The Market Today
President Trump’s Tax Proposal Likely to Drive Wednesday’s News Headlines
by Craig Dismuke, Dudley Carter
Today’s Calendar – Mortgage Applications up Last Week, Markets Await Tax Reform Principles: Weekly mortgage applications rose 2.7% thanks to a leap in refinance applications. The 7.2% gain in refinance activity offset a 1.0% decline in purchase applications. The weekly improvement in refinancing inquiries was the largest weekly gain since early August of last year. Refinancing appears to have stabilized after the notable post-election slowdown bottomed in late 2016. According to Freddie Mac’s U.S. Mortgage Market Survey, the rate on a 30-year fixed rate mortgage fell to 3.97% that week, the first sub-4% mortgage rate since the week after the election.
Markets will continue to look for direction from quarterly corporate earnings results although most news headlines today are likely to be focused on President Trump’s tax proposal. So far, Wednesday’s pre-market earnings releases have continued to provide upside surprises relative to Street estimates; a common trend for this quarter’s corporate results. President Trump is expected to release the principles of his tax reform plan sometime today. According to the WSJ, “President Donald Trump on Wednesday is planning to unveil a proposal to cut corporate taxes on U.S. companies’ foreign profits and to slash the top tax rate on so-called pass-through businesses, including many owner-operated companies, to 15% from 39.6%, …Mr. Trump also plans to include a tax break for child-care expenses, …On income-tax rates for individuals, Mr. Trump has said he wants to reduce the number of brackets, but his advisers are still debating where to set the rates.”
Overnight Activity – Markets Await President Trump’s Tax Reform Principles: Equity trading has been mixed so far as the effect of the French election seemed to calm and markets turned their attention to political, fiscal, and monetary policy decisions around the globe. Asian equities leveraged yesterday’s U.S. rally to make another leg higher but European exchanges are unchanged to lower on average. The caution in Europe has U.S. futures trading essentially flat. The Euro finally paused its weekly surge but the Yen continued to tick lower. The result was the Dollar finding stability at one of its weakest levels since the U.S. election. After swift climbs in the first two days of the week, German yields pulled back and French yields inched higher on Wednesday. Treasury yields were mixed but little changed with the 2-year yield +0.4 bps and the 10-year yield lower by the same amount. In addition to President Trump’s tax proposal, both the BoJ and ECB will make policy decisions tomorrow and the potential for a U.S. government shutdown on Saturday remains in the back of investors’ minds.
Yesterday’s Trading Activity – Stocks Rip Higher: The capital flight back into riskier assets remained in high gear Tuesday as a continued stock surge helped pressure Treasury yields past Monday’s highs and back into their post-election ranges. The economic data was mixed with a faster pace of new home sales helping offset a softer-than-expected read on consumer confidence (more below). Also supporting risk assets, reports indicated President Trump would unveil details of his desired changes to the U.S. tax code today. The Nasdaq broke above 6,000 for the first time and the Dow and S&P climbed back towards their respective record highs set on March 1. Corporate earnings results continued to paint a positive picture of U.S. companies’ bottom lines. The 2-year Treasury yield rose 4.1 bps to 1.27%. The 5-year note yield added 5.3 bps to 1.86% and the 10-year yield climbed 5.9 bps to 2.33%. The Dollar fell as the Euro held near a six-month high and Yen weakness persisted.
New Home Sales Notch Surprising Gain: A surprisingly strong March result for new home sales included a large positive net revision to the previous months’ data. Sales in March improved 5.8% MoM versus expectations for a 1.4% pullback. At 621k annualized units, the March pace was just 1k shy of the cycle-high pace set back in June 2016. The previous three months’ (December through February) results were revised up 43k in total. New homes sales data tends to see notable revisions once all is said and done but the general trend looks more solid. The average change between the initial release and the final revision averaged 26k in 2016. Supply remains tight with 5.2 months’ supply on hand matching the lowest since September 2016.
Consumer Confidence Index Pulls Back but General Outlook Remains Optimistic: The Conference Board’s Consumer Confidence Index cooled more than expected in April and March’s 16-year high reading was revised down marginally. Still, the April and March results represent the strongest back-to-back readings since November and December of 2000. The index tracking the assessment of the present situation and future expectations softened in April with the biggest share of the headline decline driven by the latter. While most underlying details weakened in the April report, the overall takeaway is that confidence amongst U.S. consumers remains at an extremely strong level.
CBO Report Shows Federal Government Unnecessarily Pays Employees More Than the Private Sector: The CBO released a five-year study Tuesday comparing the compensation (including wages and benefits) of federal and private-sector workers. Specifically, the report analyzed the compensation of federal civilian workers, which total approximately 2.2 million employees. The report stated that “greater job security tends to decrease the compensation that the federal government needs to offer, relative to compensation in the private sector, to attract and retain highly qualified employees.” Despite this, “the federal government paid 17 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector.” Moreover, the report noted. “The analysis excludes certain benefits some workers receive – for example, the above-market rate of return the federal government offers its employees through the G Fund (one of the investment options in their retirement plan).” Interestingly, the report stated, “The span between the wages of high- and low-paid employees was narrower in the federal government than in the private sector … [which] may reflect the constraints of federal pay systems, which make it harder for managers to reward the best performers or to limit the pay of poor performers.”