The Market Today

Senate Tax Plan to Take Stage as House Plan Hits Roadblocks

by Craig Dismuke, Dudley Carter

Today’s Calendar – Senate Tax Plan:  Initial Jobless Claims for the week ending November 4 rose from 229k to 239k as the hurricane effects continue to come out of the numbers.  Claims spiked beginning September 1 and have since dropped below sustainable levels in the wake of the hurricane-related spike.  Now it appears they are leveling back out at sustainable levels. Initial filings of 239k is, nonetheless, very low from an historical perspective and indicative of a labor market with few layoffs.   The September report on Wholesale Inventory growth, which would affect the 3Q GDP revision, is scheduled to be revised at 9:00 a.m. CT.  After two weak quarters to start the year, inventories are expected to continue to accumulate at a faster pace in 4Q and add to overall growth.


Senate Republicans are expected to lay out their tax reform plan shortly after a party briefing today at 10:30 a.m. CT to share the details with colleagues.  The plan is rumored to be quite different than the House plan including leaving the estate tax in place, changing the pass-through tax proposal, treating state and local taxes differently, and potentially increasing the number of individual tax brackets and raising the child tax credit even more.  Meanwhile, House Republicans changed a plan to halt corporate tax avoidance which was expected to raise $140 billion in revenues over the next 10 years.  Now it would raise just $7 billion which has put the plan over the $1.5 trillion allowance provided in the FY2018 budget.  Because it is now over budget, it would only take one Senator to invoke the Byrd rule and vote down the plan.


Overnight Activity – Sovereign Yields Climb, Unaffected by Daily Equity Weakness: European markets are driving activity Thursday with equity weakness there helping push U.S. futures lower (Dow – 0.37%, S&P – 0.52%, Nasdaq – 0.78%). Earlier, Asian shares were mixed with China leading gains after better-than-expected inflation data. The Stoxx Europe 600 was off 0.93% and having its worst day since August. The index is at its peak daily negativity and all 12 sectors are in negative territory. The quiet economic calendar continued and traders were pointing to mixed corporate earnings as one reason for the moves. Earnings will likely impact U.S. trading as well with Macy’s and Walt Disney representing a couple of the major names among a busy calendar of corporate results. The uncertainty for equity investors has boosted demand for some safe haven assets, primarily gold and the Yen, but not affected sovereign debt markets. The world bond screen is crowded with higher yields. U.S. yields are the least changed with the 2-year yield 0.4 bps higher (1.65%) and the 10-year yield up 1.2 bps (2.34%). European yields have moved the most with the 10-year yields in Germany and France around 4 bps higher and similar maturity peripheral yields up more than 6 bps. Technicals could be a major catalyst for the rising yields due to the swiftness and sharpness of the drop that followed the ECB’s latest decision two weeks ago.


Yesterday’s Trading Activity – Stocks Climb to New Records Despite Another Falter for Financials: U.S. stocks moved to new records Wednesday despite a continued drag from the energy and financials sectors. Crude prices edged lower for a second day after the EIA’s weekly inventory report showed a surprise build in crude inventories, the largest since September 15, and a 0.7% increase in weekly U.S. production to the highest level on record. Those price-bearish points offset the effect of a larger-than-expected draw of gasoline stocks. U.S. crude prices, however, were still up 2.1% for the week due to the Monday rally following weekend political turmoil in Saudi Arabia. Financial companies within the S&P faltered for a fourth consecutive session with banks leading that decline. Over that four-day stretch, the KBW bank index has dropped nearly 3.5%. Investors are keeping an eye on developments on the tax reform front as the House Committee continues to mark-up their tax plan and the Senate gets ready to release its version. The Treasury curve finally, but unremarkably, broke its eight-day streak of flattening between the 2-year and 10-year notes. The 2-year yield rose 1.6 bps to 1.65% while the 10-year yield added 2.0 bps to 2.33%. Other parts of the curve, however, continued their flattening trends. The spread between the 5-year and 30-year notes hit a new 10-year low (see Chart of the Day).


The Difficult Dynamics Facing Congressional Republicans (Politico):  According to Politico’s Morning Money, “It’s probably true that Republicans need to have SOMETHING to point to as a legislative accomplishment to take to voters in 2018. They can’t go zero for two on health care and taxes. But it’s not clear at all that what they actually DO will be massively popular with voters. … The centerpiece of this tax effort is slashing rates on corporations. That’s a reasonable idea in many respects but it’s not a politically popular one and won’t be until its promised impact winds up in people’s bank accounts. … Getting rid of the estate tax and the AMT and giving a lower pass-through rate to passive owners of businesses while taking away popular tax credits like those for adoption and student loans is also not super popular. Suburban voters may wind up not liking whatever gets done on state and local tax deductions. … It’s true most individual tax payers will see some tax cuts, at least in the first few years under the bill. But plenty, especially itemizers, could see tax hikes in 2027 and beyond, per the JCT analysis. And the corporate side of the plan COULD boost growth. But that could take a while to work through the system, leaving it a non-factor in 2018.”

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