Daily Market Color November 2, 2017Fed Chair, Taxes and Jobs…Oh My! Tax Cuts and Jobs Act House Republicans rolled out their much anticipated tax bill today, outlining the plan to revamp both corporate and individual tax rates, and with the hopes to work a passable version by the end of the year. Notable details of the released bill include: Collapse number of individual income tax brackets from seven to four Gradually phase out the estate/death tax Eliminate Alternative Minimum Tax Cut corporate tax rate from 35% to 20% Impose limit on state and local tax deduction Notable areas of the tax code unrevised in the tax reform summary were 401k savings accounts, the ACA individual mandate and the top individual tax rate (39.6%). Powell Gets the Nod This afternoon President Trump officially named Jerome (‘Jay’) Powell as his nominee to replace Janet Yellen as the Federal Reserve Chair come next February. In doing so, Yellen becomes the first Fed Chair in 40 years to not be selected for a second term, despite receiving high praise from Trump during his selection process. Powell’s views are considered to be closely aligned with the Fed’s current course of action, which has promoted a gradual reduction of the post-crisis monetary stimulation as the economy continues to improve. In the five years served as Fed Governor, Powell never dissented on an FOMC policy decision. Powell has also been linked to favoring looser financial regulation, including softening the Volcker rule’s trading restrictions. Economic Data Maintains Healthy Outlook A report from the Labor Department’s displayed the weekly initial jobless claims trending near a 44-year low, as the negative employment impact from the hurricanes continues to fade. The number of new claims for the week ended October 28th fell to a seasonally adjusted 229,000 (235,000 expected), down 15,000 from the previous week’s revised level. The four-week moving average of claims dropped by 7,250 to 232,500. Also detailed in the report, the number of continuing claims fell to its lowest level since December 1973 – 1.884 million for the week ended October 21st. Other key economic data on the day included nonfarm productivity, which rose at a seasonally adjusted pace of 3.0% during the third quarter – a three-year high which beat projections of 2.6%. Detailed in the report, output increased at a healthy 3.8% pace while hours worked climbed 0.8%. Compared to a year earlier, productivity increased 1.5% in Q3. BOE’s (Dovish) First Hike in a Decade This morning the Monetary Policy Committee announced its decision to increase the benchmark borrowing rate from 0.25% to 0.5%, representing the first hike by the Bank of England in the past ten years. The 7-2 vote in favor of the rate hike was largely influenced by rising inflation in Britain, boosted by a weaker pound and historically low unemployment. The MPC statement released afterwards was less-than-hawkish in its tone, as language in prior memos suggesting the need for more hikes than markets were expecting was omitted. “Considerable risks” were cited in the statement, largely pertaining to Brexit and its potential to weigh on the already-struggling productivity growth. Limited and gradual rate hikes were stressed in the text, specifically noting that another increase isn’t imminent. The British pound declined more than 1% following the announcement to $1.306. US stocks were mixed on the day as investors responded to the bevy of market news. Shares in homebuilding companies posted some of the largest declines following the tax bill release, as the plan supported a cap on deductions of mortgage interest. US Treasury prices rose in response to the tax bill and Fed Chair selection, with yields/swap rates falling 1-4 bps across the curve in a bull flattening pattern. US yield curves are now the flattest they have been since the financial crisis, with the difference between 2- and 10-year Treasury yields under 75 bps.
