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  • Taylor’s betting odds improve after winning Senate straw poll
  • House tax plan expected to be unveiled next week
  • ECB tapering expected to be announced Thursday
  • 5-year T-note auction to yield near 2.05%
  • Weekly EIA report

Taylor’s betting odds improve after winning Senate straw poll — Economist John Taylor’s betting odds for becoming the next Fed chair rose by +14 points to 28% on Tuesday after news that he won a show-of-hands vote of Republican Senators called by President Trump in a tax meeting.  Fed Governor Jerome Powell’s odds fell by -6 points to 52% on Tuesday but he remained 24 points ahead of Taylor.  Meanwhile Yellen (16%) and Warsh (10%) are trailing badly, according to PredictIt.org.

Whether the preferences of Republican Senators will make any difference to Mr. Trump in his decision-making process remains unknown.  Mr. Trump must get his appointee confirmed by the Senate, but Powell is likely to glide through the Senate as easily at Taylor.  The fact remains that Mr. Trump has called himself a “low interest rate person” and Taylor would be an unknown quantity as to how quickly he might want to raise interest rates.  On that basis, Powell remains the safest choice for Mr. Trump if he wants interest rates to rise slowly and minimize the chance of a recession before he is up for reelection in 2020.  Mr. Trump also could be considering the option of naming Powell and Taylor as Fed chair and vice chair, placing them both in Fed leadership roles.

House tax plan expected to be unveiled next week — House Speaker Ryan on Tuesday laid out his tax timetable, which is for the House to (1) pass the Senate’s version of the 2018 budget resolution on Thursday, (2) unveil its tax plan next week, and (3) vote to approve a tax bill before Thanksgiving.  Mr. Ryan then plans to send the House bill over to the Senate when there will be only a month left before the year-end completion target for (1) the Senate to pass a bill, (2) House and Senate negotiators to agree on a common plan in conference, and (3) both the House and Senate to pass the same bill.  That very limited time frame is why the betting odds for a corporate tax cut by the end of 2017 remain very low at 22%.  However, the odds in our view are substantially better for at least a watered-down tax cut by early 2018.

ECB tapering expected to be announced Thursday — The ECB at its regular meeting on Thursday is universally expected to announce its QE program for 2018.  The market consensus is that the ECB will cut its QE program in half to 30 billion euros per month from the current level of 60 billion euros per month, and that the program will stretch over the first nine months of 2018.  The ECB is expected to leave open the possibility of continuing the program past Q3-2018 if macroeconomic conditions demand.  The consensus matches a recent Bloomberg report that the ECB is considering a 9-month 30 billion euro/mo plan.

The ECB’s QE program faces an overall size limit of about 2.5-2.6 trillion euros based on the availability of securities under current rules.  That means that the ECB can buy only about 300-400 billion euros more of securities in 2018 beyond the end-2017 QE size of 2.2 trillion euros.  The consensus QE expectation implies 270 billion euros of securities purchases in 2018, which would be under that limit.

A more dovish 2018 QE configuration that is being discussed is 40 billion euros per month in the first six months of 2018 and 20 billion per month in the second six months, totaling 360 billion euros.  A middle-of-the-road possibility would be to run the program at 25 billion euros per month during all 12 months of 2018, totaling 300 billion euros for the year.

The ECB is expected to stress in post-meeting comments that it will not raise interest rates until well after its QE program is over.  The market consensus at present is that the ECB will first lift its -0.40% deposit rate by a notch in Q1-2019 and its 0.00% refinancing rate by a notch in Q2-2019.

 

5-year T-note auction to yield near 2.05% — The Treasury today will sell $15 billion of 2-year floating-rate notes and $34 billion of 5-year T-notes.  The Treasury will then conclude this week’s $103 billion T-note package by selling $28 billion of 7-year T-notes on Thursday.  Today’s 5-year T-note issue was trading at 2.05% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.27% against the current 5-year breakeven inflation expectations rate of 1.78%.  The 5-year T-note yield has risen sharply by +45 bp since early-Sep to post a new 7-month high of 2.05% on Tuesday.

The 12-auction averages for the 5-year are as follows:  2.48 bid cover ratio, 5.0 bp tail to the median yield, 15.4 bp tail to the low yield, and 37% taken at the high yield.  The 5-year T-note is moderately popular among foreign investors and central banks.  Indirect bidders, a proxy for foreign buying, have taken an average of 65.1% of the last twelve 5-year T-note auctions, which is well above the average of 61.1% for all recent Treasury coupon auctions.

U.S. new home sales expected to take a hurricane hit, but home prices are expected to rise — The consensus is for today’s Sep new home sales report to fall -1.1% to 554,000 due to hurricane disruptions, adding to Aug’s -3.4% drop.  However, Aug FHFA home prices are expected to rise +0.4%, continuing the steady march higher.

Weekly EIA report — The market consensus for today’s weekly EIA report is for a -3.0 mln bbl decline in U.S. crude oil inventories, a -1.0 mln bbl decline in gasoline inventories, a -500,000 bbl decline in distillate inventories, and a +1.5 point increase in the refinery utilization rate to 86.0%.  U.S. oil production should recover sharply in today’s report after last week’s dramatic -1.1 mln bpd plunge (-11.3% w/w) on Hurricane Nate, which resulted in the shutdown of numerous oil rigs in the Gulf of Mexico

 

 

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