US CreditMkt WkAhd: Traders Eye Tax Plan, Flynn/Trump,Nov Jobs

--Traders Also Watch Dec. 8th US Debt Limit Expiration 

By Sheila Mullan

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

monitoring US Congress's action on the Republican Senate tax plan and preparing

for Friday's November jobs report.

     Plus the market will be watching U.S. politics after former Trump National

Security Advisor Michael Flynn pled guilty Friday to lying to federal agents,

said news reports. Flynn also said he will cooperate with Special Counsel Robert

Mueller and would testify against US Pres. Donald Trump.

     Meanwhile the Trump White House said that Flynn's guilty please doesn't

implicate anyone "other than Mr. Flynn." White House lawyer Ty Cobb said that

Flynn was a "former Obama administration official" and that he had served for

"25 days during the Trump administration."

     However the Flynn-tied uncertainty spurred a safe-haven rally in the U.S.

Treasuries, and sent U.S. stocks cratering amid massive risk-off sales in US

stocks on Flynn news, while gold surged, and the U.S. dollar fell.

     BMO's Ian Lyngen said next week, the US economic "fundamental data will

once again take a backseat to politics as the Russia probe comes back into focus

and the Dec. 8th continuing resolution (debt limit) expiration quickly

approaches. The current House proposal offers nothing more than a can-kicking

concession to extend the deadline for a broader budget agreement to Dec. 22nd

and even that might prove challenging to get through the Senate."

     Lyngen added that "whether the political brinkmanship brings about a

partial government shutdown before a budget deal is reached is an open question,

but we think the odds are better than even that we see a 'social' shutdown, in

which no major disruptions occur and the market is content to dismiss the hiccup

as politics as usual. After all, we haven't heard much from the White House on

immigration reforms or funding the wall on the US/Mexico border in a while."

     Later Friday, the Treasuries focused back to the Senate, where most

Republican holdouts on the GOP tax bill appeared to be satisfied with various

tax bill compromises. GOP leaders said they had votes to pass the bill, which

they did late Friday night. Democratic senators sought to delay the bill via

various procedural moves but did not succeed, said news reports.

     Barclays economists said the US tax plan "seems to have moved slightly

closer to becoming a reality. If it passes, we believe the Fed would likely

upgrade its rate hike path."

     The Treasuries market faced other urgent issues: the temporary lifting of

the debt ceiling will expire on Dec. 8th. 

     BMO's Ian Lyngen said on debt limit/government shutdown prospects that

"timing of the shutdown risk becomes a bit more challenging to narrow down. And

while the magnitude of any market impact of a partial closure into yearend might

differ" from one in first quarter 2018, "the prospects are not going to derail

the FOMC's plan to hike rates later this month" and futures are "currently

pricing in 24 bp of tightening by year-end, implying a 96% probability that

Yellen's last act as Fed Chair will be to deliver the fifth hike of the

tightening campaign."

     He added "assuming that the Fed's 2.9% terminal rate holds (admittedly, a

big assumption), that means that after Dec. 13th, the FOMC will be roughly half

way through its tightening cycle."

     Credit Suisse analysts led by James Sweeney said the week's "highlights"

will be Friday's November US employment report and the preliminary December

University of Michigan consumer sentiment.

     They expected a "second strong month for payrolls growth as the recovery

from Hurricanes Harvey and Irma likely continued into November. We estimate the

hurricane recovery added around 125,000 jobs in October and anticipate a smaller

20-40,000 boost to November employment growth.

     "Smoothing out the weather-related noise, our forecast is consistent with

trend job gains around 160,000," they said. "The unemployment rate is likely to

tick down slightly to 4.0%. Average hourly earnings disappointed in October, and

we expect a reading of just 0.1% MoM growth in November. This would lift the

year/over/year reading slightly to 2.5%."

     Credit Suisse analysts expect Friday's University of Michigan consumer

sentiment "to tick up slightly in December to 99.0 from 98.5 in November. With

the labor market tightening, improved prospects of a tax reform bill, and

positive Black Friday anecdotes, consumers appear to be more confident heading

into the holiday season."

     TD analysts Priya Misra and Pooja Kumra said on the EUR/USD cross-currency

basis that "even though we expect some tightening in basis once the year-end

turn is over, we think it would only be temporary. There are two factors that

should drive higher the cost of US dollar funding in first half 2018: 1)  A

pickup in (US) bill supply after the debt ceiling is raised/suspended and 2) USD

repatriation of overseas profits which should remove some US dollars from the

credit markets."

     Traders said that due to the trillion-dollar bond-buying spree during

post-crisis Quantitative Easing, the 5/30-year Treasuries curve flattening

and/or any potential inversion would not have the implication that a recession

loomed. "This is a very different environment," said one trader.

     Also, the Treasury said it will favor increasing front end/bill debt

issuance once it normalizes auction issuance after a debt ceiling situation

solution.

     Also the Dec. 4th week should see heavy U.S. dollar high-grade corporate

bond issuance.

     And traders will watch the Saudi Arabia/Iran/Lebanon nexus 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.

     Meanwhile, the Fed has begun gradual reduction of its $4.5 trillion balance

sheet ($4.2 trillion in U.S. Treasuries and Agency MBS). Before any potential

December rate hike, the Fed started its taper/Fed balance sheet reduction

program in October to whittle down  Treasuries and MBS. Fed bought bonds to

alleviate market tightness since the financial crisis of 2008-2009. Now it will

let both Treasuries and MBS run off. Once tapering begins, the Treasury would

have to figure out how to slice its debt issuance to cope with such a Treasuries

runoff.

Below is monthly Fed reinvestment cap schedule:

--- 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

-- Questions? sheila.mullan@marketnews.com 212-669-6432; also contribution from

Giovanny Guerrero of MNI/NY.

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

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

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

- 04-Dec 1000 ** Oct factory new orders 1.4%/-0.3%

- 04-Dec 1000 ** Oct factory orders ex transport 0.7%/-- %

- 04-Dec 1130am ET US Tsy $42.0B 13-Week Bill auction

- 04-Dec 1130am ET US Tsy $36.0B 26-Week Bill auction

- 05-Dec 0830 ** Oct trade balance -$43.5B/-$46.7B

- 05-Dec 0855 ** 02-Dec Redbook retail sales m/m -0.2%/-- %- 

- 05-Dec 0945 *** Nov Markit Services Index (final) 54.7/--

- 05-Dec 1000 Fed Chr Nominee Powell confirmation hearing: Sen Bkg Panel-

- 05-Dec 1000 *** Nov ISM Non-manufacturing Index 60.1/59.0

- 05-Dec 1000 ** Dec IBD/TIPP Optimism Index 53.6/--

- 05-Dec 1000 * Q2 QCEW employment -- -- m

- 05-Dec 1130am ET US Tsy $20.0B 52-Week Bill auction ***

- 06-Dec 0700 ** 01-Dec MBA Mortgage Applications -3.1%/-- %

- 06-Dec 0815 *** Nov ADP private payrolls 235K/-- k

- 06-Dec 0830 ** Q3 non-farm productivity (f) 3.0%/3.3%

- 06-Dec 0830 ** Q3 unit labor costs (f) 0.5%/0.3%

- 06-Dec 1000 * Dec help-wanted online ratio 1.21/--

- 06-Dec 1030 ** 01-Dec crude oil stocks ex. SPR w/w -3.43M/-- m bbl

- 06-Dec 1500 * Nov Treasury STRIPS Holdings --/ -- b USD

- 07-Dec 0730 * Nov challenger layoff plans -3.0%/-- %

- 07-Dec 0830 ** 02-Dec jobless claims 238K/241K

- 07-Dec 0830 NY Fed Dudley welcome chat Higher Educn Fin conf, NY

- 07-Dec 0945 * 03-Dec Bloomberg US consumer comfort index 51.6/--

- 07-Dec 1000 * Q3 Service Revenue --/-- %

- 07-Dec 1030 ** 01-Dec natural gas stocks w/w --/-- Bcf

- 07-Dec 11am ET Tsy announce 3/10/30Y cpn auctns (On Dec11/Dec11/Dec12)

- 07-Dec 11am ET Tsy announces next wk 1M,3M Bill auctions (for Dec 11th)

- 07-Dec 1130am ET: NY Fed VP Stiroh keynote: Fincl Serv Ethics conf, NY

- 07-Dec 1200 * Q3 domestic non-financial debt --/-- %

- 07-Dec 1500 * Oct consumer credit $20.8B/$16.2B

- 07-Dec 1500 * Nov Treasury Allotments (final) --/-- b USD

- 07-Dec 1630 ** 06-Dec Fed weekly securities holdings --/-- t USD

- 08-Dec 0830 *** Nov nonfarm payrolls 261K/204K

- 08-Dec 0830 *** Nov private payrolls 252K/200K

- 08-Dec 0830 *** Nov unemployment rate 4.1%/4.1%- 

- 08-Dec 0830 *** Nov average hourly earnings 0.0%/0.2%

- 08-Dec 0830 *** Nov average workweek, all workers 34.4/34.4 hrs

- 08-Dec 1000 ** Oct wholesale inventories 0.3%/-- %

- 08-Dec 1000 ** Oct wholesale sales 1.3%/-- %

- 08-Dec 1000 *** Dec Michigan sentiment index (p) 98.5/98.9

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

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

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

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