Message body WEDNESDAY, SEPTEMBER 27, 2017 TOP NEWS • Fed's Yellen says gradual hikes should continue, despite weak inflation The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen said on Tuesday in remarks that acknowledged the central bank's struggles to forecast one of its key policy objectives. It is possible, Yellen said, that the Fed may have "misspecified" its models for inflation, and "misjudged" key facts like the underlying strength of the labor market and whether inflation expectations are as stable as they seem. • China's Aug industrial profit growth accelerates as commodity prices surge Annual profits at China's industrial companies rose 24 percent in August, accelerating from the previous month in an indication economic growth remains in good heart even as signs emerge of fading momentum following a robust first half. Profits in August jumped 24 percent to 672 billion yuan, the biggest percentage jump since the January-Feb period, the National Bureau of Statistics said. Annual profit growth was 16.5 percent in July. • U.S. consumer confidence slips; new home sales hit 8-month low U.S. consumer confidence fell in September and home sales dropped to an eight-month low in August due to the impact of Hurricanes Harvey and Irma, supporting the view that the storms would hurt economic growth in the third quarter. The Conference Board said on Tuesday its consumer confidence index declined to a reading of 119.8 this month from 120.4 in August, which was the highest reading in five months. It said confidence in Texas and Florida "decreased considerably." • China's Q3 growth slips but still solid, commodity reversal a big risk-Beige Book survey China's economic growth likely slipped in the third quarter but was still in far better shape than last year, a private survey showed, while adding that major risks are looming for 2018. Profits at Chinese firms are much healthier and hiring remains robust, but a five-quarter boom in commodities which has stoked growth has begun to reverse, according to the quarterly survey of thousands of Chinese firms by China Beige Book International. • French 2018 growth forecast "reasonable" - fiscal watchdog The French government's 2018 budget is built on a reasonable growth estimate but there is little margin for error on spending targets, the independent fiscal watchdog said. The first budget of President Emmanuel Macron's administration, to be presented on Wednesday though the broad outlines are already public, forecasts economic growth of 1.7 percent both this and next year, the strongest since 2011. U.S. CONSUMER CONFIDENCE MORNING MEETING JGBS HEAVY, MARKETS AWAIT US TAX PLAN BONDS, EQUITIES, OTHER ASSET MARKETS • US Treasury 10s indicated 2.240%, JGB 10s 0.036%, Bund 10s 0.411% • US-Japan-Germany respective 2s indicated 1.453%, -0.138%, -0.719% • JGBs weaken despite BoJ ops scheduled for this week • 30yr yields up to 0.84% before easing to 0.835% • Dealers' positions may still be heavy after yesterday's 40yr sale • At 150.70, futures off 10 ticks on day, range 150.84/150.67 • Nikkei gap down open, 20,213-269 range since, at 20,259 -71 points, 0.35% • AXJ mostly up - HSI 0.4%, STI 0.7%, TWI 0.9%, NZX50 0.3% • Shanghai and KOSPI around par on day, ASX outlier, -0.3% • Crude off touch from recent highs at NYMEX close, Dalian iron ore +0.5% Currency Summaries JPY • Risk-on, higher US yields post-Yellen push USD/JPY, JPY crosses up • Little new in NoKorea-Trump war of words, US Treasury 10s @2.240% • USD/JPY from 111.50 to 112.49 yesterday, Asia today 112.23-54, buoyant • Good demand at Tokyo fix, spot date both month and Japan fiscal half-ends • Some exporter offers from @112.50, trail up but stops 112.75+, 113.00+ • Downside well supported on option expiries, total USD3 bln 111.00-112.00 • Tech support from @112.35 daily Ichi tankan, 112.08 200-DMA, 110.84 50-WMA • EUR/JPY holding up despite soggy EUR/USD, Asia 132.35-56 • GBP/JPY testing up marginally, Asia 150.94-151.25 • AUD/JPY and NZD/JPY heavy, 88.45-64 and 80.85-81.08, respectively • CAD/JPY bid after FinMin Morneau talk o/n, Asia 90.83-91.02, Poloz tonight EUR • EUR/USD opened 0.44% lower at 1.1795 as USD broadly firmed on higher US yields • USD retained a broadly bid tine in Asia and EUR/USD slipped to 1.1777 • Support came from hope Trump's tax plan out later today will be well received • Asia went back to sleep late in the morning and EUR/USD drifted back to 1.1790 • Sentiment towards EUR/USD turning bearish in the short-term at least • USD-favourable US/DEM yield spread and German political uncertainty weighing • EUR/USD will be vulnerable if US tax reform fever is revved up later today • Tax plan likely to include holiday for repatriating USD earnings abroad • EUR/USD support between 1.1700/20 while resistance at former 1.1820/35 support GBP • Cable on soggy side in Asia on broad USD strength, 1.3435-61 range • Holding above 1.3410 low o/n, support to 1.3400, likely stops below • 1.3400 possibly key support, little support below save 1.3382 9/15 low • Descending 100-WMA 1.3366, 1.3257 top of weekly Ichi cloud • Heavy EUR/GBP and possible GBP/JPY Japan buy interest supports though • EUR/GBP heavy, off to 0.8755 o/n, Asia today 0.8760-72, quiet • Next key support ascending 200-DMA below at 0.8720, 55-WMA 87.12 CHF • USD/CHF steady in Asia after push up from 0.9645 Monday, 0.9654 yesterday • Range 0.9688-0.9705, steady, market awaiting European open • CHF like JPY may become favored short but caution pre-month, quarter-ends • EUR/CHF still heavy after push down to 1.1408 o/n, Asia 1.1424-43 • Stops eyed sub-1.1400, 55-DMA 1.1361, 1.1360-65 multiple lows Aug-Sept Market Briefs • Trump: military option for N.Korea not preferred, but would be 'devastating' • Fed's Yellen says gradual hikes should continue, despite weak inflation • Republicans fail again to kill off Obamacare in U.S. Senate • Trump shows interest in bipartisan tax reform as Obamacare repeal collapses • China's Aug industrial profit growth accelerates as commodity prices surge • China's Q3 growth slips but still solid, commodity reversal a big risk-Beige Book survey • Putting May on notice, Corbyn says Britain's Labour ready for government • After German election, France's Macron paints sweeping vision for Europe • New Zealand's First Party says will not decide coalition partner before Oct. 7 • Tokyo Gov Koike announces manifesto for new Hope Party, to rival Abe's LDP Looking Ahead - Economic Data (GMT) • 06:45 FR Sep Consumer Confidence, 103 eyed; last 103 • 08:00 IT Sep Consumer Confidence, 110.8 eyed; last 110.8 • 08:00 IT Sep Mfg Business Confidence, 108.1 eyed; last 108 • 08:00 EU Aug Money-M3 Annual Growth, 4.6% eyed; last 4.5% Looking Ahead - Events, Auctions, Other Releases (GMT) • 07:10 ECB's Nouy speaks in Madrid • 08:00 ECB releases monthly data on lending and money supply • 09:15 Norges Bank Governor Olsen speaks in Kristiansand • 09:00 Norges Bank Deputy Governor Nicolaisen speaks in Bodoe • 10:30 UK 0.950 bln for 19 year auction See North American Open for a detailed listing of US/NorAm releases, events. AUD/USD vulnerable if EM starts to correct lower One of the factors behind AUD/USD strength in 2017 has been the huge gains in EM assets since the start of the year. While the day-to-day correlation isn't perfect, the peaks and troughs in EM assets and the AUD/USD have lined up pretty well over the past 10 to 15 years. Investors have flocked to EM assets and BofAML's September fund manager survey shows investors have not been this underweight US equities relative to EM since December 2007. There is a danger that the trade is getting overcrowded and due for at least a correction. The iShares MSCI EM ETF gained over 30% between the start of 2017 and Sept 18. It has since corrected over 3%, but has continued to close above the 55-day MA, as it has done since Jan 5 this year. A daily close below the 55-day MA (44.23 Tues vs a close at 44.49) could signal a deeper correction is underway. This would likely put added pressure on the AUD/USD and confirm a top is in place at 0.8125. Look for signature sign-offs from the RBNZ The phrase "Numerous uncertainties remain" has been included in the final paragraph of every post-RBNZ meeting statement since Nov 10, 2016, when the central bank last lowered the OCR by 25bps to 1.75%. We can now add the uncertainty that comes with a caretaker NZ government and a caretaker RBNZ governor. The reality however, is that even with political certainty and a full-time governor in place, there would be little reason for current RBNZ messaging to change. In his Aug 30 farewell speech, then-Gov Wheeler nominated inflated global asset prices and the continuing build-up in global debt as the greatest risks facing New Zealand. There's nothing the RBNZ can do about those. "Monetary policy will remain accommodative for a considerable period" is the other post-meeting mantra from the RBNZ since Feb 9, 2017. Expect to see a re-run of both signature sign-offs tomorrow.