US Credit Mkt WkAhd:Traders Eye Fed, Trump/Tax & Fri Sept Jobs

--Traders Await Expected FOMC Taper Start In October

By Sheila Mullan

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

to see how the bond market digests Federal Reserve policy signals, Pres. Trump

tax/budget action and the key Friday September nonfarm payroll employment.

     BMO analyst Ian Lyngen said next week, "the fourth-quarter gets underway"

and "while the market awaits Friday's BLS employment report, we suspect

Treasuries will continue to find trading inspiration from the incoming political

headlines" from both Washington and overseas."

     "The Fed's active campaign to de-emphasize the importance of lagging

core-inflation has apparently been successful, as evidenced by the market's

ability to easily shrug off the weaker-than-expected August core-PCE print,"

said Lyngen. "With inflation now running at the slowest year-over-year pace

since October 2015, we're reminded that the last time core-PCE was this low, the

Fed hadn't even delivered its first rate-hike of the cycle."

     He added "the FOMC has now delivered the fourth hike of the cycle and

pulled off the balance sheet taper sans tantrum, and inflation is back to the

initial departure point. Coincidence? The Fed appears to be convinced that it

is."

     The Fed itself could be a hot conversation topic. Treasuries Friday saw dip

buying after a tame core August PCE price inflation reading then sold off on

Washington Post and Wall Street Journal stories saying US Pres. Donald Trump met

with former Fed Gov. Kevin Warsh about a potential Fed Chair post.

     But some traders bought the dips as the Trump administration later said the

process is still ongoing to chose a Fed Chair, and Fed Chair Janet Yellen and

two others bankers are also candidates. Treasuries also ebbed on a higher MNI

Chicago report.

     Some observers did not particularly like Warsh.

     But others proved raving fans.

     Tom di Galoma, managing director of government trading and strategy at

Seaport Global Holdings, believes "former Fed Gov. Kevin Warsh will be the next

Fed Chairman. His wife is a wealthy heir to the Estee Lauder fortune, and his

ties to Trump are quite strong. He served in the George W. Bush administration

and is known to dislike unconventional moves like "Quantitative Easing."

     "I am looking for no rate move this December, however with a new Fed Chair

such as Warsh, rate hikes in 2018 could be fairly consistent with market theme

of three hikes in 2018," di Galoma added.

     John Herrmann, director of US rate strategy at MUFG Securities, approved of

Warsh as a potential Fed chair. "While at Stanford University in 2012-2013,

Warsh had keyed into a potential "flaw" in the Fed's then Quantitative Easing

program: that then-Chairman Bernanke's financially engineered 'wealth effect'

might not trickle down through the remainder of the economy, thereby failing to

support significant growth in the economy, in the labor force and in consumer

inflation," said Herrmann.

     "Warsh's key insight was quite to the contrary of Bernanke's and Yellen's

thinking at the time, and Warsh's criticism was opposite of the consensus view

inside the FOMC and versus the Fed Staff's Economic Projections," Herrmann said.

"Kevin keyed into these Q/E flaws some 5 years ago, back in 2012-2013, and he

stuck his neck out on those matters," he said.

     "Now here it is 5-6 years later, and all of Warsh's criticisms and

reservations have been borne out," said Herrmann. "In addition to the flaws over

ZIRP and excessive Q/E, Warsh had argued that the Fed had subjected the economy

to excessive regulation. Warsh had predicted that all of those things would hold

back the economy, and it did."

     Herrmann added, "I know Warsh will be more hawkish and will normalize

interest rates over 2-3 years and will continue to exit the balance sheet."

     Herrmann said "many of Warsh's criticisms and proposals are focused" on

"returning America closer to its growth history." The US needs to "get back to

the good old-fashioned virtuous growth cycle: a model that emphasizes organic

business growth, business innovation and investment that spurs productivity

growth and worker take-home pay, household formation and homeownership and that

all will feed back into the economy," he said.

     "The economy needs greater dynamism, it needs new start-ups, greater

business formation, more competition, a greater emphasis upon economic vigor,"

he added. "Bernanke and Yellen's emphasis upon Q/E and corporate financial

engineering definitely boosted stocks' valuations, but it created a stagnant

economy, a weakened and depleted labor force along with a huge widening of the

personal income and wealth gaps."

     The Fed will start its taper/Fed balance sheet reduction program in October

as it whittles down its huge $4.5 trillion Fed balance sheet, which includes

$4.2 trillion in Treasuries and Mortgage-Backed Securities. The Fed bought bonds

to alleviate the market tightness since the financial crisis of 2008-2009, and

will let its Treasuries and MBS gradually run off. 

     Credit Suisse economists said "next week's highlights" are the September

"employment report and ISM manufacturing." They added that "the September

payrolls release is likely to be impacted by recent natural disasters. We have

reduced our expectations for job gains this month by around 150,000 due to

hurricane disruptions and we forecast jobs growth of just 30,000" but with

"extraordinarily high" uncertainty. 

     Bank of America/Merrill Lynch economists Ethan Harris expected an 80,000

September jobs gain, a 4.4% jobless rate and 0.3% avg hourly earnings gain.

     On international risks, some still expected there could be at least mild

safe-haven bid next week on the lingering North Korea risk. Treasuries should

see foreign exchange-tied buying by black box hedge funds if the U.S. dollar

weakens vs. the Japanese yen, and reverse selling if the U.S. dollar firms vs.

the 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

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

02-Oct 0945 *** Sep Markit Mfg Index (final) 53.0/--

02-Oct 1000 *** Sep ISM Manufacturing Index 58.8/58.0

02-Oct 1000 * Aug construction spending -0.6%/0.4%

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

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

02-Oct 1400 Dal Fed Kaplan guided Q&A/Fed Dialogue Lunch El Paso TX Q/A

03-Oct - *** Sep NA-made light vehicle sales SAAR 12.3M/13.6M-- M

03-Oct 0830 Fed Gov Powell:Regulatory Reform;Reuters Conversatn DC Q/A

03-Oct 0855 ** 30-Sep Redbook retail sales m/m 0.0%/-- %

03-Oct 0945 * Sep ISM-NY current conditions 56.6/--

04-Oct 0700 ** 29-Sep MBA Mortgage Applications -0.5/-- %

04-Oct 0815 *** Sep ADP private payrolls 237K/--Kk

04-Oct 0945 *** Sep Markit Services Index (final) 55.1/--

04-Oct 1000 *** Sep ISM Non-manufacturing Index 55.3/55.4

04-Oct 1000 * Oct help-wanted online ratio 1.17/--

04-Oct 1030 ** 29-Sep crude oil stocks ex. SPR w/w -1.85M/-- m bbl

04-Oct 1500 StL Fed Bullard welcome remarks at Comm Bkg St. Louis

04-Oct 1515 Fed Chair Yellen open remarks Comm Bkg conf St.Louis MO

05-Oct 0730 * Sep challenger layoff plans 5.1%/-- %

05-Oct 0830 ** 30-Sep jobless claims --/270K

05-Oct 0830 ** Aug trade balance -$43.7B/-$42.7B

05-Oct 0910 Fed Gov Powell on Tsys/TMPG at TMPG Conf in NY; Q/A

05-Oct 0915 SF Fed Williams; keynote spch Comm Bkg conf St. Louis

05-Oct 0930 Phil Fed Harker:Investg in Amer Wrkfrce Conf Austin TX Q/A

05-Oct 0945 * 01-Oct Bloomberg comfort index --/ --

05-Oct 1000 ** Aug factory new orders -3.3%/0.9%

05-Oct 1000 ** Aug factory orders ex transport 0.5%/-- %

05-Oct 1030 ** 29-Sep natural gas stocks w/w --/-- Bcf

05-Oct 1500 * Sep Treasury STRIPS Holdings --/-- b USD

05-Oct 1630 ** 04-Oct Fed weekly securities holdings --/-- t USD

05-Oct 1630 KC Fed George:Investg in Amer Wrkfrce Conf Austin TX

06-Oct 0830 *** Sep nonfarm payrolls 156K/78K

06-Oct 0830 *** Sep private payrolls 165K/74K

06-Oct 0830 *** Sep unemployment rate 4.4%/4.4%

06-Oct 0830 *** Sep average hourly earnings 0.1%/0.3%

06-Oct 0830 *** Sep average workweek, all workers 34.4/34.4 hrs

06-Oct 0915 AtlFed Bostic: Investg in Amer Wrkfrce Conf Austin TX Q/A

06-Oct 1000 ** Aug wholesale inventories 0.6%/-- %

06-Oct 1000 ** Aug wholesale sales -0.1%/-- %

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

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

06-Oct 1215 NY Fed Dudley on Mon Pol Outlk/Educatn Brooklyn, NY Q&A

06-Oct 1245 Dall Fed Kaplan at Investg in Amer Wrkfrce Conf Q/A

06-Oct 1350 StL Fed Bullard on US Living Standards in St.Louis

06-Oct 1500 * Aug consumer credit $18.5B/$14.1B

07-Oct 1145 Boston Fed Rosengren at 8th Intl Atl Econ Conf in Montreal

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

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