The Market Today
Tax Reform by Christmas?
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Full Cadre of Reports with Markets Focused on Tax Reform: This week’s calendar is, once again, full of important data and events. Most important will be Republican efforts to pass their newly reconciled (Friday) tax bill. The new bill does increase the child tax credit as Senator Marco Rubio demanded at the last minute. Like the original Senate bill, it also ends the individual mandate which is scheduled to actually save the government money. The irony of this only highlights the financial challenges of healthcare. To accommodate the requirement that the bill not add to the deficit after 10 years, many of the proposed provisions are scheduled to sunset before 2027, as highlighted in this morning’s WSJ A1. The House is expected to vote on Tuesday and Senate leader McConnell has stated that the Senate will follow shortly thereafter.
Apart from tax reform, there will be a barrage of housing reports beginning at 9:00 a.m. CT this morning with the NAHB Homebuilder Confidence index – which is currently sky high. As the week goes on, we will also see reports on 3Q GDP (final revision), personal income and spending, consumer confidence, durable goods orders (business investment), and PCE inflation. Friday is also a recommended early close for the bond market in anticipation of the Christmas Holiday. But while the calendar is busy in a holiday-shortened week, tax reform has the potential to inject plenty of market volatility.
Overnight Activity – Markets Making the Most of Tax Reform Progress: Friday’s record close for U.S. equities has put markets in the holiday spirit to start the week as Republicans continue to advance one of their major agenda items through the legislative process. The conference committee successfully reconciled the House and Senate tax reform bills on Friday and a couple of key question-mark Senators appeared to be on board with the changes. This sent all three U.S. indices to record closes on Friday. Overnight, equities were up strongly across Asia and are seeing similar strength in Europe halfway through the trading session. MSCI’s Asia Pacific Index was up a healthy 0.8% and led by big gains from Japanese companies. Economic data showed Japanese exports were up by more than expected and for a twelfth consecutive month. The Stoxx Europe 600 is up 0.9% while national indices in France and Germany have gained even more. The strong weekly start has had divergent impacts on U.S. markets. U.S. equity futures are up sharply pointing to a continuation of the positive risk momentum which has pressured Treasury yields higher. The 2-year yield is up 0.8 bps to 1.84% while the 10-year yield has added 2.0 bps to 2.37%. The Dollar, however, hasn’t been as cheerful and is down nearly 0.3% on the day.
ICYMI – December 15, 2017 Weekly Market Recap: The Treasury curve closed last week at its flattest point between the 2-year and 10-year points in over ten years. However, the magnitude of basis points moves that led to that close were relatively modest on net considering the key events that took place. The NFIB’s Small Business Optimism index on Tuesday was one of the better reports of the week, touching its highest level since 1983. A surprise result in a special election to fill one of Alabama’s seats in the U.S. Senate caused some brief market concern overnight Tuesday but will likely be more meaningful for the legislative process in 2018. Wednesday was when the action started in earnest, as another miss in the monthly CPI report (the seventh out of the last nine months) sent yields sharply lower before the Fed hiked rates by 25 bps later that afternoon. In addition to raising its rate range to 1.25%-1.50%, the Fed also updated its projections to show a stronger outlook for growth, an expectation for the unemployment rate to fall even further, but neither of these to drive inflation higher. They also left their projected rate hikes at three for 2018 and two for 2019. Thursday morning’s retail sales results for November were much stronger than expected and show a solid start to holiday shopping. However, focus quickly shifted to Washington and the back-and-forth on tax reform that ultimately ended with the conference committee approving its report and indications from the Senate of enough support to get a bill passed. Click here to see the full recap.