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Sep U.S. inflation reports won't solve the Fed's inflation angst because of hurricane distortions
U.S. unemployment claims expected to shake off more hurricane effects
30-year bond auction to yield near 2.87%
Weekly EIA report

Sep U.S. inflation reports won't solve the Fed's inflation angst because of hurricane distortions -- Today's U.S. Sep PPI report will kick off the September inflation data and the Sep CPI will be released tomorrow. The market consensus is for today's Sep final-demand PPI report to edge higher to +2.6% y/y from Aug's +2.4% but for the core PPI to be unchanged from Aug's +2.0% y/y. Meanwhile, Friday's Sep CPI is expected to rise to +2.3% from Aug's +1.9% and the Sep core CPI is expected to edge higher to +1.8% y/y from Aug's +1.7%.

The minutes from the Sep 19-20 FOMC meeting, which were released on Wednesday, disclosed that Fed officials at that meeting had an in-depth debate about whether the recent softness in the inflation data is temporary or persistent. Temporary factors that have pulled the price indexes lower in recent months have been lower cell phone costs and lower prescription drug prices. However, the Fed is also on the alert for more persistent reasons for low prices that could include online price-comparison shopping and the progressive elimination of middlemen in the economy. The minutes made clear that at least some Fed officials do not favor another rate hike until the inflation figures start moving higher.

This week's headline PPI and CPI figures for September are expected to be boosted by the higher gasoline prices that were sparked by Hurricane Harvey, which temporarily shut down more than a quarter of U.S. refinery operations and disrupted fuel distribution channels. The core PPI and CPI figures, however, are expected to be little changed at +2.0% y/y and +1.9%, respectively, both at or below the Fed's +2.0% inflation target. The Fed's preferred inflation measure, the core PCE deflator, has been much weaker and fell to a 6-1/2 year low of +1.3% y/y in August.

In any case, the Fed has another two months to gather inflation data before it needs to pull the trigger on whether to raise interest rates another notch at its Dec 12-13 meeting. The market is discounting only a negligible 12% chance of a rate hike at the FOMC's next meeting on Oct 31/Nov 1, but the odds then substantially increase to 88% for the December meeting.

Speaking of the Fed, the markets will be listening carefully to Fed Governor Jerome Powell's speech today on the topic of the emerging markets to see whether his comments seem to jibe with President Trump's criteria for the next Fed chair. Mr. Powell and former Fed Governor Kevin Warsh have recently been running neck-and-neck in the betting odds as the next Fed chair but Mr. Powell has now pulled ahead to 52% versus 30% for Mr. Warsh, according to PredictIt.org. Gary Cohn's odds have plunged to 3% and Janet Yellen's odds have dropped to 11%. A Trump nomination announcement could come at any time since Mr. Trump said on Sep 29 that a decision could come in 2-3 weeks.

U.S. unemployment claims expected to shake off more hurricane effects -- Today's initial unemployment claims report for the week ended Oct 6 should continue to shake off the effects of Hurricanes Harvey (Aug 25 landfall) and Irma (Sep 9 landfall). The consensus is for today's initial claims report to show a -10,000 decline to 250,000, adding to last week's -12,000 decline to 260,000. The initial claims series last week was still a net +24,000 above the pre-Harvey level of 236,000. Meanwhile, today's continuing claims report for the week ended Sep 29 is expected to show a -8,000 decline to 1.930 million, which would actually leave the series below the pre-Harvey level of 1.951 million.

30-year bond auction to yield near 2.87% -- The Treasury today will sell $12 billion of 30-year T-bonds in the second and final reopening of the 2-3/4% bond of Aug 2047. Today's 30-year T-note issue was trading at 2.87% in when-issued trading late Wednesday afternoon, which translates into an inflation-adjusted yield of 0.93% against the current 30-year breakeven inflation expectations rate of 1.94%. The 12-auction averages for the 30-year are: 2.29 bid cover ratio, $6 million in non-competitive bids to mostly retail investors, 5.8 bp tail to the median yield, 24.9 bp tail to the low yield, and 44% taken at the high yield. The 30-year is mildly popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 62.7% of the last twelve 30-year bond auctions, which is mildly above the average of 61.0% for all recent Treasury coupon auctions.

The 30-year bond yield has risen by +25 bp to 2.88% from the 11-month low of 2.63% posted in early-Sep due to the rise in Fed rate-hike expectations and the +13 bp rise in 10-year breakeven inflation expectations. The markets today will find out whether that rise in yields will boost demand for the bond or will instead create a fearful/bearish tone that scares investors away from the auction.

Weekly EIA report -- The market consensus for today's weekly EIA report is for a -750,000 bbl decline in U.S. crude oil inventories, an unchanged level of gasoline inventories, a -2.0 million bbl decline in distillate inventories, and a -0.5 point decline in the refinery utilization rate to 87.6%. The effects of Hurricane Harvey have largely dissipated as seen by the fact that the current refinery utilization rate of 88.1% is just mildly below the 2016 level of 90.1 and the 5-year average of 89.4%. In addition, U.S. crude oil inventories initially rose on weak demand after Hurricane Harvey but have fallen in the past two reporting weeks by -1.7% and are expected to show another decline today. Meanwhile, product inventories remain close to the seasonal average. Specifically, gasoline inventories are +2.0% above the 5-year seasonal average and distillate inventories are -2.4% below average.

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