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Republicans’ tax bill is nearly a done deal
China launches unexpected but small rate hike
Markets continue to doubt Fed’s rate-hike schedule
U.S. industrial production expected to slow after hurricane spike

Republicans’ tax bill is nearly a done deal — The Republican tax bill is very close to being a done deal that could be approved by Congress early next week. Republicans on Wednesday reached an agreement in principle on a compromise tax bill between the House and Senate versions. The House-Senate conference committee is expected to sign off on a final bill today, thus moving the bill forward to a vote by the full House and Senate.

The current plan is for the House and Senate to vote on the plan this coming Monday and Tuesday, thus meeting their self-imposed deadline of putting a bill on President Trump’s desk by year end.

The timing of the vote may need to be adjusted to account for when Senators John McCain and Thad Cochran can be present for a vote next week since both have been absent from the Senate this week for health reasons.

The betting odds for a corporate tax cut by year-end are currently at 65% and are at 75% for that tax cut by March 31, 2018, according to PredictIt.org.

Senator Rubio is putting up a last-minute fuss about the Child Tax Credit and there are questions about whether Senators McCain and Cochran will be able to vote next week. However, Republican leaders should be able to work through those potential obstacles. Senate Republicans simply cannot afford to let the tax bill drag into January because they will lose a seat in January when Democratic Doug Jones is due to be seated in the Senate as the next Senator from Alabama.

Vice President Pence has delayed his trip to Israel so that he can be present for any Senate votes that may require his vote to break a tie. Mr. Pence had previously been scheduled to leave on that trip on Saturday.

Meanwhile, Republican and Democratic Congressional leaders are negotiating a new continuing resolution (CR) that must be approved before the current CR expires next Friday in order to prevent a government shutdown. The new CR is contentious since it will include the topline spending levels for the remainder of fiscal 2018 and possibly demands by Democrats for a Dreamer solution. Next week’s CR will last until Jan 19, at which time Congress should be ready to vote on an omnibus spending bill to provide spending authority for the remainder of the fiscal year through Sep 30, 2018. The markets are not displaying any significant worry about the risk of a U.S. government next Friday that would last over the Christmas weekend.

China launches unexpected but small rate hike — The Peoples Bank of China (PBOC) early Thursday announced a small +5 bp rate hike. Most observers had not expected the PBOC to raise interest rates in response to the Fed’s +25 bp rate hike on Wednesday. However, the very small size of the rate hike indicated that it was more of a symbolic move than a move meant to have any significant monetary impact.

The Chinese markets took the +5 bp rate hike in stride without major volatility. The Shanghai Composite index on Thursday closed the day mildly lower by -0.32%. The Chinese 10-year bond yield actually closed the day -1.7 bp lower at 3.927%, remaining comfortably below the late-Nov 3-year high of 4.035%.

The Chinese yuan on Thursday rose by +0.15% to 6.6093 yuan/USD. The PBOC was likely pleased with the slight rally in the yuan against the dollar after the Fed’s +25 bp rate hike and the PBOC’s smaller +5 bp rate hike. USD/CNY has been trading sideways for the last 2-1/2 months and is currently near the middle of that narrow range. The Chinese government wants to keep the yuan supported to prevent the Trump administration from complaining about a weak yuan and also to ward off any new capital flight from China.

Markets continue to doubt Fed’s rate-hike schedule — The markets continue to doubt that the Fed will live up to the rate-hike schedule as reflected by FOMC member forecasts in the so-called “Fed dot” plot. The FOMC at its meeting this week left the median Fed-dot forecasts unchanged for 2018 at 2.13% and for 2019 at 2.69%. However, the FOMC raised its 2020 median forecast by roughly 20 bp to 3.06%. The FOMC left its forecast for the longer-run neutral funds rate unchanged at 2.75%.

The Fed-dot forecasts indicate that the Fed members believe they will raise the funds rate by +75 bp in 2018, +56 bp in 2019, and +37 bp in 2020. However, the federal funds futures market illustrates that market participants doubt that the Fed will raise rates that quickly. For 2018, the federal funds futures market points to only two rate hikes versus the Fed-dot forecast for three rate hikes. For 2019, the market is forecasting less than one rate hike versus the Fed-dot forecast for two rate hikes. The market expects the Fed to get to a terminal funds rate target of about 2.00% by late 2019, whereas the Fed is expecting a terminal funds rate target of 3% by the end of 2020.

U.S. industrial production expected to slow after hurricane spike — The market consensus is for today’s Nov industrial production to slow to +0.3% m/m from Oct’s +0.9% and for Nov manufacturing production to slow to +0.3% from Oct’s +1.3%. U.S. industrial and manufacturing production surged in October due to rebuilding after the Aug-Sep hurricanes. U.S. industrial production should now slow to a more sustainable rate, but remain generally strong due to the strong U.S. and global economy. The U.S. ISM manufacturing index in November of 58.2 illustrated relatively strong confidence in the U.S. manufacturing sector.

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