A further slowing in growth
Jive Talking: “To speak in an exaggerated, teasing, or misleading way”. I can’t believe we haven’t used this Bee Gees classic once in the year that has almost passed since the result of a certain election.
Yesterday, President Trump again promised that tax cuts will be the ‘biggest ever’. Today (tonight) the House of Reps. tax writing committee chaired by Kevin Brady is due to release the text of its tax bill, 24 hours later than panned and it could be delayed further amid reports of lack of agreement amongst the committee. Plus overnight, Treasury secretary Mnuchin has said he’s not happy with suggestions that cutting the corporate tax rate to 20% could be phased in over several years. US bond yields were lower on this, before recovering slightly after the (non-eventful) FOMC statement – see below.
Next week, the Senate promises to unveil its tax bill. It will be different from the House and neither will likely amount to the ‘biggest ever’ tax cut (an honour that will likely remain with Ronald Reagan). There will then be weeks – quite possibly months – of attempted reconciliation to fashion a unified bill that will need to be approved by both the House and Senate before it can reach the White House.
The main reason we think some sort of tax reform will eventually get done – but which Congress will ensure will not be allowed to add more than $1.5trn to budget deficits over the next decade – is because all 435 seats in the House of Reps. and a third of the 100 Senate seats will be contested next November. If nothing is done on tax by then, a lot of Republican lawmakers will be fearful of keeping their jobs and the current Republican clean sweep of House, Senate and Executive, may well disappear.
Sentiment towards tax reform promises to remain a key swing factor for US and hence global fixed income, equities and the dollar in the weeks ahead. Note that small cap stocks, who will be a major beneficiary of lower corporation tax rates, are currently underperforming, a sign that expectations for early passage of tax reform is running low.
In the meantime, President Trump promises to reveal his pick to be the next chair of the Fed before Thursday is out. Overnight he said that “Yellen is excellent”, but when asked if he’d reappoint her he replied “I didn’t say that”. Almost all the money is on Fed Governor Jay Powell getting the nod, news of which should now be met with limited market fanfare. The big surprise would be if either John Taylor is the anointed one, or Janet Yellen is offered a second term.
Janet Yellen has just presided over what may well have been her last but two FOMC meetings, the outcome of which was fairly unremarkable. Growth was described as ‘solid’ from ‘moderate – a slight upgrade – but core inflation is acknowledged as having ‘remained soft’ (an implicit downgrade). The key takeaway is that the statement has done nothing to dislodge high expectations for a December rate hike, now above 90%, hence a slightly former US dollar and Treasury yields out of the Fed.
Data wise, the US manufacturing ISM slipped to a still very strong 58.7 from 60.8 (59.5 expected) while the ADP print of 235k (200k expected) has some analysts upgrading their forecast from Friday’s payrolls number to nearer 350k from 300k (hurricane-recovery affected, remembering that payrolls printed -33k in September while ADP was +135k, now revised to 110k). UK manufacturing PMI was strong (56.3 from 55.9) helping cement expectations for a BoE rate rise tonight.
Wednesday night is still young in America, so plenty could hit the screens during our morning to drive markets. Locally, we have data interest in the form of both latest (September) trade numbers and building approvals.
For the Trade Balance, NAB’s forecast is that the surplus rose to $A1.6bn, up from $A1.0bn in August. As far as the bulk commodities are concerned, using port shipments and price data and mapping these to ABS estimates points to a flattish read for iron ore exports, higher volumes offset be the pull-back in iron ore prices. Coal in contrast is expected to rise a large 12.9% (+$0.6bn). Reporting also suggests that the ramp up in production from the new Gladstone LNG plants continued in September.
Building Approvals is a notoriously volatile monthly series and we have no strong predisposition for September’s reading. Solid underlying population demand points to activity remaining high; we look for a 1.1% gain in September, some modest growth also hinted at by the AiG PCI Construction Index.
Offshore, the House tax plan and Trump’s Fed chair decision aside, there is keen interest in the Bank of England’s policy decision, where a 0.25% rate rise is about 90% priced. Assuming it’s delivered, market interest will be in the BoE’s signalling with respect to prospects for more where that just came from.
On global stock markets, the S&P 500 was +0.22%. Bond markets saw US 10-years -1.26bp to 2.37%. In commodities, Brent crude oil -0.85% to $60.42, gold+0.4% to $1,276, iron ore +1.4% to $59.35, steam coal +0.1% to $100.00, met. coal +0.4% to $174.25. AUD is at 0.7673 and the range since yesterday 5pm Sydney time is 0.7648 to 0.7696.
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