The Market Today
Durable Orders Disappoint, Markets Continue to Digest Tax Proposal, BoJ and ECB Hold
by Craig Dismuke, Dudley Carter
Today’s Calendar – Durable Goods Orders Disappoint, Remain Supported by Strong Aircraft Demand: There was a flurry of economic reports this morning. The advance goods trade balance report for March showed a smaller-than-expected deficit for last month and February’s deficit was revised lower. These two results should be a net positive for the impact of trade on 1Q growth.
The March durable goods report showed a miss at both the headline and core levels but positive revisions for February helped soften the blow. March orders were up 0.7% (exp. +1.3%) but February’s initial result of +1.8% was revised to +2.3%. Headline durable goods orders continued to outpace core orders as strong demand for aircraft offset weaker demand for auto. This time it was a 26% increase in orders of defense aircraft that boosted the headline result. At the core level, orders fell 0.2% in March (weakness in machinery manufacturing and computers and electronics) while February’s orders were up 0.7% instead of 0.5% as initially projected. The report included mixed indications for business investment. The report’s near-term outlook for business spending is a touch softer as weaker-than-expected March orders of capital goods wasn’t fully offset by a positive revision for February. However, the shipments data provided positive signals for Q1 investment in equipment as a 0.4% increase in capital goods shipments (exp. +0.1%) was combined with a +0.1% revision to the February data.
Initial jobless claims ticked up last week from 243k (revised down 1k) to 257k compared to expectations for claims of 245k. The four-week average for initial claims was essentially unchanged and managed a 242k-handle for a second straight week. The four-week average has now improved in each of the last four weeks. Continuing claims two weeks ago remained below 2,000k for a second consecutive week, the first back-to-back sub-2,000k claims stretch since May 2000. The claims data continue to signal strength in the labor market.
Overnight Activity – Markets Contemplate Tax Reform, Trade Policies, and Central Bank Decisions: Global markets continued to respond to yesterday’s U.S. tax reform proposal (more below), twists and turns on the projected fate of NAFTA, and central bank decisions in Tokyo and Frankfurt. Reports Wednesday indicated the President was working on an executive order to withdraw the U.S. from NAFTA; the peso and Canadian dollar sank. Reports last night said the President had ultimately chosen to renegotiate the agreement instead of rip it up (confirmed in a morning tweet from @realDonaldTrump); the peso and Canadian dollar rallied back to nearly unchanged. On the monetary policy front, the BoJ elected to continue with its current policy stance as a weaker inflation forecast offset a slightly stronger growth outlook. The ECB also left its policy unchanged. As always, markets will listen in to ECB President Draghi’s press conference for insight on the outlook for the bank’s QE program. U.S. equity futures point to a rebound at the open despite a weaker overnight session globally. Treasury yields rose less than 1 bp and the Dollar jumped as the Euro slipped following the ECB decision.
Yesterday’s Trading – Stocks Erase Early Gains as Treasury Yields Slip: The major equity indices declined in the last 45 minutes of trading to completely erase early morning gains. The early morning strength had powered the S&P to a new all-time high and pushed the Dow to within 45 points of its current record. The late-afternoon sell-off solidified a shift lower in Treasury yields and the curve ended near its lowest level of the day. The 2-year yield was essentially unchanged but the 5-year yield fell 2.7 bps (1.83%) and the 10-year yield declined 2.9 bps (2.30%). The Dollar ended higher but fell from session highs after President Trump’s proposed tax changes left several key questions unanswered. Crude prices were volatile. The EIA showed a larger-than-expected drawdown in U.S. crude inventories which sent U.S. prices climbing. However, the commodity was unable to hold those gains as the same report showed higher levels of U.S. crude production, crude imports, and gasoline inventories.
Tax Proposals Leave Key Questions Unanswered: President Trump’s tax proposals released midday Wednesday provided more insight into the administration’s desired reforms. The proposal would drop the corporate rate from 35% to 15%, moving the rate from the highest of the large, developed nations to one of the lowest (Germany 16%, U.K. 19%). It would also apply the 15% rate to income from pass-through entities (e.g. partnerships and LLCs) that is currently included on the individual’s return and taxed at the individual’s rate. The announcement referred to a one-time tax break on the repatriation of foreign earnings but didn’t specify a rate. There was no discussion of an immediate deduction for capital expenditures.
As to proposed changes for individuals, the number of marginal tax brackets would shrink from seven to three with the highest rate falling from 39.6% to 35%. One of the biggest changes would be the disallowance of the deduction of state and local taxes paid in an overhaul that would limit personal deductions to just the home mortgage interest and charitable contribution deductions. However, the standard deduction would be doubled. The proposal also includes the repeal of the estate tax and alternative minimum tax. The GOP uses dynamic scoring to support the claim that the resultant boon to growth and a higher volume of tax revenues will help pay for the changes. However, an economic assessment will have to show that the plan is budget neutral outside of 10 years in order for it to be passed by a simple majority via the reconciliation process. Otherwise, any plan will need support of 60 senators. The President’s plan would be the largest re-writing of the tax code since 1986, when it took almost two years to negotiate the details. As such, it is likely to be a long process before the markets know the final details of the plan.