The euro is almost unchanged in the Friday session. Currently, EUR/USD is trading at 1.1797, up 0.09% on the day. On the release front, Eurozone CPI Flash Estimate was unchanged at 1.5%, just shy of the forecast of 1.6%. German numbers were mixed. Retail Sales declined 0.4%, well off the forecast of +0.5%. There was better news from the labor market, as unemployment rolls dropped by 23 thousand, much stronger than the estimate of a decline of 5 thousand. In the US, there are two key indicators – Personal Spending and UoM Consumer Sentiment. Both indicators are expected to soften, with estimates of 0.1% and 95.3, respectively.
The markets continue to digest the results of the German election earlier this week. President Angela Merkel won a fourth mandate from the voters, but her election win is being called a ‘hollow victory’, as Merkel’s CDU slipped badly and won just 33% of the seats in parliament. The CUD will have to negotiate with smaller parties in order to make a coalition government. The most likely coalition is the CDU, the pro-business FDP and the Greens. This is uncharted political territory, as Germany hasn’t had a 3-party coalition since the 1950s. Merkel, an experienced and astute politician, hasn’t wasted any time, and has already appointed her former finance minister, Wolfgang Schaeuble to president of parliament. This move clears the path for the FDP to join, as the party has insisted on the finance portfolio. The FDP is fiscally hawkish and against Germany continuing to finance weaker eurozone members, such as Greece. If the FDP does take part in the government, Merkel may have to shift away from her pan-European vision of a more closely integrated eurozone.
The US economy continues to perform well, as Final GDP for the second quarter posted an impressive gain of 3.1%. This figure was revised upwards from the second estimate of 3.0% in August. However, September and third quarter economic numbers could soften, due to the damage caused by hurricanes Harvey and Irma, which caused a slowdown in economic activity. The recent hurricanes have impacted on the labor market, pushing unemployment numbers higher. Still, the labor market remains strong, as underscored by unemployment rolls which have remained below the 300,000 level.
President Trump has all but given up on his health care proposal, as the plan lacks enough support from Republican lawmakers. Trump has now set his sights on tax reform, another key campaign promise. On Wednesday, Trump proposed a major overhaul of the US tax code, which includes reducing the corporate tax rate from 35 percent to 20 percent, as well as a 25 percent tax rate for small businesses, such as partnerships. Like other Trump proposals, the tax plan was sketchy on details, including how the tax plan would be paid for. With Democrats and some Republicans wary of Trump’s tax agenda, it’s likely his that tax reform proposal will face a stiff battle in Congress.
