Tax Reform Remains Front and Center in Financial Markets

Progress for Senate Tax Bill

Senate Republicans moved one step closer to bringing their tax reform bill to a successful floor vote today as Senator John McCain publicly announced his support for the current measure.  While McCain’s backing is a very positive sign for the GOP’s efforts, there still remains a handful of other Republican Senators on-the-fence about the most recent version of the bill.  Controversial topics include the individual deduction for state and local property taxes, child tax credit, carried interest and a tax rate “trigger” mechanism if the cuts don’t boost the economy as assumed in the projections.  Republicans will require 50 of the party’s 52 Senate votes in order to pass the bill, and a final vote could come as soon as tomorrow.
 
US financial markets resumed the broader risk-on sentiment following the news, with all three major US stock indices gaining 0.7% – 1.4% on the day and the DJIA hitting a new record high as it crossed 24,000 for the first time ever.  US Treasurys sold off for a second consecutive trading session, as yields/swaps rates climbed 1-4 bps across the curve.  The yield on the 10-year note rose above 2.41% – its highest in over a month, while 5 year yields hit 6 ½ year highs and 2 year yields hit their highest level in over 9 years.  In commodities, gold futures declined 0.7% to $1,275/ounce.

 

 

Spending Eases, Inflation Inches Higher

The Commerce Department’s report on personal income and consumer spending for October headlined the economic data released today.  Detailed in the report, consumer spending in the US cooled from its quickest pace in eight years, while income growth held steady and price pressures remained tepid.  Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.3% for October (+0.9% prior month), as the boost from post-hurricane motor vehicle purchases in the South faded.  Personal income grew at a strong +0.4% pace for the second consecutive month.  Inflation data in the report showed continued softness as the PCE index, the Fed’s preferred measure of inflation, increased 0.1% in October, yielding a below-target 1.6% annualized rate.  The core PCE index managed a 0.2% rise MoM and 1.4% YoY – matching last month’s lowest yearly pace since 2015.

 

 

Success in Vienna

This afternoon OPEC officials and energy ministers of other oil producing nations formally agreed to extend output cuts through the end of 2018.  As the world’s top two oil producers, Saudi Arabia and Russia will represent the largest commitments of the deal that includes 1.8 million barrels per day in overall cuts.  Additionally, Nigeria and Libya will now participate in the efforts to reduce the global supply glut – both countries were previously exempt from the cuts.  Addressing an eventual exit from the deal, Saudi Energy Minister Khalid al-Falih announced that it was too early for such discussions, but would look to evaluate further at the next regularly scheduled OPEC meeting in June 2018.  WTI crude is currently holding steady near $57.35/barrel.