I’m getting the feeling that if we don’t break the downtrend line next week, it could be at least another month (until the next PCE and Employment report) before we test it again. We have a TON of data and news next week, and potentially a ton of good trading opportunities.
- Powell, Taylor and Yellen. We should find out who the new Fed Chair will be, before Trump leaves for his Asia trip at the end of the week. There were rumors on Friday that Powell is going to get the nod. Powell should be 80+% priced into the markets, so Taylor being selected could see a violent selloff (15+bps) in the reds. That could get us to break the downtrend line, despite the fact that I would expect some flattening in the very long end of the curve (greens-golds). Taylor winning is a long shot, but we’ve seen stranger things happen in the past two years. I don’t expect more than a few bp rally if Powell gets the nod.
- PCE (Monday). As mentioned last week, the markets should be expecting an anemic core PCE based on the slightly disappointing CPI. Trump’s attacks on the drug industry could keep downward pressure on the medical components of inflation. As I showed a couple of weeks ago, the medical component has been one of the laggards in the current environment. GDP on Friday confirmed a 1.3% core. So it is not a surprise that the markets are expecting an unchanged 1.3% yoy core PCE. I think flatteners (reds-blues) make the most sense, as a high print could cause earlier hikes to be priced in and a low print will cause the longer term FF rate to be lowered. The Fed meeting on Wednesday could also add to the (reds-blues) flattening bias, as we’ve seen that the markets like having flatteners going into the Fed meeting. If we don’t see flattening (all other things being equal), that could be a sign of something amiss.
- Employment Cost Index (Tuesday) and Productivity and Costs (Thursday). As a baseline, the markets are pricing anemic inflation. I prefer to look at wages (and commodity prices), as a proxy for future inflation pressures. I think wages could have gotten a temporary spike from the hurricanes, but having to stare at high wage prints are going to make the FOMC more uncomfortable with low rates early next year.
- ADP (Wednesday). The consensus print of 220K seems high considering we printed a respectable (hurricane–affected) 135K last month. If we do get 220K, I’m going to feel more comfortable with bearish positioning going into the Employment Report – especially considering ADP has been running 712K jobs higher than private NFP the past 11 months.
- Treasury Refunding and Tax Plan (Wednesday). We find out how much the Treasury needs to borrow. Treasury borrowing is just going to keep growing, with higher debt service, and talk of unfunded tax cuts. We also get the House’s tax plan Wednesday.
- FOMC Meeting (Wednesday). Most of the statement should be quiet boring. I would think they would upgrade the assessment of the economy, but I’m not sure anything needs to change (other than the blurbs about the hurricanes and the start of balance sheet normalization). This should be a non-event, but the market thinking for most of the year has been to price in more hikes early on a hawkish statement and price down the longer run terminal rate on a dovish statement. Let’s see if anything changes.
- Employment Report (Friday). The consensus for payrolls is a whopping 323K. I was a little taken back at first. But I suppose this would get us to a two month average of 145K, which is not so high (but still constructive). At this point, the markets will focus on the wage and unemployment rate data. Earnings are supposed to drop to 2.7% yoy, but I think the tail is for this to be higher.
For the most part, I like flatteners going into the Fed meeting and looking for opportunities to add to (relative) bearish trades afterwards on an in-line (or better) ADP. I would probably wait for absolute bearish trades until after the Powell announcement, unless you think Taylor is better than 10% to get the nod (my estimate of the odds). But these views can change depending on how the data comes out and the market reaction. So stay tuned for updates in the daily emails.