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Equities Rebounded as House Passed Its Version of Reform Bill. Bigger Hurdle Follows Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Thu Nov 16 17 23:05 ET

Passage of the tax reform plan in the House of Representatives and strong macroeconomic data facilitated the rebound in equities. Wall Street gained for the first time in three days, recording the biggest gain in two months as led by the rally in tech stocks. Nasdaq jumped+1.29%, while the DJIA and S&P 500 indices rose +0.8% and +0.82% respectively. US Treasuries fell, sending yields higher. 2-year yields, jumping to a 9-year higher, added +2 points to 1.712% while 10-year yields were up 4 points to 2.361%. The better-than-expected US core CPI in October has reinforced expectations of a December Fed funds rate hike. The market has already fully priced in such an increase. Meanwhile, the chance of a rate hike June 2018 has exceeded 70%. In the FX market, US dollar was mixed with the DXY index climbing slightly higher, by +0.13%. In the commodity sector, oil prices remained under pressure. The market is increasingly concerned that the ample US output and inventory could undermine the efforts of production cut by the OPEC and other non-OPEC producers. The front-month WTI crude oil contract slipped -0.34% while the Brent contract plunged -0.82%. Precious metals climbed mildly higher with the benchmark Comex gold and silver contract adding +0.075 and +0.63% respectively. Base metal prices fell across the board, led by the sharp -5.68% selloff of nickel price.

US Tax Reform

The House passed its version of tax reform bill with a 227-205 vote. The outcome had been widely anticipated as Republicans control 240 out of 435 seats there. Despite the passage of the bill, there were 13 Republicans who did not vote for the bill. Many of them defected as they were dissatisfaction with the elimination of some tax deduction. The House bill eliminates the deduction for state and local income taxes, but preserves the deduction for property tax up to US$ 10 000. Yet, the partial preservation was not sufficient for the policymakers from high-tax states such as New York and New Jersey, and California and North Carolina. The House is presumably the easier hurdle for the tax reform bill. The next is the Senate. The Senate Republicans' version of reform bill, released last week, contains material difference from the House version. Even if the Senate manages to pass its own bill, this will need to be reconciled with that passed by the House.

Fed and BOE

As the Fed is almost certain to increase the policy rate, for a third time this year, in December, Dallas Fed president Robert Kaplan reiterated that he is "very open-minded" about "considering taking a next step in removing accommodation at upcoming meetings". Categorized as a dove by the market, Kaplan has been wary of persistent inflation weakness. He suggested that the interest rates is not far from the neutral rate and would like to "see more evidence that we are making progress in reaching our inflation objective". Separately, Cleveland Fed's Loretta Mester affirmed her support of continued gradual tightening. In the UK, BOE governor Mark Carney suggested that the policy rate would be increased "a couple of times over the next few years" if economic developments warrant. He added that it would take a long time to see the full implications of Brexit on the economy.

Dataflow

While only second-tiered data were released, they evidenced the US economy is on firm footing. Industrial production expanded +0.9% in October, beating consensus of +0.5% and the upwardly revised +0.4% in the prior month. The National Association of Homebuilders Housing Market Index added +2 points to 70 in November. This also came in higher than expectations of 67. On the job market, initial jobless claims added +10K to 249K in the week ended November 11. While this came in higher than expectations and sent the 4-wek moving average to 237.8K, the continuing claims fell -44K to 1.86M in the week ended November 4. The Philly Fed manufacturing index surprisingly fell -5.2 points to 22.7 in November. The market had anticipated a milder drop to 24.1. The details in the report were more mixed. Business conditions added +3.7 points to 50.1 while capex slipped -1 point to 36.7.Moreover, employment plunged -8 points to 22.6, new orders added +1.8 points to 21.4 and prices paid added +0.9 point to 39 in November. Today, the US would release house starts and building permits data for October, whereas Canada would release its October inflation report.

 

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