The US Congress is working in overdrive to get tax reform legislation on President Trump's desk before the end of this week, and all signs are pointing to the increasing likelihood that both the House and the Senate have their votes wrapped up by Wednesday at lunch.
As the first piece of landmark legislation during President Trump's first term coming nearly a year into his presidency, investors are taking the tax bill for what it is at face value: a massive Christmas gift for corporations. But the impact of the tax bill will vary across asset classes.
In an environment where corporate earnings growth has already been robust during 2017 - the main fuel behind US equities rallying all year long - a tax bill that promises to bolster earnings, even more, should carry US stocks well-through 2018.
Yet at the same time, the reaction by US Treasuries and the US Dollar is telling of investors' long-term beliefs about the impact of the tax bill. While it may be positive for corporate earnings growth in the short-term, it is not necessarily being viewed as the same force for economic growth and inflation in the long-term; the US yield curve (2s10s) set a fresh yearly low yesterday at +51.2-bps.
In sum, what we're seeing play out in recent days serves to confirm our 'rest of year forecast' laid out during the Thanksgiving holiday week, "US Assets Taking Divergent Paths: Stocks Look Healthy, the Dollar Doesn’t."Since November 22, the day that forecast was written, the US S&P 500 is up by +3.75% and the DXY Index is down by -0.47%.
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Agreed, the dollar should grind weaker given the tax bill. There is a good reason why bitcoin has taken off at this time. It is yet another warning of the dangers of playing weak monetary policy cards to artificially stimulate the economy. Sadly cause and effect are delayed, so one may not correlate the eventual negative effects of potentially weaker government revenues with a downturn caused by inflation later.
Agreed, the dollar should grind weaker given the tax bill. There is a good reason why bitcoin has taken off at this time. It is yet another warning of the dangers of playing weak monetary policy cards to artificially stimulate the economy. Sadly cause and effect are delayed, so one may not correlate the eventual negative effects of potentially weaker government revenues with a downturn caused by inflation later.