‘Twas the week before Christmas, when all through the markets
Not a trader was stirring, not even a louse;
The stockings were hung by the Bloomberg with care,
In hopes that tax reform soon would be there;
The investors were nestled all snug in their beds,
While visions of record returns danced in their heads.
Global markets are entering the last full trading week of the year on an optimistic footing, with equities soaring upward after Republicans successfully consolidated the tax reform measures passed by the House of Representatives and the Senate into a single bill. The legislation published late on Friday will cut America’s statutory corporate tax rate from 35% to 21%, and is expected to boost business competitiveness. Congressional Republicans hope to send the bill to President Donald Trump for signature this week.
In the currency markets, traders are taking a more cautious approach, with lingering concerns about a potential government shutdown intersecting with uncertainty about the real-world impact of the tax package to keep risk appetites suppressed.
But just as dry leaves that before the wild hurricane fly, when they meet with an obstacle, mount to the sky – we suspect that the dollar has room to run higher.
Forecasters expect lower corporate taxes to lift headline growth by roughly 0.5 percent over the next year, potentially lifting the pace of interest rate hikes from the two currently discounted by markets; closer to the three consistently projected by Federal Reserve policymakers.
Wider government deficits could also play a role in pushing real rates higher. The Republican tax plan is expected to increase the deficit by about $1.5 trillion over the next 10 years, forcing the Treasury Department to issue more short-maturity debt – just as reinvestment by the Fed turns negative in net terms.
Countries and corporates who have committed ‘original sin’ in recent years could lift demand as they try to roll trillions of dollars in loans over at prevailing rates.
Finally, asset managers seeking liquidity and corporate treasurers trying to fund operations could exacerbate the year-end ‘dollar scarcity’ problem that typically strikes in the week prior to Christmas. Increased funding costs are already evident in the cross-currency basis swap market, and could widen farther if the trade-weighted dollar exchange rate rises in the coming days.
Taken in sum, politicians may soon pause their mischief, and tax reform may be a wrap, but it’s not yet time to settle your brains for a long winter’s nap.
Director, Global Product & Market Strategy
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Scheduled Data Releases
19:30 * AUD Reserve Bank of Australia Meeting Minutes, December
08:30 * USD Current Account Balance, Q3
04:00 * EUR Euro-Zone Current Account, October
08:15 ** GBP Bank of England Speech, Carney
10:30 ** USD Department of Energy Weekly Inventories
00:00 ** JPY Bank of Japan Rate Decision
01:30 ** JPY Bank of Japan Press Conference, Kuroda
08:30 *** CAD Consumer Price Index, November
08:30 ** CAD Retail Sales, October
08:30 ** USD Gross Domestic Product, Q3 (Third Estimate)
08:30 ** USD Core Personal Consumption Expenditure, Q3 (Third Estimate)
08:30 ** USD Weekly Jobless Claims
02:45 * EUR French Gross Domestic Product, Q3
04:30 ** GBP Gross Domestic Product, Q3
08:30 *** CAD Gross Domestic Product, October
08:30 *** USD Core Personal Consumption Expenditure, November
08:30 ** USD Durable Goods Orders, November
10:00 * USD University of Michigan Sentiment, Early December
13:00 ** USD Baker Hughes Weekly Rig Count
Note: Asterisks indicate our preliminary estimate of the potential market impact associated with each event. One asterisk indicates an event with the lowest, two for a moderate impact, and three for the highest expected impact.
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