Tax Cut Blues

BY David Bassanese | 19 November 2017
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The Week in Review

It was another modest “risk off” week for global markets, largely reflecting ongoing concerns with US tax cut plans.  While the US House of Representatives and a key Senate committee passed versions of a plan last week, the Senate is still not expected to vote on their version for at least a week – and press reports indicate there’s still a few Republican Senators (enough to kill it) unhappy with the details.

In short: the US tax cut plan is still not a done deal.

This is coming at a time when US stocks were already overbought, and looking for reasons to pull back (see chart below).  My view remains that that while a US tax cut deal would provide further impetus to the global stock rally – and some form of plan still seems likely to pass – failure to pass a tax cut would be only a temporary setback.   Supporting this positive view was another fairly benign US consumer price outcome last week, with core annual inflation running at only 1.8%.

Of course, from the market’s perspective – any tax plan will do, as long as it is passed. That said,  I can’t help having sympathy for those who see the current blueprint as both enormously costly and regressive – but that is the cruel reality of US politics today.

In other key news last week, both Japan and the Euro-zone produced reasonably good Q3 GDP results – again highlighting the breadth of global growth, and why US tax cuts would be nice but not necessary for ongoing equity market gains.

Locally, the key highlights were a weaker than expected Q3 wage result and a surge in the NAB measure of business conditions.  Markets were more shocked by ongoing news of weak wages, which helped push the $A down further on the view that the RBA is even less likely to hike rates anytime soon.

All up, the Australian economy appears to be travelling well – albeit not strongly enough to decisively push down unemployment and push up wages. The combination of good growth, a more competitive $A and a sidelined RBA bodes well for the local stock market.

The Week Ahead

There’s a smattering of US economic data this week, though nothing important enough to possibly sway the market’s conviction that the Fed will hike next month. Markets will likely remain more focused on gauging US Senate support for a tax cut plan – any plan!

Locally, there should be only passing interest to the minutes of the latest RBA meeting, given the Bank appears firmly on hold.  Federal politics, however, is also starting to capture the market’s attention – given growing risks of instability caused by the ongoing citizenship saga.  Data wise, the Q3 construction survey should show encouraging growth in non-residential construction (helped by the infrastructure boom) though also confirm an emerging downtrend in residential construction, albeit from a high level.

Have a great week!

 

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