Tax Reform Proposal Spurs Risk-On Trading

 

Return of the Trump Trade!

US stocks partied like it was November 2016 today, as investor confidence surged following the Trump Administration’s release of their tax reform outline, titled “Unified Framework for Fixing Our Broken Tax Code”.  Highlights of the new proposal include:

• Consolidation and reduction of the individual tax brackets/rates- 12%, 25% & 35% (previously seven brackets ranging from 10%-39.6%)
  • Doubling of the standard deduction
  • Increasing child tax credit
• Reduction in the corporate tax rate to 20% from 35% (slightly above the 15% corporate rate promised during Trump’s campaign)
• Capping of the top tax rate for pass-through businesses at 25% (previously 39.6%)

The overall framework presents a net $2.2 trillion cut in taxes over the next decade.  To the chagrin of many Democrats, absent from the document were specific details regarding how the tax cuts would be funded, leaving much speculation about who the true winners and losers of the reform will be.

 

 

All three major US stock indices rose on the day, led by gains in banks and tech shares, as the tax cut momentum added to Janet Yellen’s hawkish rhetoric yesterday.  Treasury yields/swap rates gapped higher from the open and are currently up 1-9 bps across the curve in a bear steepening pattern.  The yield on the 10-year note is up 7 bps to over 2.30% – its highest level in two months.  The US dollar increased against major currencies for a second consecutive session, up 0.6% on the day.

 

Growing Confidence Among Businesses Seen in Durable Goods Report

Durable Goods Orders for August highlighted today’s US economic data releases.  The headline number exceeded consensus estimates (+1.7% vs +1.0%e), boosted largely by a 45% growth in civilian aircraft orders.  When stripping out transportation, orders posted a modest 0.2% rise (+0.4%e), weighed down by a 9.4% decline in defense capital goods.  On the positive side, core capital goods orders rose 0.9% MoM (+0.3%e), representing the eighth consecutive monthly gain.  Core capital goods shipments climbed for a second straight month, up 0.7% in August.  Overall, the report was viewed as a net positive and could set the stage for stronger-than-expected Q3 GDP.