Just treats, no tricks

30 Oct 2017

  • The momentum behind tax cuts continues to build in the United States.
  • The House passed a budget resolution paving the way for tax law changes
  • The structural reforms that China’s President Xi has put into motion are critical to the country’s growth in the coming years

While it increasingly seems like spooking this bull market will take some doing, politicians, central bankers, and economic data were in a benevolent state of mind in October. They all served up treats to the market, and the sugar high meant that risk assets globally experienced another excellent month of returns. The momentum behind tax cuts, if not tax reform, continues to build in the U.S. after the House passed a budget resolution that paves the way for tax law changes that could increase deficits by as much as $1.5 trillion over ten years. In Europe, the European Central Bank was clearly wary of any ‘taper tantrum’ type reaction, and after its policy meeting crafted a dovish messaging of a gentle taper. GDP data was robust in the U.S. and U.K., while the Catalan crisis could do little to impact economic sentiment in Spain, let alone the broader Eurozone region. Across Asia, a new era beckons China with President Xi wresting near-absolute control in the absence of a worthwhile successor, while Abenomics is here to stay after Prime Minister Shinzo Abe’s resounding victory. Indeed, treats aplenty around the world, but as industry old-timers reminisced, with trepidation, the events on Black Monday exactly 30 years ago, it would be wise to keep an eye out for the odd trick that might be hidden amidst the candy.

Last week the House passed a budget resolution that included the Senate version of reconciliation instructions, paving the way for tax law changes that could increase the deficit over ten years by as much as $1.5 trillion. The vote in the House was relatively close, with a number of Republicans opposing the resolution. But the close tally is anything but a negative signal – a number of Republicans felt comfortable voting against the resolution only once its passage was secure, and then only voted “nay” to signal to the leadership that they will expect changes/concessions as the process moves forward.

In the US, Q3 GDP rose at a 3.0 percent saar in the first estimate, marking the first time since 2014 that the economy registered two consecutive quarters of growth at or above a 3 percent rate. Growth was fairly broad-based across major components – even net exports contributed with a 0.4 percent increase. But the headline number benefitted from a fairly sharp rise in inventories investment. In summary, the details of the report suggest an economy that continues to expand at a moderately above-trend pace, and we expect more of the same in Q4 2017. Recent core durable goods and shipments data indicate still-healthy levels of business investment, strong global demand could continue to support exports, while a tight labor market and rising household wealth will continue to underpin consumption.

China’s President, XI Jinping, has cemented himself as the most dominant leader in the nation’s history, since Mao. At the communist party’s quinquennial meeting this month, the President’s ideology was inducted into the Party’s constitution, an honor previously reserved only for the legendary Mao Zedong. More importantly, the party did not name a successor for Xi, signaling that his reign could well continue beyond 2022. The structural reforms the President Xi has put into motion are critical to the country’s growth in the coming years as its looks to transform itself in to a domestic consumer driven economy. Investor have for some time been concerned about China’s manufacturing overcapacity coupled with debt-fueled growth, and they certainly hope that Xi’s ironclad grip will ensure some form of economic rebalancing, thereby preventing a market shock.

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