US Credit Mkt Wk Ahd: Traders Eye Fec/ECB/Taper, 2/5/7Y Auctns

By Sheila Mullan

     NEW YORK  - Traders in the U.S. Treasuries next week await the outcome of

the stylized Kabuki drama of Pres. Donald Trump's naming his new Fed Chair

choice. There also will be a host of U.S. Treasury auctions, with the nominal

2-year, 5-year, 7-year notes and a 2-year Floating rate note auction too to be

digested.

     Traders will be glad when the Fed Chair question has been settled as that

is roiling the Treasuries back and forth. Fed Chair Janet Yellen is the current

Fed Chair, but the market has whipped up and down amid news/talk of potential

candidates for the Fed Chair post.

     The U.S. president said he will make his choice before leaving Nov. 3rd for

an Asian trip.

     Fox Business News said in a TV interview to air Sunday (which also ran

Friday afternoon on its website) that Trump "may give the Federal Reserve a

double dose of top talent by nominating 2 top contenders, Federal Reserve

Governor Jerome Powell and Stanford University economist John Taylor, as

candidates for either Fed chairman and vice chairman, but it is still unclear

which role either would get."

     "President Trump may decide to reward 2 factions within the White House

that are involved with the search process, one led by Treasury Secretary Steven

Mnuchin, who prefers Powell, and the other by Vice President Mike Pence, who

favors Taylor, according to those familiar with the matter," it said.

     Barclays economists expected that "despite intense speculation about the

next Fed chair, the path of policy rates is still likely to be driven primarily

by the data, regardless of who is nominated."

     The U.S. bond market may need to look overseas also for guidance. SocGen

analysts eyed a "U.S. policy re-coupling" with Europe. They added that "while

the debate over the nomination of the next Fed Chair continues, the focus next

week is likely to be on the ECB meeting's potential for a further reduction in

asset purchases."

     "Global policy re-coupling should slowly pressure term premiums higher,"

they said. "We recommend shorting the belly via a 3s/7s/10s" butterfly trade "as

a carry-efficient way of maintaining a short bias.'

     Amherst Pierpont chief economist Stephen Stanley said next week, "financial

markets will be focused on two events not on" the economic calendar. "First,

speculation regarding the choice for the next Fed Chair has reached a fever

pitch," he said. "The interviews are done, and various "unnamed" Administration

officials regularly weigh in, presumably to push their agenda as much as to

inform."

     Stanley said that "President Trump has reportedly not made up his mind. His

decision boils down to a choice between not rocking the boat and promoting

Governor Powell, or shaking the Fed up and putting in place someone who is

emphatically in agreement with his broad economic agenda (supply-side tax

reform, lighter regulation, etc.) and installing John Taylor (or Kevin Warsh). A

decision is due within the next two weeks."

     The Amherst Pierpont economist points out that "second, the ECB meets on

Thursday and is widely expected to announce its plans for QE beyond the end of

this year, a reminder that monetary policy normalization is not only a U.S.

story."

     Looking forward to Friday's key third quarter Gross Domestic Product data,

Barclays economist Michael Gapen said Barclays is raising "Q3 US GDP forecast to

2.5% on a faster return to normal."

     He added "we had previously reduced our Q3 GP forecast (and raised our Q4

GDP forecast) on account of our expectation that the three large storms that

made landfall in August and September would slow economic activity. Our

assumption was that activity would be subdued in both August and September and

subsequently return to normal in early Q4. On net, we expected growth in the

second half of the year to be largely unchanged, with any weakness in Q3 data

made up in Q4."

     He said that "in the event, data for most indictors have rebounded strongly

in September, suggesting a faster return to normal activity levels than we

anticipated, and our Q3 GDP tracking estimate has been running modestly ahead of

our official forecast for some time."

     BA/ML economists said "don't cry over low inflation" and added that they

are "slicing a tenth to our 4Q/4Q forecast for core PCE inflation this year and

next, bringing our targets to 1.4% and 1.8%, respectively."

     "We remain convinced that inflation can gradually accelerate next year, as

drags from idiosyncratic factors should diminish," they said. "Additionally,

alternative measures of inflation signal stronger underlying inflation, implying

that we are due for some reversal in the reported core figures."

     Meanwhile back at the ranch, the Fed has begun 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.

     Before any potential December rate hike, the Federal Reserve will have

started 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 next Agency

MBS taper buying plans in MBS Friday Oct. 27th at 3:00 p.m. ET. The taper

started in MBS with the Friday Oct. 13th 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

     - Taper background (https://www.newyorkfed.org/markets/opolicy/operating

_policy_170920) And 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.

     And U.S. and Japanese or Asian/Chinese buyers should be interested in

Treasuries auctions amid tame inflation, said traders. Some U.S. and Japanese

accounts would like to buy around the 2.40% 10-year note (vs. 2.386% late

Friday). But a major break above that level triggers Commodity Trading Advisers'

selling in Treasuries, said trader.

     On international risks, some traders expected at least some more mild

on/off safe-haven bid next week on the North Korea risk.

-- 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

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

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

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

23-Oct 1500 * Oct Treasury Allotments (p) --/-- b USD

24-Oct 0830 ** Oct Philadelphia Fed Nonmfg Index 33.2/--

24-Oct 0855 ** 21-Oct Redbook retail sales m/m -1.4%/--%

24-Oct 0945 *** Oct Markit Services Index (flash) 55.3/--

24-Oct 0945 *** Oct Markit Mfg Index (flash) 53.1/--

24-Oct 1000 ** Oct Richmond Fed Mfg Index 19/--

24-Oct 1300 pm ET US Tsy $26.0B 2-Year Note auction

24-Oct 16:40 pm ET US Tsy Cnslr Craig Phillip at SIFMA meeting, DC

25-Oct 0700 ** 20-Oct MBA Mortgage Applications 3.6%/-- %

25-Oct 0830 ** Sep durable goods new orders 2.0%/1.2%

25-Oct 0830 ** Sep durable new orders ex transport 0.5%/0.5%

25-Oct 0900 ** Aug FHFA Home Price Index 0.2%/-- %

25-Oct 1000 *** Sep new home sales 0.560M/0.555M

25-Oct 1030 ** 20-Oct crude oil stocks ex. SPR w/w -5.73M/-- m bbl

25-Oct 11:30am ET US Tsy $15.0B 2-Year FRN auction

25-Oct 13:00pm ET US Tsy $34.0B 5-Year Note auction

26-Oct 0830 ** 21-Oct jobless claims --/235K

26-Oct 0830 ** Sep advance goods trade gap -$62.9B/$-- b USD

26-Oct 0830 ** Sep advance wholesale inventories +1.0%/-- %

26-Oct 0830 ** Sep advance retail inventories +0.7%/-- %

26-Oct 0945 * 22-Oct Bloomberg comfort index --/--

26-Oct 1000 * Sep bldg permits revision --/-- m

26-Oct 1000 ** Sep NAR pending home sales index 106.3/--

26-Oct 1030 ** 20-Oct natural gas stocks w/w --/-- Bcf

26-Oct 1030 am ET MinnFed Kashkari:Opp/Inclusive Growth Conf, Minn

26-Oct 1100 ** Oct Kansas City Fed Mfg Index 17/--

26-Oct 1300 pm ET US Tsy $28.0B 7-Year Note auction

26-Oct 1630 ** 25-Oct Fed weekly securities holdings --/-- Trln USD

27-Oct 0830 *** Q3 GDP (adv) 3.1%/2.8%

27-Oct 0830 *** Q3 GDP Price Index 1.0%/1.6%

27-Oct 1000 *** Oct Michigan sentiment index (f) 101.1/101.0

27-Oct 1100 ** Q3 St. Louis Fed Real GDP Nowcast 3.13%/-- %

27-Oct 1115 ** Q3 NY Fed GDP Nowcast 2.6%/-- %

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

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