US tax reform could boost bull case

by
Timothy Moore

The prospects of more details from President Donald Trump and Congressional Republicans on tax reform will move to centre stage this week, potentially throwing a a further bone to bullish investors.

With the second quarter earnings season fading in the rear view mirror, tax cuts provide a potential to extend corporate America’s profit surge. And they offer a distraction from a potential US government shutdown and a potential default.

“All this comes after a relative summer of calm for most financial markets, a calm that was not the least disturbed by (Fed chair Janet) Yellen’s remarks in Jackson Hole (which avoided monetary policy),” according to BMO Capital Markets chief economist Douglas Porter.

“Despite all the drama in the geopolitical world, US markets barely budged, on net, over the past three months,” Mr Porter noted. “Looking back to just before Memorial Day (May 29), the S&P 500 is up slightly, 10-year Treasury yields have dipped a few basis points to just under 2.2 per cent, and oil and gold are almost flat on net.”

In New York on Friday, the S&P 500 and the Dow Jones edged higher and the Nasdaq dipped. All three benchmarks were higher on the week. 

Local stocks are poised to open higher. ASX futures were up 6 points over the weekend. The Australian dollar was 0.3 per cent higher. The spot price of iron ore rebounded 1.6 per cent; base metals mostly paused. UK markets are closed on Monday for a bank holiday.  

The much anticipated speech by Dr Yellen on financial stability at the annual gathering of global central bankers at Jackson Hole proved to be rather academic; monetary policy drew no more than a passing mention.

Dr Yellen, however, argued strongly for the US to retain the majority of the financial regulations put into place after the financial crisis, saying the rules helped bolster the economy. It’s a position that could diminish her chances of a second term; her current term expires in February.

Hours later, Mario Draghi, the president of the European Central Bank, also held to script, arguing against a rising protectionist wave around the world; the euro rallied against the greenback as Mr Draghi didn’t try to rein in the single currency, which has advanced more than 13 per cent against its US counterpart this year.

In a question and answer session, Mr Draghi said he was confident inflation would accelerate over time. For now “a significant degree of accommodation” was still required, he also said, reiterating his existing stances on both.

This week – with little key Australian data and reporting season slowing dramatically – the focus will shift to US tax reform efforts and a mix of economic data including China’s official and Markit manufacturing PMIs for August. The highlight US releases include consumer confidence, personal spending, durable goods orders and August’s non-farm payrolls data on Friday.

Reporting results Monday are Lend Lease, Reliance Worldwide, Retail Food Group and Spark Infrastructure.

“We expect a healthy 200,000 gain in non-farm payrolls in August, with the unemployment rate falling to a new cyclical low of 4.2 per cent,” said Capital Economics’ Paul Ashford.

TD Economics is somewhat less enthusiastic, forecasting 175,000 new jobs with the jobless rate holding at 4.3 per cent. 

“On wages, we expect a 0.2 per cent month over month increase, taking in account unfavourable calendar effects that bias the monthly gain downward. The rise should lead average hourly earnings slightly higher on a year-on-year basis to 2.6 per cent v 2.5 per cent,” TD said.

“Overall, the combination of solid job growth and a pickup in wage gains argues for a hawkish report, though the market response will be tempered by concerns over low inflation and near-term political risks.”

US investors will be awaiting more tax reform details from President Donald Trump in the days ahead. He’s expected to press forward. Gary Cohn, the White House’s top economic adviser, said in an interview that he expects tax reform to pass this year.

What’s unclear for global investors as the week begins is the impact of Hurricane Harvey on Texas, and its oil refining sector. In addition, North Korea launched a number of short-range missiles over the weekend. By the closing bell in New York on Friday, Wall St’s volatility measure had dropped back below 12, where it has spent the vast majority of its time this year.

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