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Central bank chiefs participate in ECB conference as global QE slows
U.S. Oct core PPI expected unchanged at +2.2% y/y
German Q3 GDP expected to strengthen to 3-1/4 year high
Trump will visit Congress on Thursday to push tax bill
China's 10-year yield soars to new 3-year high

Central bank chiefs participate in ECB conference as global QE slows -- Central bank chiefs today will participate in an ECB panel discussion in Frankfurt entitled “Challenges and Opportunities of Central Bank Communication.” Participants include Fed Chair Yellen, ECB President Draghi, BOJ Governor Kuroda, and BOE Governor Carney.

Today's ECB conference takes place as the markets are looking ahead to the wind-down of the QE era, wondering if the reduced liquidity will choke off the extraordinary stock market rallies seen since 2009. The Fed has already begun its balance sheet reduction program in Q4 of $10 billion per month, which rises by $10 billion each quarter until the maximum drawdown of $50 billion per month is reached.

However, the ECB and BOJ will continue their QE programs in 2018, resulting in a net increase in the G3 (Fed-ECB-BOJ) balance sheet asset level despite the Fed's balance sheet decline. The ECB has already announced that its QE program will continue during Jan-Sep 2018 at 30 billion euros/month. Meanwhile, the BOJ is expected to continue its QE program in 2018 near its current level of 80 trillion yen per year (about $700 billion per year or $60 billion per month).

The continued rise in the G3 balance sheet asset level should continue to provide support for stock and asset prices in 2018 even as the Fed winds down its balance sheet. However, the risks will grow once the ECB halts its QE program, likely at the end of 2018.

U.S. Oct core PPI expected unchanged at +2.2% y/y -- The market consensus is for today's Oct final-demand PPI report to ease to +2.3% y/y from Sep's +2.6%. Headline U.S. inflation has seen some upward pressure in the past two months from the rally in gasoline prices, which was due to hurricane disruptions in September, and then from rising oil prices in October. However, core inflation is expected to be stable with today's Oct core PPI expected to be unchanged from Sep's +2.2% y/y.

The markets continue to closely watch the U.S. inflation statistics to see if inflation will move higher in coming months due to recent GDP growth near +3% and the tight labor market. Most Fed officials continue to expect inflation to move higher and believe that the recent softness in the U.S. inflation statistics has been transitory. However, there are several dovish Fed officials who would like confirmation that the inflation statistics will in fact start moving higher before they will support another rate hike.

In any case, market expectations for inflation have recently been moving higher. The 10-year breakeven rate in the past several weeks has risen by 6 bp and rose to a 6-month high of 1.91%. Despite that rise, however, the 10-year breakeven rate remains below the Fed's inflation target of +2.0%. More importantly, the Fed's preferred inflation measure remains well below the Fed's +2.0% inflation target. In September, the PCE deflator was at +1.6% y/y and the core PCE deflator was at only +1.3% y/y.

German Q3 GDP expected to strengthen to 3-1/4 year high -- The market is expecting today's German Q3 GDP report to show another solid increase of +0.6% q/q, thus matching the Q2 report. On a year-on-year basis, the consensus is for German Q3 GDP to improve to +2.3% y/y from Q2's report of +2.1% y/y. Today's expected German GDP report of +2.3% y/y would be a new 3-1/4 year high.

The good news is that GDP growth is broadening across Europe, leading to strong Eurozone economic figures. In fact, the Q3 Eurozone GDP has already been reported at a 6-1/2 year high of +2.5% y/y. The Eurozone economy has finally left behind the global financial crisis and the Eurozone sovereign debt crisis, allowing the Eurozone economy to start firing on more cylinders. Moreover, the Eurozone economy will have even more opportunity to take root since the ECB is leaving its QE program in place at least through Q3-2018 and since the ECB is unlikely to raise rates before 2019.

Trump will visit Congress on Thursday to push tax bill -- The White House on Monday announced that President Trump, who returns from his Asian trip today, will travel to Congress on Thursday to speak with House Republicans at an 11:30 AM meeting. Speaker Ryan plans to hold a vote by the full House by Thursday to approve the tax bill. Meanwhile, the Senate Finance Committee is expected to approve its version of tax reform by the end of this week and the full Senate is expected to consider the bill on the Senate floor during the week after Thanksgiving.

The betting odds for the passage of a corporate tax cut by year-end on Monday rose by +5 points to 22% from 17% last Friday, according to However, those low odds are mainly a function of Congress running out of time before year end. Indeed, the betting odds for Congress to approve a corporate tax cut by March 31, 2018 are much better at 62%, although down slightly from 64% last Friday.

China's 10-year yield soars to new 3-year high -- China's 10-year government bond yield on Monday soared to a new 3-year high of 3.98%. The bond yield in the past 6 weeks has now surged by +36 bp from the 3.62% level seen at the end of September. The 10-year government bond yield has been pushed higher by the perception that the government is resuming its deleveraging campaign now that the October Communist Party Congress is over. In addition, short-term rates are on the rise. The 1-year Shibor interbank rate in the past two weeks has risen by 5 bp to a new 2-1/2 year high of 4.466%, illustrating tighter bank liquidity.



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