Treasuries were little changed in a fairly quiet overnight session, but prices are beginning to drift higher this morning following the release of the August PCE inflation report.  As expected, the GOP’s initial tax plan is coming under intense scrutiny, particularly the proposed elimination of the state and local tax deduction, but as many observers understand, this will be a drawn out and tedious battle over the next several months.  As Senator Bob Corker (R-TN) said yesterday, “tax reform is going to make health care look like a piece of cake, if we do it the right way.”  Some analysts suggested tax reform might be less controversial than healthcare (and easier to navigate), but nothing is easy in Congress these days. Corker’s condition at the end of the statement is important as well. A comprehensive tax reform package would be the first such effort since the mid-1980’s, and it would undoubtedly take a long time to negotiate (more than 6 months).  However, there is a good chance that we see either a very watered-down version or no deal at all.

August personal income and spending growth was right in line with expectations, rising 0.2% and 0.1%, respectively.  However, both headline and core PCE came in below expectations. The PCE deflator (headline measure) rose 0.2% (0.3% expected) in August from the prior month, and the deflator was unchanged on a year-over-year basis at 1.4% (1.5% expected).  More importantly, core PCE rose just 0.1% m/m and 1.3% y/y.  Core CPI surprised to the upside in August for the first time in six months, and it was largely attributable to firming in shelter costs.  Core PCE has a much smaller weighting for shelter in its calculation, which might explain the weaker August print. The Fed appears motivated to move forward with a December rate hike, but if core inflation measures persist lower in the next few months, it may make it a much tougher sale for the doves of the FOMC.

Jason Haley
Managing Director, Investment Management Group

Date Time Event   Survey Actual Prior Revised
09/29/2017 08:30 Personal Income Aug 0.20% 0.20% 0.40% 0.30%
09/29/2017 08:30 Personal Spending Aug 0.10% 0.10% 0.30%
09/29/2017 08:30 Real Personal Spending Aug -0.10% -0.10% 0.20%
09/29/2017 08:30 PCE Deflator MoM Aug 0.30% 0.20% 0.10%
09/29/2017 08:30 PCE Deflator YoY Aug 1.50% 1.40% 1.40%
09/29/2017 08:30 PCE Core MoM Aug 0.20% 0.10% 0.10%
09/29/2017 08:30 PCE Core YoY Aug 1.40% 1.30% 1.40%
09/29/2017 09:45 Chicago Purchasing Manager Sep 58.7 58.9
09/29/2017 10:00 U. of Mich. Sentiment Sep F 95.3 95.3
09/29/2017 10:00 U. of Mich. Current Conditions Sep F 113.9
09/29/2017 10:00 U. of Mich. Expectations Sep F 83.4
09/29/2017 10:00 U. of Mich. 1 Yr Inflation Sep F 2.70%
09/29/2017 10:00 U. of Mich. 5-10 Yr Inflation Sep F 2.60%
10/02/2017 09:45 Markit US Manufacturing PMI Sep F 53 53
10/02/2017 10:00 ISM Manufacturing Sep 57.9 58.8
10/02/2017 10:00 ISM Prices Paid Sep 64 62
10/02/2017 10:00 ISM New Orders Sep 60.3
10/02/2017 10:00 ISM Employment Sep 59.9
10/02/2017 10:00 Construction Spending MoM Aug 0.40% -0.60%
10/03/2017 Wards Total Vehicle Sales Sep 16.55m 16.03m
10/03/2017 Wards Domestic Vehicle Sales Sep 12.58m 12.48m
10/04/2017 07:00 MBA Mortgage Applications 29-Sep -0.50%
10/04/2017 08:15 ADP Employment Change Sep 150k 237k
10/04/2017 09:45 Markit US Services PMI Sep F 55.1 55.1
10/04/2017 09:45 Markit US Composite PMI Sep F 54.6
10/04/2017 10:00 ISM Non-Manf. Composite Sep 55.5 55.3
10/05/2017 07:30 Challenger Job Cuts YoY Sep 5.10%
10/05/2017 08:30 Initial Jobless Claims 30-Sep 270k 272k
10/05/2017 08:30 Continuing Claims 23-Sep 1934k
10/05/2017 08:30 Trade Balance Aug -$43.0b -$43.7b
10/05/2017 09:45 Bloomberg Consumer Comfort 1-Oct 51.6
10/05/2017 10:00 Factory Orders Aug 0.90% -3.30%
10/05/2017 10:00 Factory Orders Ex Trans Aug 0.50%
10/05/2017 10:00 Durable Goods Orders Aug F 1.70%
10/05/2017 10:00 Durables Ex Transportation Aug F 0.20%
10/05/2017 10:00 Cap Goods Orders Nondef Ex Air Aug F 0.90%
10/05/2017 10:00 Cap Goods Ship Nondef Ex Air Aug F 0.70%
10/06/2017 08:30 Change in Nonfarm Payrolls Sep 88k 156k
10/06/2017 08:30 Two-Month Payroll Net Revision Sep
10/06/2017 08:30 Change in Private Payrolls Sep 53k 165k
10/06/2017 08:30 Change in Manufact. Payrolls Sep 5k 36k
10/06/2017 08:30 Unemployment Rate Sep 4.40% 4.40%
10/06/2017 08:30 Average Hourly Earnings MoM Sep 0.30% 0.10%
10/06/2017 08:30 Average Hourly Earnings YoY Sep 2.60% 2.50%
10/06/2017 08:30 Average Weekly Hours All Employees Sep 34.4 34.4
10/06/2017 08:30 Labor Force Participation Rate Sep 62.90%
10/06/2017 08:30 Underemployment Rate Sep 8.60%
10/06/2017 10:00 Wholesale Trade Sales MoM Aug -0.10%
10/06/2017 10:00 Wholesale Inventories MoM Aug F 1.00% 1.00%
10/06/2017 15:00 Consumer Credit Aug $15.500b $18.499b