hike". He added that "core

CPI edged up by 0.13% in September, a little below our 0.15% estimate. While

investors may be bemoaning another "soft" core print that fell short of

expectations, we are more focused on the fact that the three-month and six-month

annualized rates have bounced back nicely, as we had expected. We think this

keeps the Fed on track for a December hike."

     "In any case, there was no obvious hurricane effect on the core rate in

today's report," he said. "In fact, components suspected of posing upside risk

were actually on the softer side, especially rents."

     SocGen economist Sharif said the CPI "keeps the Fed on track in Dec" as

when Fed Chair Yellen "indicated in her June press conference that the 12-month

inflation rate would be weak until March 2018, we argued that mkt participants

should keep a close eye on the 3-month annualized core CPI rate. We felt that

the 3-month annualized core rate (and the 6-month as well) would be more

important to policymakers looking to hike later this yr" as "might show them

whether or not core inflation was rebounding from the weak stretch seen earlier

this yr. In that context, we think today's CPI report aids officials looking to

hike."

     "The 3-month annualized core CPI rate now stands at 2%, while the 6-month

figure is now at 1.5%," he said. "Both metrics have come a long way since a few

months ago. Recall that the 3-month core figure was at 0% in May (given the weak

Mar result), and the 6-month hit its low in July at 0.9%. Looking ahead to the

October CPI report, we think that the 3-mo annualized figure will inch up to

2.1%, while the 6-month rate will rise to 1.6%. The Fed will have that report in

hand by mid-November, and we suspect that these shorter-term annualized prints

will boost the arguments of officials who want to hike in December."

     Before any potential December rate hike, the Federal Reserve will start its

taper/Fed balance sheet reduction program in October. The Fed will whittle down

its huge $4.5 trillion Fed balance sheet, which includes $4.2 trillion in

Treasuries and Mortgage-Backed Securities (MBS). The Fed had bought bonds to

alleviate the market tightness since the financial crisis of 2008-2009.

     The Fed will let its Treasuries and/or MBS run off its portfolio, 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.

     Market traders said the New York Fed should be announcing its Agency MBS

taper buying plans in MBS Friday Oct. 13th at 3:00 p.m. ET. The taper will start

in MBS with Friday announcement, while it will start in U.S. Treasuries with the

end-October month-end.

     Below is the chart schedule of monthly Fed reinvestment caps consistent

with the FOMC Sept. 20 decision and June 2017 addendum:

     --- MONTHLY CAPS ON SOMA SECURITIES REDUCTIONS

--------------US TREASURIES.../AGENCY MBS/MONTH CAP

- Oct-Dec 2017.. $6 billion./$4 billion

- Jan-Mar 2018.. $12 billion/$8 billion

- Apr-Jun 2018 $18 billion../$12 billion

- Jul-Sep 2018 $24 billion../$16 billion

- From Oct 2018** $30 billion $20 billion

     - Note the Taper policy background (see link:

https://www.newyorkfed.org/markets/opolicy/operating_policy_170920 And the Taper

policy background: (The Fed Board Taper Sep20 news release:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20170920

a1.html)

     Also, Treasuries should continue to see foreign exchange-tied buying by

black box hedge funds, if the U.S. dollar weakens against the Japanese yen. And

there will be related reverse selling if the U.S. dollar firms up vs. the

Japanese yen, said traders.

     -- 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

14-Oct Annual IMF Meeting in Washington DC. 

15-Oct Annual IMF Meeting in Washington DC.  

15-Oct 0900 Fed Chr Yellen:global eco/growth:G30 Intl Bk Seminar DC Q/A

15-Oct 0900 People's Bk of China head Zhou: G30 Intl Bk Seminar DC Q/A

15-Oct 0900 BOJ's Kuroda on econ/growth at G30 Intl Bk Seminar DC Q/A

15-Oct 0900 ECB VP Constancio on econ/growth;G30 Intl Bk Sem DC Q/

16-Oct 0830 ** Oct Empire Manufacturing Index 24.4/20.0

16-Oct 1130 am ET US Tsy $36.0B 26-Week Bill auction

16-Oct 1130 am ET US Tsy $42.0B 13-Week Bill auction 

16-Oct 2100 Minn Fed Kashkari speaks at G100 Dinner Minneapolis; Q/A 

17-Oct 0830 ** Sep imports price index 0.6%/0.7%

17-Oct 0830 ** Sep exports price index 0.6%/-- %

17-Oct 0830 ** Oct NY Fed Business Leaders Index 9.4/--

17-Oct 0855 ** 14-Oct Redbook retail sales m/m -1.5%/-- %

17-Oct 0915 *** Sep industrial production -0.9%/0.2%

17-Oct 0915 *** Sep capacity utilization 76.1%/76.2%

17-Oct 1000 ** Oct NAHB home builder index 64.0/--

17-Oct 1600 ** Aug net TICS flows -$7.3B/-- b USD

17-Oct 1600 ** Aug long term TICS flows $1.3B/-- b USD            

18-Oct 0530 am ET NY Fed VP Hirtle on regulation:EU Bk Conf Berlin Q/A

18-Oct 0700 ** 13-Oct MBA Mortgage Applications -2.1%/-- %

18-Oct 0800 NY Fed Dudley,Dall Fed Kaplan talk on NY-Tex ties:NY;Q/A 

18-Oct 0830 *** Sep housing starts 1.180M/1.178M 

18-Oct 0830 *** Sep building permits 1.272M/1.238M 

18-Oct 1000 ** Oct Atlanta Fed inflation 1.9%/--%

18-Oct 1030 ** 13-Oct crude oil stocks ex. SPR w/w --/-- m bbl

18-Oct 1400 Fed releases Beige Book for upcoming FOMC meeting DC 

18-Oct Fed VC Fischer to speak at NYU Money Marketeers dinner in NY 

19-Oct 0830 ** 14-Oct jobless claims --/240k 

19-Oct 0830 ** Oct Philadelphia Fed Mfg Index 23.8/21.0

19-Oct 0945 * 15-Oct Bloomberg comfort index -- --

19-Oct 1000 ** Sep leading indicators +0.4%/0.2%

19-Oct 1030 ** 13-Oct natural gas stocks w/w --/-- Bcf

19-Oct 1300 pm ET US Tsy $5.0B 30-Year TIPS reopening auction 

19-Oct 1630 ** 18-Oct Fed weekly securities holdings --/--T USD

20-Oct 1000 *** Sep existing home sales 5.35M/5.280M 

20-Oct 1000 * Sep BLS state payrolls 85.4K/--k 

20-Oct 1100 ** Q4 St. Louis Fed Real GDP Nowcast --/-- %

20-Oct 1115 ** Q4 NY Fed GDP Nowcast --/-- %

20-Oct 1400 Clv Fed Mester;Global Fin Future:Populism,Tech,Reg, NY Q/A

20-Oct 19:30pm ET Fed Chr Yellen talks at NEC Stein Memorl Dinner; DC 

--MNI New York Bureau; tel: +1 212-669-6432; email: sheila.mullan@marketnews.com