US equities have started the week on a solid footing boosted by the prospect of US tax reform becoming law later in the week. The USD is softer across the board and the US Treasury yield curve is steeper with the move led by the back end of the curve.

Politics and voting has been the overnight theme with the House now expected to vote on the Tax bill tonight while there is still some speculation as to whether the Senate has enough votes. Senator McCain will not be able to vote on the bill due to ill health, but Corker, Rubio and Collins are reportedly on side. Meanwhile Republicans and Democrats are still haggling the terms of a temporary spending bill that needs to be passed before Friday if a government shutdown is to be avoided. The later may be a factor weighing on the USD which was unable to perform overnight despite a rise in US equities and US Treasury yields.  The USD has also struggled against EM currencies with the South African Rand (+2.53%) and Chilean peso (2.39%) leading the way. Politics and voting again the big driver with conservative and business friendly Piñera elected president in Chile while Ramaphosa was elected ANC leader, putting him on track to become South Africa’s next president.

Materials and Telcos drove the gains in the S&P but just like Friday, small companies are again outperforming with the Russell 200 index up 1.07% while the S&P500 is +0.61%. Gains in small companies probably reflect their domestic focused nature and the fact that they are likely to benefit the most from US tax reform.

While holiday mode is a factor, USD softness is also reflective of positive factors driving other currencies. SEK is the outperformer overnight, up over 1% amid expectations that the Riksbank will announce an end to its QE programme on Wednesday. Following two days of declines the euro has staged a small recovery briefly trading above 1.18 overnight with the 3m Eurobasis retreating to -87bps after blowing out over -100bps on Friday. GBP has also managed to perform, up 0.47% following remarks from PM May that a senior EU negotiator made it clear that the UK can have a bespoke trading arrangement with the EU.

AUD is up smalls (+0.27%) and remains comfortably trading in the 0.76/0.77 range. Yesterday’s Commonwealth budget update helped the AUD perform with the new numbers showing an improvement in this year’s projected budget deficit thanks to stronger company and superannuation taxes. NZD on the other hand is little changed sitting just under the 0.70 mark. Both antipodean currencies are in the middle of recent ranges, but if US equities continue to perform and UST yields continue to rise boosted by the prospect of US Tax reform becoming law later in the week, then we wouldn’t be surprise to see the AUD and NZD ending the week softer amid a stronger USD.

As for commodities, oil prices are a little bit softer (WTI -0.73%, Brent -0.33%), Copper is a little bit stronger (+0.33%) and iron ore is the big winner, up 2%.

In other news, ECB’s Liikenan said its forecasts for growth and prices were backed by the assumption that strongly accommodative policy continues throughout the forecast horizon. He added that asset purchases can continue after September ‘if inflation doesn’t appear to be accelerating to the target without monetary policy support.’ NAB’s view is the ECB will alter its message to end QE in September as 2018 progresses. Today final HICP came in as expected and in line with the flash estimate of 1.5% (headline) and +0.9% (core).

Fed President Kashkari (non-voter) mentioned the flat US yield curve was one of the reasons he dissented against a rate hike last week. Meanwhile Fed Williams (‘18 voter) said, ‘something like three rate increases next year and two to three increases in 2019 – that seems like a reasonable view’.

Coming Up

This morning New Zealand gets its quarterly consumer survey followed by its monthly business survey. In Australia the RBA releases Minutes from its December Meeting and this evening the German Ifo survey for December is out in Europe. Housing starts stats are released in the US and tonight the House is expected to vote on the Tax Bill with the Senate potentially also voting tonight otherwise Wednesday. The GOP can afford to lose two Senate votes with VP Pence postponing a Middle-East trip in case he is needed to break a tie vote.

Our BNZ colleagues note that the ANZ business survey fell sharply in November and it will be interesting to see if businesses have toned down their negativity toward the new government (see chart of the day below).

As for the RBA minutes, our sense is that they are likely to reiterate the Bank’s positive outlook on the local and global economy, but signs of a cooling housing market and subdued inflation are likely to keep the RBA on hold over the coming months. NAB expects the RBA to raise interest rates twice in the second half of 2018 as the unemployment rate falls sufficiently to convince the Bank ultra-low rates are no longer needed.

Overnight

On global stock markets, the S&P 500 was +1.48%. Bond markets saw US 10-years +3.58bp to 2.39%. In commodities, Brent crude oil +0.03% to $63.33, gold+0.6% to $1,261, iron ore +2.1% to $70.47, steam coal +0.3% to $100.15, met. coal +0.0% to $231.50. AUD is at 0.7664 and the range since yesterday 5pm Sydney time is 0.7641 to 0.7663.

For full analysis, download the report:

• Markets Today: 19 December 2017 (PDF, 120kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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