Last week, we witnessed the Goldilocks narrative in real-time. We got a CPI miss in the U.S. and a tepid inflation forecast from Draghi (underscoring the notion that central banks will not get too aggressive on normalization), an upbeat outlook on growth from the ECB and the Fed along with the hottest German manufacturing PMI print on record (underscoring the idea that inflation aside, the global economy is on sound footing), and we got a well-telegraphed hike from the Fed that was interpreted as dovish by the market. All of that is consistent with the “Goldilocks” narrative that’s been driving risk assets higher and suppressing vol.
This week will be all about the tax bill. The clock is ticking on Republicans to get this done by the end of the year, even as virtually everyone has reservations about it. On Friday, markets rallied on news that Marco Rubio is on board and Bob Corker has said he too will vote yes despite having apparently not read the legislation. Consider this from IBTimes:
“I had like a two-page summary I went through with leadership,” said Corker. “I never saw the actual text.” Despite not reading the bill — and having time to read it before the final vote scheduled for this week — he reiterated his support for the bill to IBT, support he announced hours before bill’s full text was publicly released on Friday.
Corker called IBT to respond to a series of IBT investigative reports showing that he switched his vote to “yes” on the tax legislation, only after Republican leaders added in a provision reducing taxes on income from real-estate LLCs. Federal records reviewed by IBT show Corker, a commercial real estate mogul, made up to $7 million last year from such income. President Donald Trump’s financial disclosures listed between $41 million and $68 million of the same income.
After the report, Corker called IBT and asked for a detailed description of the provision, insisting he did not know about. After the provision was described, he said: “If I understand what [the provision] does, it sounds totally unnecessary and borderline ridiculous.”
A few minutes later, however, Corker called back, and tried to back off that criticism.
Draw your own conclusions on that – everyone else certainly is (#corkerkickback).
Meanwhile, the administration is still hard at work trying to sell the public on the notion that the plan is aimed at the middle class despite the fact that independent analysis shows it overwhelmingly benefits the rich and corporate “citizens.”
“This is a very large tax cut for working families,” Steve Mnuchin told CNN this weekend. The bottom line is this, from WaPo:
Most Americans would see their overall tax burden reduced under the bill during its first few years of implementation, but the plan’s long-term implications for the middle class are more complicated, depending both on an individual family’s circumstances and decisions that won’t be made for years.
And here’s a slideshow that shows you the results of a CBS poll:
You get the idea.
Notably, John McCain will not be in D.C. for the vote. He’s flying back to Arizona to be with his family following cancer treatment. “The White House and Senate Majority Leader Mitch McConnell’s office have been planning for McCain’s potential absence during the tax bill vote, making Tennessee Republican Sen. Bob Corker’s announcement Friday that he would support the plan critical,” CNN notes, before adding that according to two Republicans close the matter, “he did so as an insurance policy for McCain’s absence.”
Here’s Barclays with a preview of what’s ahead in the U.S. along with some color on the dollar and the economic impact of the tax bill:
Although we expect only a modest boost to 2018 GDP growth from tax cuts (ie, about +0.5pp), the actual passage of the bill could still provide some modest support the USD in the near term, in our view. Second, the two-week continuing resolution (CR) will expire on 22 December, which requires another CR extension beyond year-end (or passage of full FY18 budget) to avoid a federal government shutdown. Third, the November core PCE deflator (Friday) and FOMC minutes (3 January) will allow to assess inflation dynamics and how the Fed is balancing softer inflation, tax cuts, and its implication for the outlook of rates increases.
On the data front, we’ll get the third reading on Q3 GDP along with PCE.
We’ll also get the BoJ in case anyone is in need of some comic relief. Needless to say, there won’t be any surprises there. “The BoJ will meet on Thursday [and] we expect them to keep all key monetary policy settings unchanged and retain the ‘about JPY80tn’ guideline for net JGB purchases,” BofAML writes. And here’s Goldman: “We do not expect any changes at the upcoming December 20-21 BOJ meeting.”
Everything was going great until Kuroda stood on the railing… pic.twitter.com/Znoo3sbJBR
— Rudolf E. Havenstein (@RudyHavenstein) August 28, 2017
The Riksbank is on deck as well and that’s potentially interesting. As a reminder, Sweden is effectively beholden to ECB policy (if you need a refresher course on that, see here). Additionally, the December meeting comes on the heels of a hawkish shift from the Norges Bank. A recent SEB survey shows that everyone expects the Riksbank to keep the repo rate unchanged at minus 0.50% and 63% expect the central bank to continue to expand its balance sheet in 2018. Here are the rest of the results summarized by Bloomberg:
- Only 22% expect Riksbank to announce a new QE program in Dec. but 41% believe it will start pre-investing SGB1052 already in 1Q 2018
- Almost 40% expect near-term rate path to be lowered while ~20% expect a higher path; some 54% of respondents expect the Riksbank to hike repo rate in July or September 2018
- Survey also finds that “a large majority thinks QE has worsened market functioning of both nominal and inflation-linked bonds significantly”
Here’s Goldman’s take:
The Executive Board will decide on whether to extend bond purchases beyond year-end at the December meeting. Bond purchases have gradually been scaled down (in SEK15bn increments) from SEK60bn during the first half of 2016 to SEK15bn over the past six months. We see a reduction to zero from January 2018 as representing a natural end to the bond purchase programme. In our base case we also expect the Riksbank to leave its repo rate path unchanged; the current path signals a first hike in Q3 next year. While we do not expect the Riksbank to extend its asset purchases, we still expect its message at the December meeting to be broadly unchanged from October and thus still on the dovish side.
The risk scenario is that the Riksbank extends its asset purchases for the first six months of 2018 by a small amount (e.g., SEK15bn) and possibly also pushes out the first rate hike into Q4. In this scenario, we would expect the Riksbank to argue that this is driven by continued ECB bond purchases. We attach around a one-in-three chance of this scenario.
And here’s BofAML underscoring the FX risk that’s part and parcel of why the Riksbank must everywhere and always consider what the ECB is doing:
The Riksbank will meet on Wed. Whilst policy rates are likely to remain on hold, the focus will be on whether QE will be extended into 2018. We think the risks are not insignificant, but the Riksbank will be cognizant that ending QE, whilst keeping the timing of the first rate hike for H2 2018, will drive sustained SEK appreciation. Strengthening of forward guidance may neutralize the impact of ending QE.
Finally, here’s Barclays:
Although the Riksbank is widely expected to keep its repo rate unchanged at -0.50%, expectations around the likely extension of the bank’s QE program are finely balanced. We think market pricing is consistent with a higher likelihood of QE extension but the reward-to-risk of pre-positioning ahead of the decision looks rather poor, in our view
Meanwhile, Thursday will also bring the Catalan regional elections. Here’s the latest polling via FT:
Long story short, this is a hot mess. Obviously, the result has implications for other independence movements across the EU and as such, you’ll want to watch this closely – especially as the ECB is set to taper starting in January thus implicitly rolling back the policy put for periphery debt.
All in all, “no rest for the weary” if you’re a market observer/trader.
Full calendar via BofAML