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  • Fed comments will be watched for support of Dec rate hike
  • U.S. Sep consumer confidence expected to settle back
  • U.S. new home sales expected to rebound mildly higher
  • U.S. metropolitan home prices expected to revive after 3-month stall
  • 2-year T-note auction to yield near 1.44%
  • Abe calls snap election and releases new spending plan

Fed comments will be watched for support of Dec rate hike — The markets will keep close tabs on comments by Fed officials following last week’s FOMC meeting, which reaffirmed the Fed’s intention to (1) raise interest rates one more time in 2017 and three times in 2018, and (2) begin its balance sheet reduction program in October.  The odds for a Fed rate hike by December have risen sharply to 74% (according to the Jan 2018 federal funds futures contract) from just 38% two weeks ago.  

Fed Chair Janet Yellen today will deliver the keynote speech on “Inflation, Uncertainty, and Monetary Policy” at the NABE conference in Cleveland with Q&A from the audience.  There will also be comments today from Fed Governor Lael Brainard (voter), Cleveland Fed President Loretta Mester (non-voter), and Atlanta Fed President Raphael Bostic (non-voter).

U.S. Sep consumer confidence expected to settle back — The market consensus is for today’s Sep U.S. consumer confidence index from the Conference Board to show a -2.9 point decline to 120.0, exactly reversing Aug’s +2.9 point gain to 122.9.  Expectations for a decline in today’s report are based in part on the already-reported news that the University of Michigan’s U.S. consumer sentiment index for early-Sep fell by -1.5 points to 95.3.  However, the Conference Board’s U.S. consumer confidence index remains in strong shape at only -2.0 points below the 16-3/4 year high of 124.9 posted in March.  

U.S. consumer confidence in September likely fell due to hurricane damage, North Korean tensions, and continued concern about the slow Republican agenda.  However, U.S. consumer confidence remains generally strong due to (1) the firm U.S. economy and labor market, (2) rising household wealth with the recent record high in the stock market and rising home prices, (3) continued low interest rates and mortgage rates, (4) low gasoline prices, and (5) hopes for a personal tax cut.

U.S. new home sales expected to rebound mildly higher — The market consensus is for today’s Aug new home sales report to show a +2.5% gain to 585,000, rebounding a bit after July’s sharp -9.4% decline to 571,000.  Home sales in late August started to be hurt by Hurricane Harvey, which made landfall on Aug 25.  The recent Aug existing home sales report fell by -1.7% to 5.35 million units, which was the third consecutive monthly decline.  That report bodes poorly for today’s new home sales report.  Home sales remain at generally strong levels due to firm consumer confidence and underlying home demand.  However, home sales have been undercut by high prices and mildly tight supplies.

U.S. metropolitan home prices expected to revive after 3-month stall — The market consensus is for today’s July S&P CoreLogic composite-20 home price index to show an increase of +0.2% m/m and +5.7% y/y following June’s report of +0.1% m/m and +5.65% y/y.  

The Composite-20 index has stalled with virtually no net change over the past three months (Apr -0.2%, May +0.1%, June +0.1%), which is similar to the weak spring/summer price performance seen in the last three years.  By contrast, the broader FHFA index has shown a strong net +1.0% increase during April-July, suggesting that the home price weakness has been contained to the metropolitan areas measured by the Composite-20 index.  The Composite-20 index is up +5.7% y/y and by +45% from the housing-bust trough seen in 2012. U.S. home prices continue to be pushed higher by strong demand and mildly tight supplies. 

2-year T-note auction to yield near 1.44% — The Treasury today will sell $26 billion of 2-year T-notes, kicking off this week’s $101 billion package of T-notes.  Today’s 2-year T-note issue was trading at 1.44% in when-issued trading late Monday afternoon, which translates to an inflation-adjusted yield of -0.13% against the current 2-year breakeven inflation expectations rate of 1.57%.  The 12-auction averages for the 2-year are:  2.77 bid cover ratio, 4.5 bp tail to the median yield, 22.6 bp tail to the low yield, and 45% taken at the high yield.  The 2-year T-note is the least popular coupon among foreign investors and central banks with indirect bidders taking only 47.3% of the last twelve 2-year T-note auctions, far below the average of 60.9% for all recent Treasury coupon auctions.

EUR/USD falls to 1-month low as Merkel faces difficult coalition talks — EUR/USD on Monday fell fairly sharply by -0.86% and posted a new 3-1/2 week low on (1) ECB President Draghi’s comment that the ECB “can’t afford hasty moves” on monetary policy, and (2) the outcome of Sunday’s German election.  Chancellor Merkel’s CDU party won the election but will need to build a ruling coalition with the pro-business Free Democrats and the Greens since the Social Democrats ruled out renewing their coalition with Ms. Merkel’s CDU/CSU bloc. 

Negotiating that CDU/FDP/Green coalition will be tricky and is expected to take a matter of weeks, which will distract Ms. Merkel from other business such as Brexit.  German coalitions typically take around four weeks to negotiate, but the CDU-Social Democratic coalition after the last election in 2013 took nearly three months to negotiate.  In the event that Ms. Merkel cannot build a coalition with the FDP and Greens, and if the Social Democrats continue to refuse to enter a coalition with Ms. Merkel’s party, then a new election would have to be called.

Abe calls snap election and releases new spending plan — The Nikkei index on Monday rallied back up toward last Thursday’s 2-year high and closed moderately higher by +0.50% after Prime Minister Abe on Monday met market expectations by saying that he will dissolve the parliament on Sep 28 and call an election for Oct 22.  Mr. Abe’s LDP/Komeito coalition will need to maintain at least its current two-thirds majority in the parliament in order for Mr. Abe to be assured of keeping his job as the leader of his party.  Mr. Abe on Monday also announced a 2 trillion yen ($18 billion) spending package, paid for by the planned 2 percentage point increase to 10% in the national sales tax in 2019.

 

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