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  • Global market focus
  • House expected to vote this week on its tax bill while Senate Finance Committee marks up its bill
  • T-note yields rise due to 6-month high in inflation expectations
  • U.S. stocks correct a bit lower but remain generally strong

Global market focus -- The U.S. markets this week will focus on (1) the prospects for tax reform as the House and Senate this week continue to consider their respective bills, (2) the U.S. inflation outlook with this week's PPI and CPI reports and with the 10-year breakeven inflation expectations rate last Friday edging to a new 6-month high, (3) Fed policy as a slew of Fed officials speak this week including Fed Chair Yellen on Tuesday at an ECB panel in Frankfurt, (4) WTI crude oil prices, which extended the 5-month rally last week to post a new 2-1/4 year nearest-futures high, and (5) this week's busy U.S. economic schedule.  President Trump will be in the Philippines today and Tuesday, then returning to the U.S. after his 12-day Asian tour.

The markets will watch geopolitics this week as North Korea may conduct another missile launch or nuclear test after Mr. Trump leaves Asia.  The markets also remain nervous about the Middle East after Saudi Arabia's arrest of hundreds of elites in an apparent political purge and after Saudi Arabia last week said that the attempted missile strike on its airport constituted an act of war by Iran.

In Europe, attention will mainly be on the Tue-Wed ECB conference in Frankfurt entitled "Communications Challenges for Policy Effectiveness, Accountability and Reputation."  Speakers include ECB President Draghi, BOE Governor Carney, BOJ Governor Kuroda, and Fed Chair Yellen.  Germany's Q3 GDP report on Tuesday is expected to remain strong at +0.6% q/q and +2.3% y/y.  Tuesday's UK Oct headline CPI report is expected to edge higher to +3.1% y/y from Sep's +3.0% and the core CPI is expected to strengthen to +2.8% y/y from Sep's +2.7%, which would provide further validation for the BOE's recent +25 rate hike to 0.50%.  ECB President Draghi and Bundesbank President Weidmann on Friday will deliver keynote addresses at the Frankfurt European Banking Congress.

In Asia, tonight's Chinese data is expected to be mixed with Oct industrial production easing to +6.2% y/y from Sep's +6.6%, but with Oct retail sales expected to strengthen to +10.5% y/y from Sep's +10.3%.  Tuesday night's Japan Q3 GDP report is expected to slow to +1.5% (q/q annualized) from Q2's strong +2.5% pace.  The markets will continue to closely watch the Chinese 10-year government bond yield, which rose by +3.5 bp last week to 3.926% and nearly matched the 3-year high of 3.928% posted in late-Oct.



House expected to vote this week on its tax bill while Senate Finance Committee marks up its bill -- House Speaker Ryan expects the full House to approve the House tax bill by late this week.  The odds are strong that the House will pass the tax bill this week, although it will likely be a tight vote as various House Republicans find a reason to oppose the bill such as the $1.5 trillion increase in the deficit over 10 years or the elimination of the deduction for state income taxes.

Meanwhile, the Senate Finance Committee this week will mark up its bill and possibly vote to approve it later this week.  Senate Majority Leader McConnell still hopes to get the full Senate to approve the bill before next week's Thanksgiving holiday.  However, Senate Cornyn last week said he doesn't expect the bill to be considered on the Senate floor until the week after the Thanksgiving holiday.

The markets were disappointed last week when the Senate's tax bill delayed a corporate rate tax until 2019.  The Senate's tax bill is the one to watch because the Senate will have the hardest time passing a bill since Mr. McConnell can afford to lose only two Republican Senators.  The House will likely be forced to essentially rubber-stamp whatever tax bill the Senate is able to pass.

The betting odds for the passage of a corporate tax cut by year-end fell sharply by -6 points last Friday to 17%, which is only 2 points above the record low of 15% posted in mid-Sep, according to However, those low odds are mainly a function of Congress running out of time before year-end.  Indeed, the betting odds that Congress will approve a corporate tax cut by March 31, 2018 are much better at 64%.  A recent survey by Bloomberg found that three-quarters of economists surveyed expect Congress to eventually pass some type of tax reform.

T-note yields rise due to 6-month high in inflation expectations -- The 10-year T-note yield last Friday rose sharply to post a 2-week high and closed the week up +7 bp at 2.40%.  Bearish factors for T-note prices included (1) the rise in the 10-year breakeven inflation expectations rate to a new 6-month high, and (2) carry-over weakness from the weak gilt and bund markets.  The 10-year breakeven rate rose by +4 bp to 1.91% last week due in part to continued strength in crude oil prices, which posted a new 2-1/4 year nearest-futures high last week.  The T-note market was also hurt by hawkish views of Fed policy as (1) the market fully expects a Fed rate hike at its next meeting on Dec 12-13, and (2) the Dec 2018 federal funds futures contract last week rose by another 2 bp to 1.705%, reflecting expectations for a further 33 bp of rate hikes in 2018.

U.S. stocks correct a bit lower but remain generally strong -- The S&P 500 index last Tuesday posted a new record high but then fell fairly sharply on Thursday after news that the Senate's tax bill includes a delay in the corporate tax cut until 2019.  Stocks were also undercut by (1) the week's +7 bp rise in the 10-year T-note yield, (2) the week's sharp sell-off in junk bonds, which was negative for corporate credit quality, and (3) carry-over weakness from the week's -2.6% sell-off in the Euro Stoxx 50 index.  The U.S. stock market remains mainly focused on the Republican tax bill.  Q3 earnings season is now virtually over with only 12 of the S&P 500 companies reporting this week.  SPX Q3 earnings growth of +8.1% was better than expectations of +5.9%.





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