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US: Tax reform and Fed in focus - BBH

The US Senate bill is currently expected to be brought to the floor on November 30 and analysts at BBH expect it to come down to the wire but suspect the risk is that there are at least three Republican Senators of the 52 that will vote against the bill.  

Key Quotes

“It would not end the effort, any more than a similar defeat meant the Affordable Care Act is safe.  Although the disappointment could spur a knee-jerk reaction, the medium-term implications may be constructive.  If it does pass, we suspect it would provide fodder for the equity market and could spur a steepening of the yield curve.”

“Powell Confirmation Hearings:  The hearings will begin November 28.  Investors think they have Powell's measure.  Mild-mannered, clear speaking, a gradualist who has never registered an official dissent on the FOMC.  With extensive turnover at the Federal Reserve, there will be many proposals for a "new beginning," but look for Powell to represent a strong element of continuity.  Changes in communication, and perhaps a press conference after every meeting, as the ECB and BOJ already do, would not be surprising.  Little market reaction to his testimony means that Powell did a good job.”

“Federal Reserve:  There are at least seven Fed officials scheduled to speak in the coming days, including Yellen's mid-week testimony before the Joint Economic Committee of Congress.  The market remains confident of a rate hike next month.  The January Fed funds contract implies a 1.39% effective average Fed funds rate.  Recognizing that the first three days of the new year will be the year-end rate, which we assume to be 10 bp below the prevailing rate, generates an average effective rate for the month at 1.40%.  By our reckoning, the market has one and a half hikes discounted for next year.  The Fed is signaling three, and at least one investment house says four.  Will the next iteration of dot plots that comes after next month's FOMC meeting show the same thing?  The Beige Book will be released on Wednesday in preparation for that meeting.  The report may show a strengthening of the expansion, with some areas reporting tightening of the labor market.”

Economic Data:  Two reports stand out, the revision of Q3 GDP and the measure of inflation the Fed targets (the core PCE deflator).  The initial estimate of Q3 GDP is expected to be revised to 3.2% from 3.0%, with stronger consumption a key factor, though perhaps goosed by quick rebuilding related demand after the horrific storms.  The PCE core deflator reached 1.91% last October and fell to 1.290% in August.  This is the mystery of which Yellen speaks, and one in which her working hypothesis is that is it due to short-term one-off factors.  The core deflator is expected to rise to 1.4% in October.  The bond market will be sensitive to any surprise, and through it, the dollar.” 

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