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Weekly global market focus
Washington makes little progress thus far to avert a government shutdown
U.S. Q4 earnings season begins
U.S. stock market continues to see boost from tech stocks and earnings optimism
10-year T-note yield consolidates below 9-3/4 month high

Weekly global market focus — The U.S. markets this week will focus on (1) negotiations in Washington to prevent a U.S. government shutdown a week from Friday (Jan 19) when the current continuing resolution expires, (2) any news on new Fed appointments and the timing of Jerome Powell’s Senate confirmation hearing as the new Fed chair, (3) Fedspeak with six speeches this week by various Fed officials, (4) a busy economic schedule late in the week with the PPI report on Thursday and with the Dec CPI and retail sales reports on Friday, (5) the beginning of Q4 earnings season with seven of the S&P 500 companies reporting, (6) this week’s $56 billion Treasury coupon package, (7) oil prices, which backed off from last Thursday’s 2-3/4 year nearest-futures high but still closed the week up 1.69%, and (8) ongoing geopolitical tensions with North and South Korea expected to hold talks on Tuesday to cool tensions during the winter Olympics in South Korea.

In Europe, the focus is on continued exploratory talks this week between the Christian Democratic Union and the Social Democrats as Germany Chancellor Merkel seeks a stable coalition government. There is a full slate of Eurozone economic reports this week. The ECB on Thursday will release the account of the Dec 14 ECB policy meeting. In the UK, Prime Minister May is planning a cabinet reshuffle as soon as today, according to various media reports.

In Asia, the focus will be on stocks as the Nikkei index rose to a 26-year high late last week while the Shanghai Composite index rose to a new 1-1/2 month high. Over the weekend, China’s Dec foreign-exchange reserves rose by $20.7 billion to $3.14 trillion, which was positive for the yuan since it illustrated that the Chinese government has capital flight under control.

China’s Dec CPI report on Tuesday night is expected to strengthen to +1.9% y/y from Nov’s +1.7% and thus keep the pressure on the PBOC for further small rate hikes. However, the Shanghai 1-year interbank rate last week eased slightly to 4.725% from the recent 2-3/4 year high of 4.763%, which was positive for Chinese bond prices. The Chinese 10-year bond yield last week strengthened a bit to 3.928%, but remained within its 5-week sideways range.

Washington makes little progress thus far to avert a government shutdown — Congress has only until a week from Friday to pass new spending authority and prevent a government shutdown when the current continuing resolution expires on Jan 19. Republicans and Democrats are at loggerheads on a range of issues including top-line funding for defense and non-defense spending, a dreamer solution, border wall funding, the bipartisan Obamacare fix that was promised to Senator Collins, an extension of foreign surveillance authority, disaster relief, and other issues. There was little progress on these contentious issues last week. It remains unclear at this point whether Jan 19 will be a show-down date with the real threat of a government shut-down, or whether Congress will simply just pass another CR extension.

The markets continue to watch for any new Fed appointments by President Trump. Mr. Trump needs to appoint a new Fed Vice Chair and two more Fed governors to fill an open chair and Ms. Yellen’s Governor seat when she steps down in early February. Meanwhile, Congress needs to conduct its confirmation process for Jerome Powell as the new Fed Chair and for Marvin Goodfriend as a Fed Governor.

U.S. Q4 earnings season begins — Q4 earnings season begins in earnest this week with seven of the S&P 500 companies scheduled to report. Notable reports include Lennar on Wednesday, Delta Airlines on Thursday, and JPMorgan Chase, Wells Fargo and Blackrock on Friday.

The market consensus is for Q4 SPX earnings growth of +11.9% (+9.4% ex-energy), which would be a substantial improvement from Q3’s growth +6.7%, according to Thomson Reuters I/B/E/S. Looking ahead, the market is expecting very strong earnings growth in 2018 of +13.1% in Q1, +12.3% in Q2, +14.0% in Q3, and +12.5% in Q4. On a calendar year basis, the market is expecting SPX earnings growth of +12.9% in 2018, up from +12.0% in 2017.

U.S. stock market continues to see boost from tech stocks and earnings optimism — The S&P 500 index last Friday rallied to a new record high and closed the week up +2.60%. Stocks continue to see strength from (1) expectations for strong earnings growth of +12.9% this year due in part to the tax-cut bill, and (2) renewed leadership from tech stocks. The NYMEX FANG+ index last week showed a +5.89% rally that out-performed the SPX rally by 3.29 points. Stocks were also supported by last Friday’s weaker-than-expected Dec payroll report of +148,000, which indicated less pressure on the Fed for rate hikes in 2018.

10-year T-note yield consolidates below 9-3/4 month high — The 10-year T-note yield closed last week up +7.1 bp at 2.476%, but remained mildly below the late-Dec 9-3/4 month high of 2.501%. T-note yields continue to see upward pressure from increased inflation expectations and from increased expectations for Fed rate hikes in 2018. The 10-year breakeven inflation expectations rate last week rose by another +5.3 bp to 2.036% and posted a new 9-3/4 month high.

Meanwhile, expectations for Fed tightening in 2018 continued to move higher last week despite Friday’s weak payroll report. The Dec 2018 fed funds futures contract last week closed up +5.5 bp at 1.935%, indicating market expectations for 56 bp of Fed tightening this year, the largest amount of tightening expected yet. The T-note market will be keying heavily on this Friday’s Dec CPI report, which is expected to edge lower to +2.1% y/y from Nov’s 2.2% although the core CPI is expected to be unchanged at +1.7% y/y.

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