Along with the developments on the monetary policy front, US fiscal policy is front and center today as President Trump is expected to provide a framework for the tax reform, suggests the analysis team at BBH.
Key Quotes
“Ultimately, of course, it is in the legislative branch's hands. Much of the details have been leaked, including a 20% corporate tax schedule rate three household tax brackets (12%, 25%, and 35%), allowing businesses to write off capex immediately for around five years, and getting rid of the alternative minimum tax and estate tax. Households will lose the deduction for state and local taxes, while business' ability to write-off debt servicing will be curbed and the tax of global activity of US companies will change, with a tax holiday of some kind to induce them to bring back the excess funds booked overseas.”
“The important point to remember is that this is still very early days for tax reform. The latest implosion of the effort to "repeal and replace" the Affordable Care Act (Obamacare) underscores the legislative hurdles. In additional to the distributional gains/losses, some of the debate will center around what is called dynamic scoring. This refers to taking the impact on growth (and future tax revenues) of the tax cuts/reform themselves.”
“The increase in US rates and the anticipation of the tax announcement is not the only thing underpinning the dollar today. First, as we noted yesterday, there does appear to be a squeeze in the dollar funding markets (dollar shortage). It is not clear that these are quarter-end pressures, and for what many is the fiscal year-end.”
Second, there are some idiosyncratic factors too. Consider that the dollar was bid to nearly JPY113 today, a level not seen in two months, and extending the rally from JPY107.30 on September 8. The rise in US yields (US 10-year yield is up nearly six bp today almost 2.30%) helps, but one might have anticipated the 0.5% fall in the Topix to lend the yen support. However, the decline of Japanese shares seemed to be a technical factor related to the fact that more than half of the Topix went ex-dividend.
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