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  • President Trump’s cancelation of his South America trip raises concerns about near-term Trump moves
  • President Xi’s speech is well received by the markets but rocky negotiations likely await
  • March 20-21 minutes likely to show hawkish FOMC
  • U.S. CPI is expected to show firm inflation pressures
  • 10-year T-note auction to yield near 2.80% 
  • Weekly EIA report

 

 

President Trump’s cancelation of his South America trip raises concerns about near-term Trump moves — President Trump on Tuesday canceled his trip for later this week to attend the Summit of America’s in Peru.  The stated reason was that Mr. Trump wanted to stay in the U.S. to monitor the Syrian situation, which by itself could indicate that the U.S. is planning a much larger military strike on Syria than it launched a year ago.  However, there were media reports on Tuesday that the cancelation could also be linked to President Trump’s consideration of firing Deputy Attorney General Rosenstein and/or Attorney General Jeff Sessions, which could spark a constitutional crisis and a significant drop in the U.S. stock market.

President Xi’s speech is well received by the markets but rocky negotiations likely await — The markets were pleased by Chinese President Xi Jinping’s conciliatory speech on Tuesday in which he pledged a “new phase of opening up.”  The headline offer was to reduce China’s 25% tariff on imported autos.  President Trump welcomed President Xi’s speech by tweeting, “Very thankful for President Xi of China’s kind words on tariffs and automobile barriers… also, his enlightenment on intellectual property and technology transfers.”

The important thing for the markets was that President Xi offered a conciliatory stance, thus raising market hopes that the U.S. and China will now be willing to sit down for serious negotiations.  However, it remains to be seen whether China will be willing to give President Trump the hefty concessions he wants in order to back off his 25% tariff threat on $150 billion of Chinese imports.

Bloomberg reported yesterday that the U.S. and China last week broke off trade talks after China rejected a U.S. demand that China refrain from subsidizing the key industries related to its “Made in China 2025” initiative.  The breakdown of those talks may have been what led President Trump late last week to threaten tariffs on an additional $100 billion of Chinese imports.  President Xi made no mention of concessions on state subsidies for key industries in yesterday’s speech.

President Xi yesterday managed to calm the trade waters for at least a few days and give the world’s stock markets a temporary respite.  However, if President Trump doesn’t see Chinese concessions quickly when talks resume, then the markets will need to be braced for another Trump trade barrage.

March 20-21 minutes likely to show hawkish FOMC — The FOMC today will release the minutes from their last meeting on March 20-21.  The FOMC at that meeting met unanimous market expectations by raising the funds rate target by +25 bp to 1.50-1.75%.  That meeting’s hawkish surprise was that FOMC members raised their median forecast for the funds rate by an additional rate hike for 2019/20.  The Fed-dot forecast now calls for two more rate hikes in 2018, three rate hikes in 2019, and two rate hikes in 2020, leaving the funds rate at 3.40% by end-2020.

U.S. CPI is expected to show firm inflation pressures — The market consensus is for today’s Mar CPI report to rise to +2.4% y/y from Feb’s +2.2%, leaving the index only 0.3 points below the 6-year high of +2.7% posted in Feb-2017.  Meanwhile, the consensus is for the March core CPI to rise to +2.1% from Feb’s +1.8%, which would be just 0.2 points below the 9-1/2 year high of +2.3% posted in Jan-2017.

The year-on-year CPI figures are expected to rise partly for technical reasons because the sharp 7% decline in cell-phone costs seen in March 2017 will finally drop out of the year-on-year comparison.  However, that caveat does not relieve concern about the fact that in the last three months the CPI has risen sharply by +3.6% (annualized) and the core CPI has risen by +3.1%.

The consensus suggests that today’s 3-month CPI growth rate will ease to +2.8% from Feb’s +3.6% and Jan’s 5-1/4 year high of +4.4%.  However, today’s 3-month core CPI is expected to ease to only 3.0% from Feb’s 1-3/4 year high of +3.1%.  Those expected 3-month growth rates of +2.8% (headline) and +3.0% (core) would still be well above the Fed’s +2.0% inflation target.  A strong CPI report today would firm up market expectations for Fed rate hikes through 2020.

 

 

10-year T-note auction to yield near 2.80% — The Treasury today will sell $21 billion of 10-year T-notes in the second and final reopening of the 2-3/4% 10-year T-note of Feb 2028 that the Treasury first sold in February.  The Treasury will then conclude this week’s $64 billion coupon package by selling $13 billion of reopened 30-year T-bonds on Thursday.

Today’s 10-year T-note issue was trading at 2.80% late yesterday, which translates to an inflation-adjusted yield of 0.71% against the current 10-year breakeven inflation expectations rate of 2.09%.  The 10-year T-note yield in the past several weeks has settled back to 2.80% mainly due to trade tensions and the stock market correction.  The 10-year T-note yield is down by 15 bp from the 4-1/4 year high of 2.95% posted on Feb 21.  The 12-auction averages for the 10-year are:  2.44 bid cover ratio, $18 mln in non-competitive bids from mostly retail investors, 5.1 bp tail to the median yield, 15.3 bp tail to the low yield, 39% taken at the high yield, and 64.1% taken by direct bidders (vs the 63.0% average for all recent coupon auctions).

 

Weekly EIA report — The market consensus for today’s weekly EIA report is for U.S. crude oil inventories to fall -1.4 million bbls, gasoline inventories to fall -1.0 mln bbls, and distillates to fall -250,000 bbls.  U.S. crude oil inventories in last week’s report were -2.6% below the 5-year average, the tightest such level in 9-1/2 years.

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