Congress passes long awaited tax bill

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Congress yesterday passed the long awaited tax bill, which will now go to President Trump to sign into law. Although it is the largest overhaul of the U.S. tax code in 30 years, in terms of size it is only the 7th or 8th biggest tax cut in history and will have a relatively modest impact on growth. The tax cuts will cost roughly USD1.5 trillion over 10 years, the cornerstone of which will be a permanent large corporate tax cut from 35% to 21%, along with an assortment of smaller personal income tax cuts and changes to tax brackets, some of them only temporary. The Federal Reserve recently raised its forecast for growth next year to 2.5% from 2.2% in expectation of passage of the bill, an estimate that conforms with many of those from the private sector. In contrast the US Treasury is pinning its hope that the tax cut will ‘trickle down’ through the economy to generate growth of closer to 3.0% in coming years.

The Bank of Japan (BoJ) has left monetary policy unchanged, as was widely expected. Growth has picked up in recent quarters, but inflation still remains far off the target 2.0%, giving the BoJ leeway to sit tight for the time being. All eyes will be on Governor Haruhiko Kuroda’s press conference later today, looking for any indication as to whether policy will begin tightening next year, in line with the developed market trend.

The Spanish region of Catalonia is going to the polls again today, with the final opinion polls last week suggesting a slight lead for the pro-independence camp. This comes as the EU is threatening sanctions over Poland’s reform of the judiciary, signed into law yesterday. Markets have been relatively calm ahead of the vote in Spain, and the move by Poland was widely expected and already priced in. However, success for the pro-independence parties in Catalonia could see pressure resume, especially ahead of the Italian general election next year which is likely to be the next significant test of EU unity.

Japanese CPI still far from 2% y/y target

Source: Bloomberg, Emirates NBD Research

Source: Bloomberg, Emirates NBD Research. 

Fixed Income

Treasuries extended their sell-off as the US Congress approved a bill to overhaul the tax code. Yields on the 5y USTs, 10y USTs and 30y USTs rose 1bps, 3 bps and 6 bps respectively. There was marginal impact of the move in USTs on regional bonds with the YTW on the Bloomberg Barclays GCC Credit and High Yield index gaining 1 bps to 3.73%. Credit spreads on the same tightened by 1 bps to 150 bps.

FX

USDJPY has rallied to one-week high overnight above 113.00, driven by a rise in U.S. Treasury yields, while the passage of the U.S. tax reform bill in both the House and the Senate was also a positive. With the BOJ having maintained monetary policy unchanged in Japan overnight the focus may also turn to BOJ Governor Kuroda’s press conference later today. Otherwise the dollar index was softer overall as liquidity thinned.

NZDUSD reversed the week’s declines to climb back above the 0.7000 level. This was despite economic data showing that GDP slowed to 0.6% q/q in Q3 2017 compared to 1.0% the previous quarter. Despite a flurry of soft economic data including a fall in milk prices to the lowest level in more than a year, consumer confidence near their lowest levels since 2009 and the trade deficit in November being twice as large as expected, the kiwi has been resilient amid thin liquidity. We see resitance at 0.7034, the December high and support at 0.6929 (the 50-day moving average) with the main driver behind the price being market appetite for USD.

Equities

Asian equities were mixed after US stocks dipped in the aftermath of the U.S. congressional passage of tax cuts suggesting investors see the growth boost narrative from the corporate and individual rate reductions as having played out. The S&P 500 Index gave back a rally before closing -0.1% down for the session in New York while the MSCI Asia Pacific Index was also down -0.2%. 

Commodities

Oil prices gained yesterday following a drop in U.S. crude inventories to the lowest level since October 2015. Data from the Department of Energy showed a drawdown in U.S. crude inventories of nearly 6.5m barrels compared with market expecations for a drawdown of 3.15m. Over the course of the day ICE Brent Futures rose 1.19% to close at USD 64.56/bbl while NYMEX WTI Crude Futures gained 0.92% to close at USD 58.09/bbl. 

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