US Credit Mkt Week Ahead: 3/10/30 Tsy Supply, Fed Black Out

By William Sokolis

     CHICAGO (MNI) - Early next week brings Treasury auctions with $24.0B 3-Year

Note Monday, $20.0B 10-Year Note Reopen Tuesday and $12.0B 30-Year Note Reopen

Wednesday followed by CPI and retail sales data while speakers from the Federal

Reserve enter the black-out period ahead the September 20 Federal Open Market

Committee policy announcement.

     Markets will also have a clearer picture of just how bad the second major

hurricane to hit the United States will be come Monday with Hurricane Irma,

hovering between a category 4 and 5 storm, expected to make landfall in southern

Florida late Saturday night.

     Dealerships are trying to price in the net economic effect of not just

Hurricane Harvey but Hurricane Irma as well. Whatever the bottom line is, it's

negative in the medium term and also likely to take the wind out of hawkish Fed

sails.

     While "difficult to asses," RBC Analysts said damage caused by Hurricane

Harvey alone could "as much as $180 billion by some estimates," higher than the

"prior record held by the Hurricane Katrina." With Florida bracing for Hurricane

Irma, "it's obviously extremely premature to talk about a dollar impact."

     "Ultimately storms of this nature, while taking an incalculable toll on

many individuals, tend to create short term volatility in the economic data but

do not cause any significant shift in trend growth. The rebuilding phase in the

aftermath of these tragedies ultimately reverses (and then some) a lot of the

short term economic pain," RBC said.

     On next week's supply, Nomura's George Goncalves said he is "cautious on

the long-end and see any positive surprise on auction demand as further signals

of investors being 'stopped in'." Meanwhile, the "November

refunding...overshadowed by the debt limit, may see Treasury postpone auction

size increases or 50yr ideas."

     On data and the upcoming FOMC, FTN Financial's Jim Vogel said "bond market

flows should start slowly then crescendo after the 10-yr auction with the

arrival of CPI and retail sales" while the "Fed may still be intent on

normalizing interest rates...bond markets further detached from central bank

thinking this week." 

     While a majority of Fed speakers continue to suggest one more rate hike on

2017 is possible, rate markets have been gradually pricing in lower expectations

with September and November at 0.0%, while December fell to 18.8% on Thursday,

MNI PINCH.

     "If a decade of easy money didn't generate inflation, why do short-term

rates have to go up at all to prevent faster inflation," Vogel questioned. "As

long as 10-yr real interest rates stay low and the 2s/5s curve remain in a bull

flattening mode, that radical explanation for lower rates deserves more

attention."

     Dealerships are starting to concur. Due to several non-idiosyncratic longer

term factors, Morgan Stanley researchers have lowered their "estimated monthly

growth in inflation, and take down the path for rate hikes next year."

     MS cites 5 factors that are likely to weigh on inflation over the medium

term: "1) rising use of technology, (2) domestic oversupply, (3) China

overcapacity, (4) a structural bull market for the dollar, and (5) falling

inflation expectations."

     MS estimates "annual growth in core PCE ending 2017 at 1.4%Y and 2018 at

1.7%Y." MS still sees the Fed raising rates this December, however, while

lowering their expectations of hikes in 2018 from a total of four to three.

     Separately, dealerships are trying to price in the net economic effect of

not just Hurricane Harvey but Hurricane Irma as well. Whatever the bottom line

is, it's negative in the medium term and also likely to take the wind out of

hawkish Fed sails.

     RBS/Natwest analysts said Hurricanes Harvey and Irma have managed to upend

the "political landscape," forging a bipartisan agreement to "increase funding

for Hurricane Harvey relief pulled both Republicans and Democrats to the table."

     "The President's deal ensures that the budget debate will ramp up once

again during the heart of the tax reform / tax cut push in the fourth quarter,

which in our eyes weakens the (already faded) prospects of a reform package

being passed in the near-term."

     In regards to the debt ceiling, RBS/Natwest posited a "December

reinstatement of the debt limit, along with emergency measures, likely means the

new default date into March or April of 2018. This means both the budget debate

and debt ceiling will be fertile ground for fiscal-hawk Republicans and the

Democrats to seek concessions from Republican leadership and the Trump

administration, which will likely make achieving GOP unity on tax reform even

more difficult."

     "Given the recent inflation soft patch," Deutsche Boerse strategists said

upcoming economic data will give a better read on "inflation and consumer

spending" with August PPI on Wednesday and CPI Thursday.

     DB said "headline PPI (+0.3% forecast vs. -0.1% previously) will likely get

a boost from gasoline, while core producer prices (+0.2% vs. -0.1%) should rise

more modestly. As always we will pay close attention to the health care

industries component within the PPI as this is used to estimate health care

services in the core PCE deflator - the Fed's preferred inflation metric."

     DB anticipates "similar gains for headline (+0.3% vs. +0.1%) and core

(+0.2% vs. +0.1%) CPI. After five consecutive downside misses on core CPI,

policymakers will no doubt be looking for signs of some firming in the monthly

inflation trend." 

     "It is important to remember though that even an in-line core CPI figure

would result in the year-over-year rate slipping a tenth to 1.6%, the lowest

level since January 2014. In our view, the year-over-year rate of core CPI

inflation may not bottom out until Q1 2018." 

     "In the absence of inflation pressures," DB concluded, "continued labor

market performance becomes all the more important if the Fed is to continue

along its 'gradual' tightening path. 

     "Unfortunately, assessing near-term labor market developments will be

difficult, as the September employment data will likely be severely impacted by

Hurricane Harvey and potentially Hurricane Irma."

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

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

- Sep 11 Sep NY Fed expectations survey 1100ET

- Sep 11 US Tsy $39.0B 13-Week Bill auction 1130ET

- Sep 11 US Tsy $33.0B 26-Week Bill auction 1130ET

- Sep 11 US Tsy $24.0B 3-Year Note auction 1300ET

- Sep 12 Aug NFIB Small Business Index (105.2, --) 0600ET

- Sep 12 09-Sep Redbook retail sales m/m  (+0.3%, --) 0855ET

- Sep 12 Jul JOLTS job openings level (6163k, --) 1000ET

- Sep 12 Jul JOLTS quits rate (2.1%, --) 1000ET

- Sep 12 US Tsy $20.0B 4-Week Bill auction 1130ET

- Sep 12 US Tsy $20.0B 52-Week Bill auction 1130ET

- Sep 12 US Tsy $20.0B 10-Year Note Reopen auction 1300ET

- Sep 13 08-Sep MBA Mortgage Applications (3.3%, --) 0700ET

- Sep 13 Aug Final Demand PPI (-0.1%, 0.3%) 0830ET

- Sep 13 Aug PPI ex. food and energy (-0.1%, 0.2%) 0830ET

- Sep 13 Aug PPI ex. food, energy, trade (0.0%, --) 0830ET

- Sep 13 08-Sep crude oil stocks ex. SPR w/w (+4.6m bbl, --) 1030ET

- Sep 13 Aug Kansas City Fed LMCI (0.51, --) 1100ET

- Sep 13 Aug Treasury budget balance (-42.9B USD, -133.0B) 1400ET

- Sep 13 US Tsy $12.0B 30-Year Note Reopen auction 1300ET

- Sep 14 09-Sep jobless claims (298k, 300K) 0830ET

- Sep 14 Aug CPI (0.1%, 0.3%) 0830ET

- Sep 14 Aug CPI Ex Food and Energy (0.1%, 0.2%) 0830ET

- Sep 14 10-Sep Bloomberg comfort index 0945ET

- Sep 14 08-Sep natural gas stocks w/w (+65Bcf, --) 1030ET

- Sep 14 13-Sep Fed weekly securities holdings 1630ET

- Sep 15 Aug retail sales (0.6%, 0.5%) 0830ET

- Sep 15 Aug retail sales ex. motor vehicle  (0.5%, --) 0830ET

- Sep 15 Aug retail sales ex. mtr veh, gas (0.5%, --) 0830ET

- Sep 15 Sep Empire Manufacturing Index (25.2, 18.5) 0830ET

- Sep 15 Aug industrial production (0.2%, 0.1%) 0915ET

- Sep 15 Aug capacity utilization (76.7%, 76.8%) 0915ET

- Sep 15 Jul business inventories (0.5%, 0.3%) 1000ET

- Sep 15 Sep Michigan sentiment index (p) (96.8, 95.0) 1000ET

- Sep 15 Aug BLS state payrolls (298.7k, --) 1000ET

- Sep 15 Q3 St. Louis Fed Real GDP Nowcast 1100ET

- Sep 15 Q3 NY Fed GDP Nowcast 1115ET

--MNI Chicago Bureau; tel: +1 312-431-0089; email: bill.sokolis@marketnews.com

[TOPICS: M$U$$$,MK$$$$,M$$FI$,M$$FX$,MN$FI$,MN$FX$]