The Market Today
Tax Reform Conference Committee to Release Details
by Craig Dismuke, Dudley Carter
Vining Sparks 2018 Economic and Interest Rate Projections: Vining Sparks Economics released our 2018 Forecast yesterday. Underlying the projections is the passage of tax reform which we continue to assign a greater-than-50-percent chance of occurring. We expect economic activity to accelerate in 2018 to 2.7% due to gains in business investment (current tax reform proposals would give incentives to businesses to invest), personal consumption (solid consumer metrics across-the-board along with a potential tax cut), and U.S. exports (improving global economy). Government spending could become another tailwind if the president is successful in pushing through an infrastructure spending package. As for the impact to interest rates, we see the Fed hiking twice in 2018, the 2-year Treasury yield to rise to 2.10%, and the 10-year Treasury to rise to 2.75%. There are growing risks to imbalances (the inevitable causes of slowdowns/recessions) although there are very few red flags at this time.
Today’s Calendar – Tax Reform Report; Industrial Production and Manufacturing Output: The conference committee is expected to approve its report this morning in a vote between 10:00 a.m. and 12:00 p.m. They are then expected to release the report later this afternoon highlighting the changes and compromises made in reconciling the House and Senate bills. The New York Fed’s regional manufacturing index pulled back from 19.4 to 18.0 (exp. 18.7) in its December report. The index has dropped 12 points from its October peak but remains double its 30-year average. Both the New York and Philly Fed indices continue pointing to a further increase in manufacturing activity in coming months. The Federal Reserve’s November Industrial Production and Capacity Utilization report will be released at 8:15 a.m. CT and is expected to show manufacturing output up another 0.3%.
Overnight Activity – Global Equities Weaken Into the Weekend, European Yields Approach Key Levels: Another negative close in the U.S. has again weighed on global markets in overnight trading. Wednesday’s late-day weakness for U.S. equities led to shaky market sentiment Thursday and a similar pattern has played out so far on Friday. The biggest Asian markets faltered the most with China’s CSI 300 down 1.1% and Japan’s Nikkei off 0.6%. Shares of Japanese companies weakened even after a prominent manufacturing sentiment (quarterly) index rose to its strongest level of the cycle. European markets are also lower with the Stoxx Europe down 0.4%. The EU and U.K. agreed enough progress has been made on preliminary items to allow for next-step discussions on trade and other aspects of the future relationship. The Pound is sinking nonetheless after leaders from the EU reminded that this next step would be the toughest yet. Sovereign yields have moved in different directions amid the daily weakness in equities and after the latest policy decisions from key global central bankers this week. In Europe, yields have moved lower with several key technical levels that should create some resistance for prices to move higher. Germany’s 10-year yield is down 1.2 bps overnight to 0.29%, matching its lowest level since yields spiked in late June following a hawkish speech from ECB President Draghi in Sintra, Portugal. France’s 10-year yield is lower as well and hovering right about its lowest level since November 2016. U.S. yields have bucked the global move lower and risen in a flattening fashion as U.S. equity futures have strengthened. The 2-year yield is up 1.7 bps while the 10-year yield has added 0.2 bps; the spread between the two fell to a new ten-year low. With a quiet economic calendar, markets will be focused on tax reform developments.
Yesterday’s Trading Activity – Curve Flattened as Strong Retail Sales Anchored Short Yields, Stocks’ Slide Pushed Longer Yields Lower: An opening jump for U.S. equities and longer Treasury yields quickly succumbed to a slow and steady drift lower during Thursday’s session. The stronger-than-expected retail sales data for November showed the consumer and broader U.S. economy on a better-than-expected path and gave an initial boost to investors’ risk appetite. However, the momentum quickly faded and both stocks and longer Treasury yields turned back. Stocks’ slide was steady and rather strong with two noticeable intraday drops. The first occurred around 10 a.m. CT and coincided with a similar shift in the S&P’s financials sector. The second occurred just after 1 p.m. CT following a breaking news alert indicating Senator Marco Rubio would vote no on the tax bill if the Child Tax Credit wasn’t enhanced. After rising as much as 0.2% in the morning, the S&P ended 0.4% lower. The Dow and Nasdaq experience similar swings with both closing 0.3% lower. As stocks weakened, a bid for longer Treasurys reemerged and pushed the 10-year Treasury yield from a high of 2.39% to as low as 2.34% (closed at 2.35%). The Long Bond fell 2.1 bps to 2.71%. But with yesterday’s Fed decision including a continued expectation for more gradual rate increases to come, and this morning’s solid economic data boosting the market’s buy-in a bit (fed funds futures closed a touch steeper), shorter yields were more anchored. The 2-year yield was less affected by stocks’ deterioration, rising 3.7 bps to 1.81% and finishing near its daily high. The Dollar finished stronger on a mix of notable swings against the Euro, Yen, and Canadian Dollar.