Sell the news? Stocks are slumping (following Japan"s overnight volatility) as traders await tax-cut legislation from the House Ways and Means Committee (and The Senate will also release its own version).
High-Tax companies are underperforming...
And Junk bonds just hit the lowest since March...
Whether this selling due to disappointment in what is expected to be in the bill... or an expectation that it will not pass anyway - is unclear.
Yesterday, the dollar slumped and yields dropped after a WaPo report claimed that the corporate tax cut could - the core piece of GOP tax reform - would be delayed by up to a year, a clear indication that there may be irreconcilable differences in the Senate regarding tax reform. Then, moments ago, Axios confirmed as much, reporting that the Senate "won"t release its version of the GOP tax bill tomorrow", citing a senior GOP aide. On Tuesday Mitch McConnell said that the bill would come out on Thursday. That said, the aide reportedly said "this wasn"t a delay, because the release of the Senate bill was always going to start after the House Ways and Means Committee finished marking up its bill."
As Axios explains, the delaying introduction of the bill is problematic "because it not only gives off the impression that things aren"t going well (whether it"s true or not), but also removes one more day that could have been spent getting the caucus on board with the bill."
Meanwhile, speaking on Bloomberg, Treasury Secretary Mnuchin said that the White House"s preference would be to start the corporate tax rate cut next year, which again implies a material probability of delay.
“Our strong preference is that the corporate tax rate starts next year. The longer we wait, the worse it is for the economy,” Mnuchin said in interview on Bloomberg TV.
Asked whether he rules out delaying corporate tax cuts: “Again, I’d just say, the president’s strong preference -- he feels very strongly that he wants to start this right away. But having said that, we’ll have to look at the entire Senate package -- I assume it’s just a money issue -- as to how they’re moving the different pieces around”
“It’s not a philosophical issue; I’m sure they’d like to start this just as soon as they can”
Some other soundbites courtesy of Bloomberg:
In the final update, CNBC reports that "the Senate tax plan is not expected to include a controversial 20 percent excise tax on imports by multinational companies, according to three people briefed on the issue."
The tax is a critical revenue raiser in the House bill—worth about $155 billion over a decade—and applies to purchases by U.S. subsidiaries of multinational businesses from their foreign counterparts. Among the most vocal opponents of the new fee is the conservative advocacy group Heritage Action, which called it a "backdoor border adjustment tax."
The fee covers both intangible goods such as intellectual property as well as consumer parts. But unlike the border adjustment tax—a proposal that Republicans have discarded—the transactions must occur within a single parent company. Business groups such as the Organization for International Investment also fear the tax could disrupt international supply chains and raise costs for multinational companies—and ultimately consumers.
"It"s an extraterritorial reach into global supply chains that were never part of the U.S. tax base," OFII President Nancy McLernon said. "It will have a disproportionate impact on international companies that have made a deliberate decision to invest and create jobs in the United States."
Last week, House Ways and Means Committee Chairman Kevin Brady defended the tax as a crucial to ensuring that companies do not shift profits overseas. He said that the border adjustment tax was abandoned months ago and that the excise tax in the current bill bears no resemblance to that proposal.
With so many moving parts and even more conflicting opinions, it will be surprising if a one day delay by the Senate is all it boils down to.
The Bloomberg dollar index has surged, rising as much as 0.8% higher against all G-10 peers, its biggest advance since Jan. 26, and is on track for its first weekly gain since early July.
The move has been largely attributed to the "stronger-than-expected employment and wage gains", although as several banks commented shortly after the payrolls report came out, "everything is in place for a classic short-squeeze."
However, the real reason why the dollar is spiking today is following comments from Gary Cohn who said that he’s “confident” tax reform can be accomplished by year-end and together with House Ways and Means Committee Head Brady, underscored that another Homeland Investment Act, or HIA2, plan to repatriate offshore dollars is coming:
As a reminder, the original Homeland Investment Act of 2004 provided for a one-time tax holiday in 2006 on the repatriation of foreign earnings by US corporations. Back then, companies repatriated €300b in 2005, 5x more than in preceding years. As a result, the DXY was up 12.2% in 2005. While the dollar was generally favored by interest rate differentials, and also some of the repatriation would have been dollars held in offshore accounts that would not have required an FX component to them, the HIA provided a significant USD bid.
As several banks, most notably Citi notes, Democrats are under pressure to support HIA while tech companies, which are major donors to the party, are one of the major beneficiaries of repatriation. There are anecdotal reports in DC of intensive lobbying of Democratic lawmakers taking place by these firms, which would suggest that even if the Fed disappointed in the next few months, HIA 2 alone could provide a much needed tailwind to the USD.
And, in an amusing tangent, so far the White House response to today"s data has been "very disciplined and professional" with Trump also sounding more polished in his WV rally last night. This has prompted various analysts to concludes that Generally Kelly is getting a grip, which is also dollar bullish.
That said, not everyone is convinced, and CIBC’s Bipan Rai saying that “today’s number is just a short-term vehicle to express intraday dollar trading rather than a shift in strategic view.” Though, he adds, the USD is due for a “corrective snap back."
