Now the Fun Begins!
The much vaunted tax policy has finally been released and both Cohn and Mnuchin will have both earned their keep if they can convince both Houses to accept Trump’s tax policies. On balance the Tax Policy is far reaching however it’s all about providing tax cuts with the biggest tax cut falling to corporates which will only pay 15% tax. What it appears to lack on the surface is the incentive to invest in infrastructure and R&D.
What the Trump Administration will find tough will be getting the Bill passed in both Houses. The Republicans can run the gauntlet and go for a simple majority but that only is a short term fix. In ten years’ time the Bill would be phased out and would require replacing. At the heart of the policy is for sustainable 3% growth and this is required to get the Bill even close to deficit neutral. For many Republicans this is hard to go back to their electorates and for those of the Tea Party it should be totally unpalatable. At heart is the deficit and given many branches of the Republican Party’s rallying call was reducing Government spending and reducing the deficit will be hard to explain when they are expected to vote for increasing the deficit.
It is noble to believe that a simple tax cut will increase growth and that growth will be sustained in excess of 3%. Retooling takes time, finding people who can use those times are even harder. Just ask GE who after sacking a large number of technicians some years back found it extremely difficult to employ people with the necessary skills when GE brought back some manufacturing capacity.
Growth occurs when disposable income rises and productivity increases. A simple tax cut won’t do that. It may pave the way but without incentives, CAPEX is a very difficult mistress and has been the cause for many a CEO to lose their job.
It will be interesting to see how Trump wins over the necessary number to win the votes. The Administration may need to compromise to garner the necessary votes and without tax border offsets getting the budget to neutral will be difficult. We have however already seen a slight casualty and that’s the Wall. It is interesting to note that the Wall has been delayed so that the Government can keep operating beyond Friday but importantly it gives time to win over the representatives of the Southern Border States, which at the time appears to be difficult. Many U.S. businesses are dependent upon undocumented labour to get the necessary laborious tasks completed.
On the day Trump continued to wage war on NAFTA and it appears as though the rhetoric on Mexico is increasing with the Peso reflecting the days’ comments and falling some 1.7%. Trump also wants to investigate Aluminum and this could alter relations with China, given China is a major producer. The War on trade with Canada continues. It would appear as though the Pillars of Free Trade are being washed away with the Trump Administration and this will be difficult for global growth and which the USA has benefited significantly. Emerging markets are set to be under pressure albeit more pressure. On another note Trump has established a new Office, and the task will be assist the incarceration and prosecution of offending undocumented people living in the U.S.
On the day the equity market surged early but faltered late in the day to close down. The announcement did not provide the boost and many investors believe that the Tax Bill will have a difficult passage.
The economy is not growing as strong as previously thought. Retail sales which were reported initially as up 4.6% have now been revised down to 3.1% suggesting that the economy was growing at a far slower pace than expected. Accordingly JPM have reduced their growth forecasts. Inventory for vehicle manufacturers remains high and so too trucks as demand falters.
The Bloomberg USD Spot Index increased 0.3% today. The yen was stable and the euro fell 0.2%. (Be wary because Le Pen has a good chance of getting through. With what appears strong Kremlin support and an enraged public following recent terrorist activity and a strong nationalist movement she should not be easily dismissed). Gold was up 0.2%. Crude was up on a government report suggesting crude stockpiles had fallen for a third week. Bonds staged a small rally closing at 2.30%.
Aussie Market Today.
Given the day’s activity equities should be flat on the day and bonds will be slightly better. Geopolitical risk weighs on the region and this will have a direct impact on any bond market direction. Flight to safety risks will mean a bond rally. For the moment markets appear to be acting rationally but a comment or a provocative move can easily change a complacent market.
Iron ore was down slightly and this could weigh on the Aussie dollar. I expect the market on the day to be quiet given the future direction could quickly change if Le Pen wins the French Election or Trump culls NAFTA or the geopolitical risks increase on the Korean Peninsula. Interesting times ahead I just hope they don’t become too interesting.