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Beige Book expected to show firm U.S. economic growth
U.S. housing starts expected to edge lower as hurricane disruptions emerge
Senate vote on 2018 budget resolution is expected by Friday
Weekly EIA report

Beige Book expected to show firm U.S. economic growth — The Fed today will release its Beige Book survey of the regional U.S. economy ahead of the next FOMC meeting in two weeks on Oct 31/Nov 1. The Beige Book may provide some detail on the extent of economic damage from Hurricanes Harvey and Irma. However, the Beige Book should find generally favorable economic conditions across most of the country. The Fed’s last Beige Book report, released on Sep 6 in the midst of the hurricanes, found that, “Economic activity expanded at a modest to moderate pace across all twelve Federal Reserve Districts in July and August.” The market consensus is for Q3 GDP to show solid growth of +2.3%, down from +3.1 % in Q2 but above the Fed’s estimate of U.S. GDP potential of +1.9%.

The market consensus for a rate hike at the next FOMC meeting on Oct 31/Nov 1 at only 12%, according to the November federal funds futures contract. A rate hike is not expected at that meeting in part because there will be no press conference for Fed Chair Yellen following the meeting. However, the odds for a Fed rate hike at the following meeting on Dec 12-13 are nearly a lock at 92%.

Fed Chair Yellen just this past weekend reiterated that she expects inflation to move higher in 2018 and that she believes the Fed should continue its policy of gradually raising interest rates. FOMC members, as reflected in the Fed dot forecasts, are sticking to their expectation for another rate hike by December and then three more rate hikes for 2018. The market is more dovish, however, expecting only the December rate hike and then one further rate hike in 2018 versus the Fed’s expectation for three rate hikes in 2018.

The Wall Street Journal on Tuesday reported that Ms. Yellen’s interview with President Trump for reappointment to her post will be on Thursday. Politico on Monday first reported that Ms. Yellen would be interviewed this week but Politico did not provide a date. It is not clear whether President Trump plans on interviewing anyone else for the position after Ms. Yellen. If not, then Mr. Trump could announce his Fed chair nomination soon after he interviews Ms. Yellen on Thursday. Mr. Trump on Tuesday said he be making a decision “over the next very short period of time.”

The betting odds late Tuesday at PredictIt.org for the next Fed chair are 35% for Fed Governor Jerome Powell, 23% for Stanford economist John Taylor, 21% for Ms. Yellen, 19% for former Fed Governor Kevin Warsh, 7% for White House advisor Gary Cohn, and 3% for Minneapolis Fed President Neel Kashkari.

U.S. housing starts expected to edge lower as hurricane disruptions emerge — The market consensus is for today’s Sep housing starts report to edge lower by -0.4% to 1.175 million, adding to August’s -0.8% decline. Today’s report will see disruptions from Hurricane Harvey, which made landfall in Texas on Aug 25, and from Hurricane Irma, which made landfall on Sep 10 in Florida. After the initial disruptions from those hurricanes, housing starts should see somewhat of a boost through year-end from hurricane rebuilding efforts.

U.S. housing starts in general remain in good shape. Housing starts are -11.1% below the 10-year high of 1.328 million units posted in Oct 2016, but much of that weakness is due to a drop off in multi-family units. Single family home starts, by contrast, are currently at 851,000 units, which is only -3.0% below the 10-year high of 877,000 posted earlier this year in February.

Senate vote on 2018 budget resolution is expected by Friday — The Senate on Tuesday voted to open debate on the 2018 budget resolution and a final vote is expected by Friday. The vote will be another squeaker because Senator Rand Paul has said he opposes the resolution and Mississippi Senator Thad Cochran is convalescing at home and cannot be in Washington this week to vote. That means that all the remaining 50 Republican Senators must vote in favor of the bill for it to pass, with help from a tie-breaker vote from Vice President Pence. If only one of those 50 Republican Senators turns against the bill, however, then the resolution will not pass and tax reform will be dead.

The budget resolution is only symbolic since it is non-binding and will have no final effect on spending levels. Nevertheless, the resolution must be passed by both the Senate and House as a legislative vehicle for the tax reform bill to be passed through reconciliation, thus bypassing the threat of a Democratic filibuster in the Senate.

The House has already passed its version of a 2018 budget resolution. If the Senate can pass its version of a budget resolution on Friday, then the House will either have to approve the Senate version or there will have to be a conference to iron out the differences.

The bickering in the Senate over passing even a symbolic budget resolution is not encouraging as to whether Republicans will find success in passing a final tax reform bill. The process will clearly be torturous. However, we still expect Republicans to be able to pass some version of a watered-down tax cut bill so that Republicans can claim victory on tax reform.

Weekly EIA report — The market consensus is for today’s weekly EIA report (for the week ended Oct 13) to show a -3.25 million bbl decline in U.S. crude oil inventories, a +1.0 million bbl rise in gasoline inventories, a -1.5 million bbl decline in distillate inventories, and a +0.5 point increase in the refinery utilization rate. The effects from Hurricane Harvey are wearing off since the refinery utilization rate is now back to normal seasonal levels. U.S. crude oil inventories remain in a glut at +21.0% above the 5-year seasonal average while product inventories are fairly close to normal seasonal levels.

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