The rally yesterday in stocks after Trump said he will unveil a “phenomenal” tax plan made sense because we wanted to see him focus on what was most important and not get distracted by other noise and tweets. There remains though the issue of what will be unveiled. Will it be the Ryan plan that includes a border adjustment tax (BAT) or will that be left out and we’ll get clean tax cuts at the expense of a much higher deficit? That distinction is very important because if it’s the former, it won’t be so “phenomenal” for those companies that import a large portion of their cost of goods sold if the dollar doesn’t rally by the same extent as the tax. Retailers in particular would be most impacted and they rallied the past two days maybe implying we won’t get the BAT but we believe that Trump is behind the Ryan Plan (with possible tweaks) that would include it.
As for the impact on earnings estimates, the all in impact (which includes a BAT) is an increase in earnings of between 5-10% from what I’ve seen. The S&P 500 is up 8% since November 8th so it can be argued that we’ve about priced in the “big league” tax reform. Gains from here would then be due to further multiple expansion which would then get to what the Fed does in response to the fiscal jolt.
The Fed should now know that in 2-3 weeks, they will hear from the Administration on what their tax plan is. Therefore, there should not be any excuses about ‘uncertainty’ of what is to come. They want to raise 3 times this year and they have 4 meetings with press conferences. If they miss the March meeting, they are leaving themselves little flexibility on the remaining 3.
Greek bonds are having a furious rally as today their creditors will lay out a unified plan for Greece to follow in order to get more tranches of bailout money. The Greek 2 yr yield is down by 106 bps to 8.97%. The 10 yr yield is lower by 35 bps to 7.46%. That’s all I’ll say on that.
I was glad to see Trump reach out to Chinese President Xi overnight as its only the 2nd most important economy in the world. Chinese exports in January rose 7.9% y/o/y in dollars, well more than expectations of up 3.2%. I’ve been saying for at least the past month that the trade data out of a variety of Asian countries was reflecting a likely bottom in global trade. The y/o/y comparison however was easy (last January it was down 15.2% y/o/y). Imports were higher by 16.7%, above the estimate of up 10%. The main caveat with the January data however is the impact of the lunar holiday so it really is better to merge January with February to smooth out any distortions. The trade balance in dollars widened to $51.4b, up from $40.7b in December. Helping to explain the yuan weakness specifically vs the dollar (its been much more stable against its basket) was the smallest trade surplus with the US since June at $21.4b in January. For the full year though of 2016, the trade surplus with the US was still $347b. The Shanghai comp and H share index were higher about .5% overnight.
In Europe, the UK reported a much better than expected December industrial production figure with a 1.1% m/o/m gain, well above the estimate of up .2%. It was mostly driven by a 2.1% rise in manufacturing. A big boost in particular was a near 10% spike in pharma products which the ONS statistics office called “highly erratic.” Construction also rose. The pound is weaker notwithstanding the upside number but gilt yields are higher. The UK economy in 2017 that is still highly dependent on consumer spending will have to balance the upcoming jump in inflation and how wages respond.
French industrial production in December was about in line if we include the November revision. Ahead of the upcoming election in France there is a lot of fear of a Marie Le Pen victory but she’s about 20-25 pts behind in the polls. I know, don’t trust the polls.
Italy was a bright spot with a better than expected IP figure. PM Renzi’s loss on his referendum really had no economic impact to confidence. After all, they are used to government turmoil with 60+ different governments in the last 70 years.