Daily Market Color

Treasurys Rise on Inflation, Tax Reform Uncertainties

Tax Reform Tumult  – The swap curve experienced a modest bull flattening today as inflation and tax reform uncertainties continue to blur the outlook for US economic growth.  Earlier today it was reported that President Trump was reevaluating the most recent tax overhaul proposal after it was determined that the plan would adversely affect a number of middle-class Americans.  Trump stated that “we’ll be adjusting” the new tax framework in order to properly cut taxes for middle-income earners, however Gary Cohn confirmed the much-disputed elimination of the state and local tax deduction would not be reversed.  The repeal of the “SALT” deduction is expected to generate roughly $1.3 trillion over the next ten years to help fund the proposed tax cuts, and any altering of the plan would add to the already vast complexity involved in balancing the reform budget.



Treasury yields/swap rates fell 1-4 bps across the curve, pushing the 10-year note yield to its lowest level in two weeks at 2.32%.  Major US stock indices fell from record highs, weighed down by shares in energy producers whose prices suffered following an IEA report which stated that the global supply glut may not be reduced as planned during 2018.  WTI crude futures also declined, down 1.3% to $50.65/barrel. The US dollar held relatively steady against major currencies, albeit posted a 0.4% rise against the British pound as Brexit negotiations seem to have come to a standstill.  In cryptocurrencies, Bitcoin (making a debut in the DMC) rose to an all-time high of over $5,200/BTC, up nearly 25% over the last month.



Inflation Remains in Spotlight

A light day of economic data releases was highlighted by September’s producer-price index for final demand, which reported inflation experienced by US businesses at +0.4% MoM.  The reading matched estimates and was a steady uptick from August’s 0.2% monthly increase, largely driven by higher energy prices as a result of the recent hurricanes .  The core PPI exceeded median forecasts, and was also reported at +0.4% MoM (+0.2.% expected).  Looking at producers’ inflation over the past year, overall producer prices have increased 2.6% while core prices have risen 2.2%.  As producer prices can often be a leading indicator for consumer inflation, today’s release represents a positive signal for consumer price growth ahead of tomorrow’s CPI release, where median forecasts call for a 2.3% YoY gain in the overall CPI index and a 1.8% rise in core CPI.
Other key economic data on the day included the Labor Department’s initial jobless claims, which totaled a seasonally adjusted 243,000 (+252,000 estimated) for the week ended October 7th.  The reading was a substantial decline from the prior week’s 258,000 claims, albeit still above the levels consistently reported earlier this year as the impact from Hurricanes Harvey and Irma continue to be felt in the southern states.  Overall, initial claims for unemployment have held below 300,000 for over two and a half years.  Also detailed in the report, the number of continuing claims declined by 32,000 to 1.889 million for the week ended September 30th.      



Today’s Regulatory Update

CFTC Chairman Christopher Giancarlo stated his intention to delay lowering the de minimis threshold for swap dealer registration from $8 billion to $3 billion for one year. He said “the goal is to get it right, not a rushed result.” This delay would be especially welcomed by market participants that have high trading volumes and are able to avoid the regulatory burden of swap dealer registration. The other commissioners from the CFTC had differing views with Brian Quintenz (Republican) supporting Giancarlo’s desired delay and Rostin Benham (Democrat) on the opposing side. Benham believes a delay “prolongs” market uncertainty for market participants and creates market risk. A decision will be made soon since the lower threshold is supposed to be in force in December.

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