US Credit Mkt WkAhd: Traders Eye Jobs, PCE, Refundng,Korea/Jpn

By Sheila Mullan 

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

things next week: U.S. economic data such as the June personal consumption

expenditure (PCE) Tuesday and key US nonfarm payroll employment out next Friday.

But the market will also watch geopolitics after North Korea reportedly fired a

missile into the sea near Japan Friday.

     Traders will especially look at inflation clues in the PCE report, as that

is the favored U.S. inflation gauge for the Fed these days. Many say PCE is a

big deal, because the Fed is watching that inflation gauge.

     "The PCE looms large as the Fed cares more and more about inflation, so the

markets should care more and more about that inflation gauge," said one

observer.

     A veteran trader agreed. "The job report is the biggest thing, but the

market is obsessed with inflation," he said. "So, you got PCE on Tuesday. That

is the 'it" number, the one the Fed looks at."

     Most traders also agree that the Friday July jobs report is key, but then

what's next in importance is subject to debate. The MNI poll of economists had a

186,000 median July jobs gain estimate. "We expect payrolls growth to maintain

its strong trend in July, with headline job gains coming in at 210K," said

Credit Suisse economists.

     "Leading indicators for the labor market have been broadly positive in

recent months," said the economists. "We expect the unemployment rate to drop to

4.3% after ticking up slightly in June. We expect wage growth can rise somewhat

in the months ahead and forecast a small pickup to 0.3% MoM in July's report.

However, due to a strong base effect, this solid monthly reading would actually

cause the YoY average hourly earnings growth to slip to 2.4%."

     And others said the month-end period on Monday, July 31st, will be a

interesting for markets. Wells Fargo director in rate strategy Boris Rjavinski

and head of rate strategy Michael Schumacher expected that into/around the

month-end, there would be selling of $6.0 billion in stocks vs. buying of $5.0

billion in bonds.

     The Wells Fargo strategists expected "modest quarter-end pension activity,"

at the month-end. "Equities outperformed domestic bonds in July with domestic

large cap up about 2.5% and Emerging Markets equity index up as much as 6.5%

month-to-date," they said. "The broad domestic IG bond index that often serves

as a good proxy for a bulk of pension fixed income portfolios is close to flat

on the month."

     They said "while Emerging Market stocks beat bonds by a significant margin,

they typically get smaller allocation than domestic stocks in pensions

portfolios. Furthermore, many pensions only rebalance at quarter-end.

Consequently, we project modest rebalancing needs for domestic defined benefit

pensions: about $6 billion selling in stocks versus $5 billion purchases in

bonds at the moment."

     They added that it is "possible that the post-FOMC rally in bonds has

helped pensions alleviate some of the rebalancing needs." They added that "if

stocks and bonds diverge into month-end, pensions may find themselves in a

last-minute need to adjust asset allocations in their portfolios." So the Wells

Fargo analysts will "update the model closer to month-end in case there is a

meaningful change in pension rebalancing projections,"

     And it's likely black box hedge funds may still be buying Tsys on a weaker

U.S. dollar/yen vs. selling on a firmer dollar. The Treasury market may be just

"chopping around with the dollar, up and down," said one trader.

     Meanwhile of course markets will be watching North Korea and the general

stock market tone and US politics. Treasuries on Friday consolidated near

session high prices after the market improved on midday/late morning buying

after North Korea reportedly sent out a missile that landed in the sea near

Japan, said traders.

     FTN's Jim Vogel focused on the 5/30-year curve for guidance. "Without

near-term guidance from bellwether 10-years, intermediate portfolios should be

looking to the 5/30-year curve for important rate clues," Vogel said.

     He said "the 15-basis-point range on 5-years is roughly equivalent to a

daily barometer for the first two rate hikes of 2018. Near 1.80%, the forecast

is no rate hikes in 1H 2018. Up around 1.95%, the market sees one each at March

and June on the way to a total of three hikes next year. That's a

simplification, but it works well for understanding the market for the next two

months."

     Vogel also said that the 30-year bonds' "15-basis-point range captures i)

global fixed income sentiment; ii) a growing tail of the inflation trade; and

iii) asset allocation across risk assets." He said the 5/30-year at 105 basis

points "has room toward 102" basis points "without signaling any big change."

     And the Treasury also will announce its August refunding auctions of

3/10/30-year Treasuries and other debt-tied news on Wednesday at 8:30 a.m. ET.

"I suspect that Treasury will hold off making any major announcements" about

larger Treasury debt issuance in the August refunding statement, because the

debt limit has to be resolved before Treasury can ramp up issuance, in any

case," said Amherst Pierpont chief economist Stephen Stanley.

     "The big announcement seems more likely at the November refunding, but it

would probably be a wise idea for (US Treasury) debt managers to at least give

the markets a heads-up in August, that once the debt limit is extended, gradual

increases in bill and coupon auction sizes are likely," Stanley said.

     And Societe Generale analysts said that "central banks are torturing

investors" as a "cocktail of low rates and hesitant steps towards tighter

policies, with threatening macro data, all makes for tough investment choices."

     They added that "this regime of financial repression continues to pressure

valuations, pushing investors to take on more yield, duration or risk than is

reasonable by any standard. To avoid the pain of underperforming benchmarks,

investors are pushed into looking for meagre gains by trading the ranges just

now. They are unlikely to hold much beyond 3Q, suggesting longer value in

conditional trades."

     The Societe Generale analysts eyed the "debt ceiling vs. balance-sheet

unwinding" and quipped, "let the games begin." They said the Fed "is likely to

announce a change in its reinvestment policy at the September meeting. The debt

ceiling deadline in late September might throw a wrench in the Fed's plans. We

look at the debt ceiling playbook and trades likely to perform if the

negotiations are contentious. While we still favor summer carry trades, we

remain on guard, and hold 6-9m forward 5/30-year and 3-month forward 5/10-year

bear steepeners."

     They urged to hold a "neutral duration stance near term, and a bearish tilt

medium term." And they suggested to "add to 2-year forward 2/10-year conditional

bear flatteners."

-- Questions? sheila.mullan@marketnews.com 212-669-6432

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

-

-- Rating: *** most market sensitive, * least market sensitive

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

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

31-Jul 0900 * Jul ISM-Milwaukee Mfg Index 58.68/--

31-Jul 0945 ** Jul MNI Chicago PMI 65.7/61.0

31-Jul 1000 ** Jun NAR pending home sales index 108.5/--

31-Jul 1030 ** Jul Dallas Fed manufacturing index 15.0/ --

31-Jul 11:30am ET US Tsy $39B 13-week T-bill auction

31-Jul 11:30am ET US Tsy $33B 26-week T-bill auction

31-Jul 1500 * Jun farm prices 2.1%/-- %

01-Aug - *** Jul NA-made light vehicle sales SAAR 12.7M/13.1M

01-Aug 0830 ** Jul personal income 0.4%/0.4%

01-Aug 0830 ** Jul current dollar PCE 0.1%/0.1%

01-Aug 0830 ** Jul total PCE price index -0.1%/-- %

01-Aug 0830 ** Jul core PCE price index 0.1%/0.1%

01-Aug 0855 ** 29-Jul Redbook retail sales m/m -1.3%/-- %

01-Aug 0945 *** Jul Markit Mfg Index (final) 53.2/--

01-Aug 1000 *** Jul ISM Manufacturing Index 57.8/56.4

01-Aug 1000 * Jun construction spending 0.0/0.4%

01-Aug 1030 ** Aug Dallas Fed services index 10.1/--

02-Aug 0700 ** 28-Jul MBA Mortgage Applications 0.4%/-- %

02-Aug 0815 *** Jul ADP private payrolls 158K/--K

02-Aug 0830 US Treasury Aug. Quarterly Refunding Announcement

02-Aug 0945 * Jul ISM-NY current conditions 55.5/--

02-Aug 1000 * Aug help-wanted online ratio 1.24/--

02-Aug 1030 ** 28-Jul crude oil stocks ex. SPR w/w -7.2M/-- m bbl

02-Aug 11:00 am ET Cleveland Fed Mester at Comm Bkrs Assn Of Ohio Q/A

02-Aug 15:30 pm ET SF Fed Williams:MonPol/Sustnbl Grwth Las Vegas Q/A

03-Aug 0730 * Jul Challenger layoff plans -19.3%/-- %

03-Aug 0830 ** 29-Jul initial weekly jobless claims --/242K

03-Aug 0945 *** Jul Markit Services Index (final) 54.2/--

03-Aug 0945 * 30-Jul Bloomberg comfort index 48.6/--

03-Aug 1000 *** Jul ISM Non-manufacturing Index 57.4/56.9

03-Aug 1000 ** Jun factory new orders -0.8%/2.5%

03-Aug 1000 ** Jun factory orders ex transport -0.3%/--%

03-Aug 1030 ** 28-Jul natural gas stocks w/w --/-- Bcf

03-Aug 1630 ** 02-Aug Fed weekly securities holdings --/-- t USD

04-Aug 0830 ** Jun trade balance -$46.5B/-$44.5B

04-Aug 0830 *** Jul nonfarm payrolls 222k/186k

04-Aug 0830 *** Jul private payrolls 187k/190k

04-Aug 0830 *** Jul unemployment rate 4.4%/4.3%

04-Aug 0830 *** Jul average hourly earnings 0.2%/0.3%

04-Aug 0830 *** Jul average workweek, all workers 34.5/34.5 hrs

04-Aug 1100 ** Q3 St. Louis Fed Real GDP Nowcast --/-- %

04-Aug 1115 ** Q3 NY Fed GDP Nowcast --/-- %

04-Aug 1500 * Jul Treasury STRIPS Holdings -- -- b USD

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

[TOPICS: M$U$$$]