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It was a session of two halves on Friday night.

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First for the market came a lower than expected US PCE core deflator for August, weighing on the US dollar and bond yields.  The core PCE deflator for August came in at 0.1%/1.3% after 0.1%/1.4% in July, the August print missing expectations by a tenth for both the monthly and annual readings.  But then came a solid Chicago PMI for September (ahead of the ISM Manufacturing report tonight) increasing from 58.9 to 65.2 and a WSJ article reporting that several candidates had been interviewed by the President for the top Fed job.  Former Fed Governor Kevin Warsh, current Governor Powell, Dr. Yellen and the President’s Head of the National Council of Economic Advisors Gary Cohn were all interviewed, apparently.  Some regard Warsh as more hawkish.

That data and the reporting of interviews gave support to the dollar and bond yields, yields ending the session a net 3 basis points higher.  The President said that a decision on the next Fed Chair can be expected in two to three weeks.  By the end of the session, the market had lifted the probability of the Fed hiking again in December from 76% to 80%, though another in 2018 continues not to be 50% priced until June and fully priced by the December 2018 meeting.

The US 10-year Treasury yield initially fell 1.5bps to a low of around 2.295% but added nearly 4bps after the WSJ article/Chicago PMI data to end the day just over the 2.33% mark, its highest close in five weeks. The Fed will have three more CPI figures (and two more PCE deflators) released before it has to make its decision, providing plenty of opportunity to support its view that recent weak inflation has been driven by temporary forces.

There have been more press reports of how the Trump tax package is progressing.  Already some GOP Congressional members from States with higher State taxes are complaining about the proposed non-deductibility of State taxes.  The key Senate and House Committees have to work through to develop a lot of the detail, detail that will be all important.

As US inflation underwhelmed expectations, so did the headline and core Eurozone CPI for September, coming after Germany’s CPI out Thursday was “in line”.  The headline CPI came in at a steady 1.5% against expectations of 1.6% and core CPI at 1.1% y/y against expectations of 1.2% growth.  Over the weekend, Catalonia had its referendum to vote on whether to secede.  The national government had already declared this vote illegal and there were ugly scenes of what seems to be heavy-handed police intervention, including at polling booths, which presumably runs the risk of further galvanising local support, but no doubt entrench the opposition of the national government as well which of course remains pro-European.

With news that some parts of heavier-polluting Chinese industry will be curtailed from this month, and met coal prices have already pulled back.  But the official Manufacturing PMI (and the Non-manufacturing PMI for that matter) released over the weekend revealed no such net impact.

Admittedly, it was for September and the cutbacks are yet to play out, but the Manufacturing PMI rose from 51.6 to 52.4, the strongest reading since April 2012.  Even new orders pushed up from 53.1 to 54.8 and the Steel PMI remained above 50 at 53.7, though down from 57.2.  There was certainly no sign from this report of some slowing in the core Chinese economy, the Non-manufacturing PMI up from 53.4 to 55.4.  The following Caixin Manufacturing PMI though did ease from 51.6 to 51.0 ahead of the release of the Caixin Non-manufacturing and composite PMIs today.

Coming up

The data flow heats up further this week with the RBA meeting tomorrow, AU Retail Sales, Building Approvals, and Trade the main watch points.  The data though is not till later in the week.  Today sees the monthly AiG (and now CBA) Manufacturing PMIs, the CoreLogic Home Values report, something close to flat in the offing for house prices with the first three weeks of sales values already in.  The monthly MI CPI gauge for September is also out today, though none of these reports are likely to have much market impact at all.

Of more interest for the market though will be the BoJ Tankan business survey for Q3, the headline Large Manufacturers’ Index expected to tick up to 18 from 17.

The Manufacturing focus continues tonight with the first of the big three US releases, the ISM Manufacturing report for September out.  US activity data might well be distorted in headline, production, orders, employment, and even perhaps prices by Hurricanes Harvey and Irma.  Dallas Fed Kaplan (FOMC voter this year) is speaking tonight.  The Non-farm payrolls report comes at the end of the week and the market is already expecting only a 85K gain in payrolls as a result of the hurricanes.  For the market, the more important will be whether average hourly earnings increased by 0.3% or more after a meagre 0.1% gain in August.

Overnight

On global stock markets, the S&P 500 was +0.37%. Bond markets saw US 10-years +2.51bp to 2.33%. In commodities, Brent crude oil -0.65% to $56.79, gold-0.3% to $1,282, iron ore -1.3% to $62.05, steam coal -0.4% to $97.25, met. coal +0.0% to $177.50. AUD is at 0.7835 and the range since Friday 5pm Sydney time is 0.7812 to 0.786.

Good luck.

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