US: Progress in tax reforms - BBH
US tax reform made important progress last week as the House of Representative approved its version while the Senate Finance Committee approved its version, points out the research team at BBH.
“The next step is a vote on the Senate floor. This could come after the return from the Thanksgiving break, after which there are a dozen legislative sessions before next month's holiday break. However, we are skeptical that the bill can pass in its current form. The regressive nature of the proposals and the divisive inclusion of the repeal of the individual mandate for the Affordable Care Act will produce at least three defections from the Republican Party.”
“Indeed, nearly 2/3 of the economists polled by Reuters (November 13-17) were not confident that tax reform would pass this year. Many who think it might be passed next year seem to expect a scaled-down version that may rely on temporary cuts more than reform per se.”
“If the tax bill falters on the floor of the Senate, as we think likely, the stock market may be vulnerable to disappointment and volatility would likely increase. Bond yields may ease, and with the short-end anchored by the expected path of Fed policy, the yield curve may flatten further.”
“In the currency market, on a purely directional basis, the yen is the most sensitive to US 10-year yields (past 60-day correlation 0.94). The Swiss franc (0.86) is followed by the Australian dollar (0.81) and the Norwegian krone (0.80). The correlation between the 10-year yield and euro (and Swedish krona) lags but is still robust at 0.76, while the Canadian dollar's correlation is a touch lower at 0.74. Sterling is the outlier with a correlation of 0.18 over the past 60 sessions.”