The Market Today
Focus Remains on Tax Reform as House Votes; Yields Rebound from Two-Day Slide
by Craig Dismuke, Dudley Carter
Today’s Calendar – House to Vote on Tax Reform and Senate Republicans Face Challenges; Import Price Inflation Moderates: Initial jobless claims for the week ending November 11 rose 10k to 249k. While this increase was larger-than-expected, claims remain below 250k and the week did contain the Veterans Day holiday. Holidays often skew the fast data like jobless claims. Import prices for the month of October rose less-than-expected, up 0.2% MoM (exp. +0.4%). The weaker read appears to have come from non-energy items which, collectively, rose just 0.1% MoM. Petroleum-based imports rose 1.7% MoM bringing the YoY rate up to 14.9%. The YoY rate of all import prices, an important leading indicator of base U.S. inflation pressures, fell from 2.7% to 2.5% during the month. Also released this morning, the Philly Fed Business Outlook Index showed manufacturing activity in the region continues to expand, although at a weaker pace than in October. The index fell from 27.9 to 22.7.
The October Industrial Production report is expected to show a jump in output at 8:15 a.m. CT, driven by a strong 0.6% increase in manufacturing output. With the synchronization of global growth resulting in improving demand for U.S. exports, improving business investment in equipment, and a temporary renaissance in auto sales; manufacturing output is likely to be a tailwind for a while. At 9:00 a.m. CT, the NAHB Homebuilder Confidence index is expected to show strong confidence, albeit one point weaker than October’s 68.
Tax reform continues to percolate around Washington with the latest developments being Wisconsin Senator Johnson’s disapproval of the Senate version and an expected vote from the House today where the House version is expected to pass.
Tax Reform – A Lot of Room to Negotiate Still: An interesting consideration on tax reform – while lawmakers haggle over the types of deductions and credits to retain, they really have quite a bit of room to work. If leadership wants to bring dissenters onboard, they have a material negotiating tool in the top corporate rate. As discussed in our 4Q Economic Outlook webinar, every 1% reduction in the corporate rate will cost $100 billion in tax revenues over the next 10 years. With many of the politico in Washington acknowledging before this process began that a 25% corporate tax rate might be more feasible than a 20% rate, this would give leaders $500 billion in negotiating powder to re-include things like the healthcare deduction, etc… and bring on new supporters.
Overnight Activity – Global Yields Rise as Stocks Recover: After several days of struggling, global equities appear to have found some footing overnight which helped alleviate the weekly upward pressure on the price of safer assets. Through Wednesday, the MSCI All-World Equity Index had declined for five consecutive sessions, the longest stretch since early March. However, markets bounced overnight across both Asia and Europe. Shares in Japan rose more than 1% to lead Asian markets while widespread gains in Europe pushed the Stoxx Europe 600 up 0.72%, the biggest gain since the ECB’s late-October policy decision. U.S. equity futures are also enjoying a rebound against the firmer global backdrop and edged out a new daily high after Wal-Mart’s quarterly financial results topped estimates. While most global equity sectors are taking part in the positive reversal, energy companies continue to lag. Crude prices are lower again Thursday and down in three consecutive sessions for the first time in six weeks. Adding to the weekly fragility for oil prices that started after the IEA downgraded its global demand outlook, official data showed U.S. oil inventories unexpectedly grew last week. For Treasurys, the recent rally cooled and U.S. yields are leading global yields higher. The 2-year yield is up 2.5 bps at 1.71%, its highest level since October 2008. The 10-year yield is up 3.9 bps to 2.36%.
Yesterday’s Trading Activity – Stocks Fell and the Treasury Curve Flattened…Rinse and Repeat: Wednesday’s stock trading pattern looked a lot like the path taken during Tuesday’s session. Stocks sold off early after another bout of global trepidation had again pushed futures lower ahead of the U.S. session. The S&P dropped as much as 0.83% in the first 30 minutes of trading before quickly reversing to its highs of the day in mid-morning trading. There was little net movement over the next several hours before a report that a Republican Senator opposed the current tax plan pushed the index back lower in the final hour of trading. On the day, the S&P fell 0.55% in its biggest single-day drop since September 5 (the day after North Korea successfully tested a hydrogen bomb). According to the WSJ, that ended a 50-day streak without a decline of 0.5% or more which was the longest since 1965. The Dow fell a steeper 0.59% and the Nasdaq dropped 0.47%. Treasury yields were also lower before solid U.S. CPI and retail sales data and a quick stock recovery helped briefly boost them off their daily lows. However, that bounce disappeared as quickly as it came and yields spent the remainder of the day drifting back towards their overnight lows. The 2-year yield dropped 0.4 bps while the 10-year yield settled down 5.0 bps at 2.32%. The daily flattening moved the spread between the two yields down 4.5 bps to 63.5 bps. The persistent flattening trend continued across the curve with several portions reaching their lowest level in a decade.