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Weekly market focus
Congress aims for tax vote next week
Treasury sells 3-year and 10-year T-notes today
U.S. stock market gains support on firm payroll report

Weekly market focus — The U.S. markets this week will focus on (1) the Tue/Wed FOMC meeting where the unanimous market expectation is for a +25 bp rate hike to 1.25-1.50%, (2) ongoing negotiations among Republicans for the tax reform bill in the run-up to a likely vote next week on the bill, (3) whether there are any spill-over disruptions as bitcoin futures start trading today at the CBOE, (4) the U.S. inflation outlook with Wednesday’s Nov CPI expected to move higher to +2.2% y/y from Oct’s 2.0% but with the core CPI expected to be unchanged at +1.8% y/y, (5) the Treasury’s sale on Monday and Tuesday of $56 billion of 3-year, 10-year and 30-year securities, (6) another light earnings week with only eight of the S&P 500 companies scheduled to report including Costco, Adobe and Oracle on Thursday, and (7) another round of NAFTA talks this week in Washington with chief technical negotiators.

The European markets this week will focus mainly on Thursday’s ECB and BOE policy meetings, which are both expected to produce unchanged interest rate decisions. German coalition talks will begin this week after the Social Democrats last week agreed to enter exploratory talks with German Chancellor Merkel’s party for a new grand coalition government. EU leaders at their summit on Thursday/Friday will agree that the Brexit negotiations can move ahead for a transition period and a trade agreement after Prime Minister May last Friday came up with a sufficient offer on divorce issues.

In Asia, the focus will be on whether the Asian stock markets can recover from recent weakness. The Nikkei index recovered sharply late last week from a 1-month low, but the Shanghai Composite closed the week just mildly above last Wednesday’s 3-3/4 month low. The Chinese 10-year bond yield last Friday closed at 3.945%, comfortably below the recent 3-year high of 4.035%. This Wednesday night’s Chinese economic reports are expected to be solid with the Nov industrial production report expected to be unchanged at +6.2% y/y and Nov retail sales expected to strengthen to +10.3% y/y from Oct’s +10.0%.

Congress aims for tax vote next week — House and Senate conferees will convene their tax-bill conference committee this week and hold their only public hearing on Wednesday. The negotiations this week on ironing out the differences between the House and Senate versions of the tax bill will mostly proceed behind closed doors. President Trump will reportedly deliver a speech on Wednesday making closing arguments for the tax bill. The latest betting odds are 68% for a corporate tax cut by year-end and 90% for a cut by March 31, 2018, according to PredictIt.org.

Republican leaders effectively have until next Friday (Dec 22) for Congress to approve the tax bill if they plan to have a bill on President Trump’s desk before their self-imposed deadline of year-end. Congress by next Friday (Dec 22) must also pass a new continuing resolution (CR) or there will be a partial U.S. government shutdown.

Republican leaders are under additional pressure to get a tax bill approved by next Friday because a new Senator from Alabama will be seated soon in the Senate. The election for the Alabama Senate seat will be held this Tuesday. The new Alabama Senator is not expected to be sworn in until early January, but if the certification process occurs much more quickly then expected, then the new Alabama Senator could be sworn in as early as Dec 23, reinforcing next Friday’s effective deadline for a tax vote.

If Democrat Doug Jones wins the election, then the Republicans’ majority in the Senate will be cut to 51-49 from 52-48, which would make it more difficult for them to pass legislation. Even if Republican Roy Moore wins the election, Senate Majority Leader McConnell will still have problems because Mr. Moore is not expected to toe the line for established Republican positions. The bottom line is that Republican leaders are under huge pressure to get a tax bill approved by next Friday.

Treasury sells 3-year and 10-year T-notes today — The Treasury today will sell $24 billion of 3-year T-notes and $20 billion of 10-year T-notes. Today’s 10-year T-note auction will be the first reopening of last month’s 2-1/4% 10-year note of Nov 2027. Today’s 3-year T-note was trading at 1.92% in when-issued trading late last Friday afternoon and today’s 10-year T-note was trading near 2.38%. The 12-auction averages for the 10-year T-note are: 2.44 bid cover ratio, $18 million in non-competitive bids, 5.3 bp tail to the median yield, 14.4 bp tail to the low yield, 41% taken at the high yield, and 63.8% taken by indirect bidders (higher than the coupon average of 61.8%).

U.S. stock market gains support on firm payroll report — The U.S. stock market last Friday closed moderately higher after the Nov payroll report of +228,000 was stronger than market expectations of +197,000, which provided further confidence in the strength of the U.S. labor market and the overall economy. March 10-year T-notes last Friday closed little changed, undercut by the +228,000 payroll report but supported by the tepid wage growth and the weaker-than-expected consumer sentiment report of -1.7 points. The Nov average hourly earnings report rose to +2.5% y/y from +2.3%, but was weaker than expectations for a rise to +2.7%.

The U.S. markets this week will focus mainly on the tax bill and also whether the FOMC at its meeting will signal a strengthened resolve for three rate hikes in 2018, which is more hawkish than the market’s expectation for only about two rate hikes. The T-note market will be sensitive to inflation concerns with this week’s PPI and CPI reports. The stock market will continue to key heavily on tech stocks, which rebounded higher late last week. The NYFANG index last week closed +0.69% higher after correcting lower last week by a total of -8.3% from the late-Nov record high.

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