House passes largest tax system overhall
The House of Representatives passed a bill for the largest overhaul of the US tax system in 31 years. The text provides for reducing the corporate tax to its lowest level since 1939 and to reduce the personal tax in 2018. It repeals the ‘alternative minimum tax’, a flat tax, increases the tax credit for dependent child, establishes the abolition of the estate tax by 2025 and modifies the tax regime applied to multinationals. The bill if made into law would increase taxes for some people because of the removal of deductions for regional taxes, medical expenses and student loan interest. Overall, the bill would reduce federal taxes by $ 14 trillion over the next decade. Currently, futures on federal funds indicated a 100% probability of a 25bp hike in central bank rates at its meeting in December
Euro might finally tighten
Rising growth, increasing inflation and lower unemployment are building a groundswell for the European Central Bank to tighten the euro. Last month the ECB said it will cut quantitative easing from €60 billion per month to €30 billion, beginning in January, and wind down to nil by September 2018. While the Bank’s President Mario Draghi says the end of bond-buying does not foretell imminent policy tightening: we don’t believe him.
Signals published this week are bullish for the Eurozone. Purchasing-manager-indices have accelerated since mid-2016. The European Union’s Autumn Economic Forecasts say the economy will grow 2.2% in 2017 and 2.1% in 2018, adding that it is ‘on track to grow at its fastest pace in a decade this year.’ Falling unemployment has fuelled a privately-led consumption recovery. Years of austerity has created pent up domestic demand, which now is unwinding. Headline inflation in the Eurozone fell marginally in October from 1.5% to 1.4%. Yet core inflation came in higher than expected, rising to 1.1% from 0.9%.
Soft oil will weigh on Canadian dollar
I remain bearish on commodities: improving demand will not yet cover a supply glut. Oil is in a loop where higher prices trigger higher production that sends prices swiftly lower. CAD economic outlook remains highly influenced by oil prices – as they decline, USD/CAD has room to appreciate. Especially considering that USA T-bill 2-yr yields are elevated at 1.708% with limited expectations of inflationary spill-over. Soft oil, higher US yields and leveraged funds trimming long CAD position will pressure USD/CAD back to 1.30 resistance.
Commodities outperformed in the last quarter with metals up 10% and energy up 12%, driven by demand, weather and OPEC supply limits. In 2018 oversupply and slow demand growth will curtail any significant jump in prices. OPEC is likely to make supply cuts at the end of November, but this will have only a marginal effect. Last week, U.S. Energy Information Administration reported that crude inventories rose by 1.9 million barrels in the week ended 10 November, well above expectations of 1.4 million. US shale producers have increased output, buoying domestic production to a record weekly high of 9.645 million. This renews speculation of a supply glut.
