Markets eyeing tax cuts

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Published Date 10/23/2017

Just about any news these days bolsters the US and global equity markets. Over the weekend, Japanese Prime Minister Shinzo Abe’s election victory lifted world stocks and the dollar this morning. His victory assures Japan will continue its quantitative easing, which means a weaker yen and stronger Japanese government bond prices.

Trump also saying that the re-appointment of Federal Reserve Chair Janet Yellen was still a possibility.

The 30 stocks in the DJIA continue to headline, but a more detailed look isn’t as shiny; last week the DJIA increased 1.73%, NASDAQ +23, S&P +22. If not for an increase of 24 points on Friday, the NASDAQ would have been unchanged on the week; S&P on Friday +13 points.

Last week, the Senate voted to pass a continuing resolution to add $15 trillion to the debt over 10 years. That cleared the way for tax cuts, but still a lot of discussion about how much and to whom. Democrats are not likely to vote for any plan put together by Republicans, and Republicans in each chamber are not on the same page about most anything. There is almost 100% agreement that a tax cut package should happen, but there isn’t anywhere close to that about who gets what and by how much.

On Thursday, the ECB meeting, at which it is widely expected the bank will announce the beginning of reducing its QE. Mario Draghi in his recent speeches and comments has prepared markets for the moves to lessen market support.

Doesn’t take much these days to push the indexes higher, especially the DJIA. The broader market taking a breather last week and looking at volumes of trading it has lessened recently. That said, no one appears to be outwardly nervous (not selling) even though remarks and statistics are warning of an extended equity market.

One data point this morning: the Chicago Fed National Activity Index, expected -0.10 increased 0.17 (August index -0.37). Not much until Wednesday.

The key 10 yr. note yield increased 6 bps Friday as the DJIA ran up 165 points; MBS price -24 bps. Very key technical support now for the 10 at 2.40%, tested three times since last May and has held. If the 10 moves above 2.40% it will add additional technical bearishness in the rate markets and will push mortgage rates higher. Nothing new here; as long as equity markets refuse to pull back there isn’t much to push rates down. Inflation remains subdued; that is helping and keeping rates generally stable recently. Our technical models remain bearish in the wider view, but it is all dependent on stock market trading.

Source: TBWS

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