Detail, what detail, that’s the trouble with raising expectations, and then falling short as markets digested the outline of the Trump administrations new tax reform plan.
Generally you would expect a plan on something as complex as tax reform to take up more than a single A4 piece of paper. The fact that it didn’t shouldn’t really have come as a surprise, yet there was still some disappointment about the lack of detail, and as with anything in politics, that’s where the devil will be, as US markets turned lower as the detail turned out to be more of a wish list.
Yesterday’s announcement outlined a series of aspirations, and they more or less confirmed what markets had been expecting, in that the corporate tax rate would be reduced from 35% to 15%, while a one off tax on overseas profits would be cut to as yet an undefined level, while all company profits would be levied on a territorial basis.
On the subject of tax brackets, they would be reduced from seven to three, 10%, 25% and an upper rate of 35%, with all deductions eliminated with the exception of mortgage interest relief and charitable donations.
Markets had been hoping for more in the way of specifics, in particular the percentage level of the one-off profits tax, which it is hoped will prompt technology companies to repatriate the billions of dollars in profits currently held overseas, as well as some indications on timings, and how the cuts would be funded.
These still appear to be some way off, and appear unlikely to go through this year, though we may get something on healthcare by the end of the month. In any case the effect on the US dollar is likely to be a negative one given that markets will have to wait a while longer for a repatriation boost.
Away from the US, attention turns to central banks, after the Bank of Japan maintained its current policy stance, while upgrading its economic forecasts to reflect the general upshift in economic mood we’ve seen globally so far this year.
This now shifts the attention to the latest European Central Bank rate meeting later today, and while we aren’t expecting any change in policy, ECB President Draghi will also come under pressure to acknowledge the upturn in the economic fortunes of the Eurozone economy in the last few months.
In light of the economic data seen out of France and Germany and the rest of the euro area so far this year it is simply no longer credible to assert that the balance of risks remain tilted to the downside.
PMI’s are at 6 year highs, unemployment is also at its lowest level in several years, and though youth unemployment remains quite high, there is little the ECB can do about that.
If, as expected core CPI inflation rises to 1% tomorrow the pressure to adjust the guidance is only likely to increase, given rising unease, particularly in Germany, with the central banks negative rate policy. It is simply not credible to argue that negative rates remain necessary at a time when there is ample evidence that economic activity is continuing to improve.
EURUSD – having held above the 1.0820 area earlier this week as well as the 200 day MA we look set to move higher, moving above the 1.0940/50 area and potentially closing in on the 1.1000 area, and towards the November peaks at 1.1300.
GBPUSD – while above the 1.2750 area the bias remains for a move back towards the highs last week just above 1.2900, and potentially higher towards 1.3000 and the 1.3300 area. A move below 1.2750 argues potentially back towards the 1.2600 area.
EURGBP – the inability to push up to, or even get close to the 0.8570/80 area where the 50, 00 and 200 day MA’s converge on each other, makes the euro vulnerable to a pullback towards the 0.8470 area as well as the 0.8430 area.
USDJPY – having briefly pushed through the 111.60 area yesterday we need to gain a foothold above it to argue for a move towards 112.50. Whilst below it we remain vulnerable to a drift back down towards the 110.50 area and even 109.20.
