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Weekly global market focus
T-note prices show solid recovery after weak CPI and ECB QE news
U.S. stocks barely eke out a weekly gain

Weekly global market focus — The U.S. markets this week will focus on (1) the likelihood of another North Korean missile launch this week as the U.S. and South Korea conduct a joint military drill on Monday through Friday, (2) any developments on tax reform as the Senate returns to session after last week’s holiday, (3) the first big week for Q3 earnings with 93 of the S&P 500 companies scheduled to report, (4) Fed policy as the Beige Book is released on Wednesday and as Fed Chair Yellen speaks on Friday in Washington DC at the National Economists Club, (5) any news of President Trump’s impending appointment of a new Fed chairperson, (6) the Treasury’s auction of 30-year TIPS on Thursday, and (7) 10-year inflation expectations, which fell to a 1-week low last Friday on the weaker-than-expected core CPI report.

NAFTA negotiations resume today against the backdrop of President Trump’s ongoing threat to withdraw from NAFTA. On Iran, the markets will be watching any legislative developments in Congress in response to President Trump’s move last Friday to decertify Iran’s compliance with the nuclear deal. Congress is unlikely to snap back nuclear sanctions, but may change the terms of the U.S. certification process.

This is the third week since President Trump said on Sep 29 that a Fed chair announcement could come in 2-3 weeks. President Trump could announce his Fed-chair nomination at any time although Chief of Staff Kelly said last Thursday that more interviews are planned and that a decision is “some time away.” The betting odds at PredictIt.org as of late Sunday afternoon were 43% for Powell, 24% for Warsh, 17% for Yellen, 10% for Taylor, 8% for Cohn, and 6% for Kashkari.

The European markets this week face the prospect of Spanish turmoil as Spanish Prime Minister Rajoy by Thursday’s deadline may seize political control of Catalonia if Catalonia’s President Puigdemont does not clearly reject independence. Mr. Puigdemont has until Monday to clarify whether Catalonia now considers itself to be independent and he then has a 3-day grace period (until Thursday) to rectify any deficiencies. If he is not satisfied with Catalonia’s responses, Prime Minister Rajoy on Thursday can use Article 155 of the Spanish Constitution to begin taking control of Catalonia’s regional government through police force if necessary.

EU leaders meet at a 2-day summit on Thu-Fri and will decide whether there has been enough progress on Brexit to start negotiating a trade deal. That permission appears to be unlikely since Brexit negotiations have essentially reached a deadlock with the UK refusing so far to agree on a divorce tab. The European markets are also eagerly looking ahead to next Thursday’s ECB meeting. There was increased optimism for a dovish outcome after Bloomberg late last week reported that the ECB is considering cutting its QE program in half to 30 billion euros per month and extending it in 2018 for nine months.

In Asia, the main focus will be on the week-long Chinese Communist Party Congress that begins on Wednesday. Chinese President Xi Jinping will kick off the conference on Wednesday with an opening speech as he moves to consolidate his power during another term by installing supporters in key posts. The markets will be keying heavily on this Wednesday night’s (ET time) release of the Chinese Q3 GDP report, which is expected to ease slightly to a still-strong +6.8% from Q2’s +6.9%. Other Chinese reports on Wednesday night include Sep industrial production (expected +6.7% y/y vs Aug’s +6.0%) and Sep retail sales (expected unchanged from Aug at +10.1% y/y).

In Japan, the markets are hoping for a strong showing by Prime Minister Abe’s party in this coming Sunday’s national election so that he has a mandate to continue his Abenomics program that involves stimulative monetary policy and structural reforms. The Nikkei index last week soared to a new 20-3/4 year high on expectations that PM Abe will perform relatively well in Sunday’s election and that the BOJ will continue its extraordinarily easy monetary policy.

T-note prices show solid recovery after weak CPI and ECB QE news — Dec 10-year T-note futures prices last Friday rallied sharply to a new 2-1/2 week high, which appeared to be enough to halt the Sep-Oct plunge and usher in a period of consolidation or even some further upside retracement. Meanwhile, the 10-year T-note yield fell to a new 2-1/2 week low and closed the day -4 bp at 2.27%, down by -13 bp from early-Oct 5-month high of 2.40%.

T-note prices were boosted late last week by (1) the report that the ECB will continue its QE program at 30 billion euros/month in the first nine months of 2018, which would keep liquidity flowing into the global markets, and (2) last Friday’s news that the Sep core CPI remained unchanged at a 2-1/2 year low of +1.7% y/y, which was weaker than market expectations for a rise to +1.8%. The market is currently discounting the odds for a rate hike at the next FOMC meeting on Oct 31/Nov 1 at only 12% but those odds then rise substantially to 86% for the following meeting on Dec 12-13.

U.S. stocks barely eke out a weekly gain — The S&P 500 index last Friday edged to a new record high but closed the week with a gain of only +0.15%. U.S. stocks last week received support from the dovish ECB QE report, Friday’s T-note rally, and continued hopes for a tax cut. On the negative side, (1) 10-year T-note prices have fallen sharply in the past 5 weeks, (2) the dollar index has stabilized after the Jan-Aug drop, (3) the S&P 500’s forward P/E remains high at 19.4, and (4) Q3 SPX earnings growth is expected to slow to +4.4% y/y from +12.3% in Q2 and +15.3% in Q1.

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