The Senate Tax Bill and Other Market Factors This Week

The Senate tax bill and magnitude of holiday shopping will remain the markets' focus this week.   Last week, odds of passage improved when the Alaska Senator Murkowski endorsed ending the ObamaCare mandatory insurance provision.  But, there is still uncertainty about passage, although scuttlebutt among Washington staffers is that the odds of passage are slightly positive (from what I hear).  News headlines should spike on Tuesday, when Trump and Senate Republicans meet and the Senate Budget Committee acts on the legislation ahead of the full Senate vote later in the week.

A tax cut would be a positive for stocks and negative for Treasuries, which should carry into H118.  But, these market responses could reverse later next year, when the boost to the economy from the tax cut begins to dissipate while the drag from higher interest rates begins to build.  This is the typical "model" prediction of the after-effects of a tax cut.  Potentially more important is the possibility that the corporate tax cut will enhance and sustain the recent pickup in productivity growth by encouraging additional investment.   A faster trend in productivity growth will help solve long-term problems, such as the solvency of social security and Medicare, as well as improve the US standard of living (see  my November 5 blog).

This week's US economic data are expected to show modest pullbacks in new home sales and business surveys, joining the Claims data in suggesting a slight crack opening up in the "strong growth" story.  The pullbacks are not enough to derail the story, but should act to keep Treasuries in a range (see table below).  The October Core PCE Deflator is expected to edge up to 0.2% m/m and 1.4% y/y (was 0.1% and 1.3% in September).   Some of the speedup results from pass-through of the higher oil prices, and the overall story of modest, below-target inflation should remain intact.

                                                              (level)
                            New Home Sales        Markit Mfg PMI             Chicago PM              Mfg ISM
       Q117                 617k  Units                54.2                                 55.3                           57.0
       Q2                     605                            52.5                                 61.1                           55.8
       Q3                     603                            53.0                                 61.0                           58.6

       Oct                    625 **                        54.6                                 66.2                           58.7
       Nov *                                                   53.8                                 63.0                           58.3

* consensus estimate

** consensus estimate, down 6.3% from 667k in September

There are also a number of Fed speakers this week, including Yellen, Fed Governor Powell, NY Fed President Dudley and SF Fed President Williams.   They will likely keep open the door for a December rate hike.   Last week, Yellen emphasized the apparent decline in long-term inflation expectations in cautioning about raising rates too fast.  This would be important except that she is a lame duck.   Powell, Trump's appointee for Fed chair, should be more circumspect.