US Credit Mkt Wk Ahd: Traders Eye FOMC/Tighten, Future Hints?

--Traders Also Watch Tax Reform Negotiations

By Sheila Mullan

     NEW YORK  - Traders in the U.S. Treasuries will focus on next week's big

event, the Tuesday-Wednesday FOMC meeting, which is expected to result in a

25-basis-point rate hike. The meeting also includes the outgoing chair Fed Chair

Janet Yellen's news conference, which will be closely scanned for future policy

hints.

     Jefferies economists Ward McCarthy and Tom Simons said the "highlight of

the market calendar" will be the "FOMC meeting on Wednesday, but the ongoing and

careening nature of the tax reform negotiations will continue to be the primary

market driving force."

     "The busy data calendar will feature all three of the primary inflation

releases for November, in addition to retail sales and industrial production, as

well as the October TIC data," they said. They "project stable to firmer

inflation readings, solid retail sales and an uptick in production."

     JPM economist Michael Feroli expects the FOMC "will raise the fed funds

target range by 25 basis points" at its policy meeting, "taking it to

1.25-1.50%.

     "As this is also the overwhelming consensus expectation, the more

interesting development will be what the Committee signals about its 2018 policy

outlook," Feroli added. "In their last quarterly projection from September the

median committee participant expected three hikes next year. We think there are

about even odds that this increases to four expected hikes."

     David Rolley, global bond portfolio fund manager at Loomis Sayles & Co.,

said the Fed "won't upset any apple carts" when it tightens rates in December as

it is widely expected. Then he did not "think that the Fed has to do much more"

tightening afterward.

     The MNI PINCH calculation Friday afternoon showed a 100% rate hike

probability levels for the Dec. 13th rate hike.

     Loomis Sayles' Rolley said the "goal of the Fed's interest rate movement is

to get to the neutral interest rate" and so dampen inflation. He quipped the Fed

has "300 people who are paid to work watching economic conditions" and projected

it will want to get to its neutral interest rate around 2.5% to 3.0% without

upsetting markets.

     "If they manage that, that will be the first soft landing in American

history," he added. "So, let's wish them well. The odds are not in their favor."

     He added the market has had a long period of unusually low US interest

rates. "But no one should build a business model or business on a 0% interest

rate," he added. Asked by MNI if he feared the Fed might over-tighten, he did

not seem to think that was the danger, as he said the rate hike process has been

"glacially" slow so they could be "behind the curve."

     Traders noted current Fed Chair Yellen will be stepping down in February as

her term ends. "We are expecting continuity," said Loomis' Rolley of the new Fed

leadership of incoming Fed Chair Jerome Powell."

     TD analysts added the November 228,000 jobs report and 0.2% average hourly

earnings showed   "the story of robust job gains, low levels of slack and

elusive wage growth remains the same. As such, implications are limited for Fed

policy. We expect the Fed to take the next step in rate normalization next week,

followed by two more hikes in 2018."

     Credit Suisse economists expect the FOMC "to hike rates for a third time

this year at their December meeting. We will also receive an update of the

Summary of Economic Projections, which are likely to lean in a hawkish

direction," they said. "We expect median interest rate projections to remain

stable in 2018, 2020, and the longer run but the 2019 median dot could shift

higher. Risks are to the upside for the dots, with several participants of the

committee worried about low volatility, easy financial conditions, and the

likely passage of tax cuts."

     But CS analysts said "the policy statement is unlikely to mark a shift in

tone" while "Yellen's last press conference as Fed Chair is likely to reflect

her well-established views. We expect her to reiterate that the real neutral

rate is probably low (but subject to change over time) and gradual rate

increases are warranted. Along with the hike next week, we expect two Fed rate

hikes next year, in Q1 and Q2."

     Credit Suisse economists expect the Wednesday November CPI would be up

0.4%, while Core CPI Ex-Food/Energy will be up 0.2%; that Thursday 8:30am ET

November retail sales "likely increased 0.4% MoM in November despite falling

motor vehicle sales."

     And JPM's Michael Feroli said FOMC SEP economic forecasts are "likely to

show a lower unemployment rate than the September projections, and a generally

firmer outlook for GDP growth."

     Feroli said "both revisions should be directionally supportive of a

somewhat faster rate normalization path. Relative to the last post-meeting

statement, we don't anticipate any interesting changes in how next week's

statement describes the economy or monetary policy. Finally, the monthly caps on

the amount of balance sheet shrinkage should be increased by $10 billion per

month beginning in January, consistent with the previously-announced schedule."

     And traders will watch the Saudi Arabia/Iran/Lebanon news  and North Korea,

too. And Dec. 29 yearend could be volatile, as banks trim balance sheets,

keeping dollar funding in-house to fortify yearend earnings. 

     Also, Treasuries should see foreign exchange-tied buying by black box hedge

funds, if the U.S. dollar weakens against the Japanese yen, or selling if the

dollar firms, said traders. 

     Meanwhile, the Fed also gradually is reducing its $4.5 trillion balance

sheet ($4.2 trillion in U.S. Treasuries and Agency MBS.) The Federal Reserve

started its taper/Fed balance sheet reduction program in October to whittle down

its huge balance sheet of bonds bought to alleviate market tightness since the

2008-2009 financial crisis.

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

slice its debt issuance to cope with such a Treasuries runoff. The taper started

in MBS with the Friday Oct. 13 announcement on MBS rolldowns, and started at the

end of October in Treasuries. 

     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) 

     -- 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

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

- 11-Dec 1000 ** Oct JOLTS job openings level 6093K/--k

- 11-Dec 1000 ** Oct JOLTS quits rate 2.2%/-- %

- 11-Dec 1000 * Nov ETI 135.57/--

- 11-Dec 1100 ** Dec NY Fed expectations survey --/--

- 11-Dec 1130 am ET US Tsy $39B 6-Month Bill auction competv bid deadline

- 11-Dec 1130 am ET US Tsy $24B 3-Year Note auction

- 11-Dec 1300 pm ET US Tsy $45B 3-Month Bill auction

- 11-Dec 1300 pm ET US Tsy $20B 10Y Note Reopening auction

- 12-Dec Start of two-day FOMC policy meeting in Washington

- 12-Dec 0600 ** Nov NFIB Small Business Index 103.8/--

- 12-Dec 0830 *** Nov Final Demand PPI 0.4%/0.3%

- 12-Dec 0830 *** Nov PPI ex. food and energy 0.4%/0.2%

- 12-Dec 0830 *** Nov PPI ex. food, energy, trade 0.2%/--%

- 12-Dec 0855 ** 09-Dec Redbook retail sales m/m -0.9%/--%

- 12-Dec 1100 ** Nov Kansas City Fed LMCI 0.52/--

- 12-Dec 1300 pm ET US Tsy $12B 30Y Bond Reopening auction

- 12-Dec 1400 ** Nov Treasury budget balance -$63.2B/-$135B

- 13-Dec Final day of FOMC policy meeting in Washington

- 13-Dec 0700 ** 08-Dec MBA Mortgage Applications 4.7%/-- %

- 13-Dec 0830 *** Nov CPI 0.1%/0.4%

- 13-Dec 0830 *** Nov CPI Ex Food and Energy 0.2%/0.2%

- 13-Dec 1030 ** 08-Dec crude oil stocks ex. SPR w/w -5.6M/--M bbl

- 13-Dec 1400 ***FOMC monetary policy announcement statemeent, Washington

- 13-Dec 1430 ***Fed Chair Yellen press conference in Washington

- 14-Dec 0830 ** 09-Dec jobless claims 236K/239K

- 14-Dec 0830 *** Nov retail sales 0.2%/0.3%

- 14-Dec 0830 *** Nov retail sales ex. motor vehicle 0.1%/0.7%

- 14-Dec 0830 *** Nov retail sales ex. mtr veh, gas 0.3 -- %

- 14-Dec 0830 ** Nov imports price index 0.2%/0.8%

- 14-Dec 0830 ** Nov exports price index 0.0 --/ %

- 14-Dec 0945 *** Dec Markit Services Index (flash) 54.5/--

- 14-Dec 0945 *** Dec Markit Mfg Index (flash) 53.9/--

- 14-Dec 0945 * 10-Dec Bloomberg comfort index 52.3/ --

- 14-Dec 1000 * Oct business inventories 0.0%/-0.1%

- 14-Dec 1030 ** 08-Dec natural gas stocks w/w -- -- Bcf

- 14-Dec 1630 ** 13-Dec Fed weekly securities holdings -- -- t USD

- 15-Dec 0830 ** Dec Empire Manufacturing Index 19.4/17.8

- 15-Dec 0915 *** Nov industrial production 0.9%/0.3%

- 15-Dec 0915 *** Nov capacity utilization 77.0%/77.2%

- 15-Dec 1000 ** Dec Atlanta Fed inflation 2.0%/-- %

- 15-Dec 1100 ** Q4 St. Louis Fed Real GDP Nowcast --%/-- %

- 15-Dec 1115 ** Q4 NY Fed GDP Nowcast --/-- %

- 15-Dec 1600 ** Oct net TICS flows --/-- b USD

- 15-Dec 1600 ** Oct long term TICS flows --/-- b USD

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

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