The Market Today

Mnuchin Says Tax Reform by August less Likely after Healthcare Failure

by Craig Dismuke, Dudley Carter

Single-Family Starts and Permits Continue to Trend Higher:Housing starts fell 6.8% in March after rising a revised 5.0% in February (revised up from +3.0%). Taking the revision into account along with the weaker March data, starts were 1.2% weaker than expected, falling to a four-month low. The March decline was led by a 7.9% drop in multi-family starts and a 6.2% decline in single-family starts (see Chart of the Day). Multi-family starts have struggled to regain traction after the mid-2016 slump and have yet to reach their mid-2015 peak. Single family starts continue to trend very gradually higher. Building permits for the month rose 3.6%, a better result than expected. Single family permits fell 1.1% while the ever-volatile multi-family data jumped 13.8%. Kansas City Fed Bank President George is scheduled to speak this morning.

Overnight Activity – Treasury Yields Slip, U.K.’s May Calls for Early Elections: European equities sank Tuesday after a mixed start in Asia as U.K. Prime Minister May announced snap general elections later this summer. The announcement was unexpected given her repeated claims early elections weren’t forthcoming but comes on the heels of polls showing her party gaining in popularity. The House of Commons will hold a vote tomorrow to determine whether the June elections can move forward; British law requires two-thirds support in the lower house. The pound is outperforming other major currencies, Gilt yields are steady, but U.K. stocks are leading losses in the region. The ICE Dollar index tumbled within the last couple of hours, breaking below 100 for the first time since March 30. The 2-year Treasury yield is down 2.0 bps (1.181% – near the lows since late February), the 5-year yield is 3.6 bps lower (1.739% – near the lows since mid-November), and the 10-year yield fell 3.4 bps (2.216% – near the lows since mid-November). U.S. equity futures are off 0.3%.

Yesterday’s Trading Activity – Longer Yields Rise for the First Time in Five Sessions:
The major U.S. stock indices closed just off of their highs of the day as a strong performance by the financial sectors helped the Dow and S&P to a 0.9% gain; the best daily result since the first day of March. Energy companies were positive on average but lagged the broader index after crude prices fell 0.8%. The Treasury curve regained some steepness after falling last Thursday to its flattest between 2s and 10s since the election. The 2-year yield fell 0.4 bps to 1.20% while the 10-year yield added 1.2 bps to 2.25%. Yield movements were relatively benign considering the weaker inflation data last Friday – while markets were closed – and softer economic reports first thing Monday morning. The Dollar declined again despite a slight bounce from Treasury Secretary Mnuchin calling a strong Dollar “a good thing.” The Dollar has faltered in five of the last six sessions.

NAHB Housing Market Index Moderates but Maintains Strength: The NAHB’s Housing Market Index, released yesterday, fell back in April after setting a new cycle-high in the final month of the first quarter. The three-point drop in the headline index, from 71 to 68, was slightly bigger than the one-point pullback expected. The weakness in the headline index reflected slightly weaker readings on each of the three underlying indices – present sales, sales over the next six months, and traffic of prospective buyers. Despite the decline, the index – and all three underlying indices – remain elevated and consistent with levels seen over the period from 2004 to 2005.

Mnuchin Says Healthcare Focus Creates Headwinds for Tax Reform Timeline: After the GOP, including President Trump, pivoted back to healthcare reform over the last several weeks, the concern was that it could push back the timing of income tax reform. This possibility was confirmed by Treasury Secretary Mnuchin yesterday in comments to the Financial Times. Mnuchin previously said he hoped for tax reform by August but noted the goal was “ambitious”. He showed greater uncertainty in yesterday’s comments, saying the August expectation was “highly aggressive to not realistic at this point”. As to why, Mnuchin said, “It is fair to say it is probably delayed a bit because of the healthcare.”

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