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  • Congress moves on to tax reform after health care appears to fail 
  • U.S. June housing starts expected to partially recover after recent declines
  • Weekly EIA report

Congress moves on to tax reform after health care appears to fail — The effort by Senate Republicans to repeal Obamacare now appears to be virtually dead given that there weren’t enough votes for either repeal-and-replace or repeal-and-delay.  After Senate Majority Leader McConnell’s health care plan fell apart on Monday night, Mr. McConnell and President Trump called for a straight repeal of Obamacare with a 2-year delay to give Republicans time to come up with a new plan.  However, even that repeal-and-delay plan appeared to go down in flames on Tuesday after several Republican Senators said that would not vote to support that idea.  Mr. McConnell said he will hold a procedural vote early next week anyway, but the Obamacare repeal process appears to be dead for the time being.

President Trump responded to Tuesday’s health care defeat by saying that he will now let Obamacare fail, which he believes will force the Democrats to negotiate.  Mr. Trump could single-handedly knee-cap the Obamacare insurance exchanges as early as Thursday by refusing to make the cost-sharing subsidy payments that are due to insurance companies.  Without those subsidies, insurances companies are likely to quickly drop out of the Obamacare exchanges.

The apparent end of the Republican’s effort to repeal Obamacare was a negative for the U.S. stock market, both because it raised questions about Republican cohesion and because of the negative implications for tax reform.  Without the Obamacare repeal, Republicans will not have the $1 trillion of extra room over 10 years for the tax reform bill that the Obamacare repeal would have provided.  In effect, the failure of Obamacare repeal reduced the size of the tax reform bill by up to $1 trillion over 10 years.

In any case, Republicans can now pivot to tax reform, which should be easier than health care since there is agreement among Republicans about the basic idea of cutting taxes.  In fact, the betting odds of tax reform by the end of 2017 rose on Tuesday by 3 points to 41%, according to PredictIt.org.  The tax reform process gets started today as the House Budget Committee is expected to approve a 2018 budget resolution.  That budget resolution is the vehicle that contains the tax reform reconciliation provisions that are necessary to allow the Senate to pass a tax reform bill on a 51-vote margin without the threat of a Democratic filibuster.   The full House is expected to vote on the 2018 budget resolution next week, then passing it over to the Senate for its approval, probably after the August recess.

The markets would be pleased if the House can easily pass the 2018 budget resolution next week before leaving for the August recess since that would move the ball forward on tax reform.  However, even that vote will come with some drama because the conservative House Freedom Caucus is demanding that the budget resolution contain much sharper cuts in domestic spending than Speaker Ryan is willing to allow.  The 2018 budget resolution is non-binding and can be ignored when the actual spending authority is passed.  Nevertheless, the House Freedom Caucus is using the 2018 budget resolution as a cudgel to get the promises they want on cutting spending and on other measures.

The drama on the debt ceiling front also continues since Congressional leaders do not have a plan as yet about how they will get a debt ceiling approved before the Treasury’s X-date, which falls in early to mid-October according to the CBO.  Treasury Secretary Mnuchin has called for a clean debt ceiling hike, but that clearly will not happen because conservative House Republicans want to use the debt ceiling to force spending cuts and other reforms.  A debt ceiling hike will likely go down to the last minute as usual and will likely require Democratic votes to push it across the finish line.  However, there is likely to be some market nervousness in the meantime as Washington politicians once again play chicken with the full faith and credit of the U.S. government.

The markets will not get serious about watching the debt ceiling until September. At present, the markets are showing little concern.  The 5-year U.S. credit default swap (the cost of insuring against a U.S. sovereign default) is currently trading quietly near a 1-year low at 21.82 bp.

 

 

U.S. June housing starts expected to partially recover after recent declines — The market is expecting today’s June housing starts report to show an increase of +6.2% to 1.160 million, more than offsetting May’s -5.5% decline to 1.092 million.  U.S. housing starts have declined for three straight months by a total of -15.2% and are now -17.8% below the 9-3/4 year high of 1.328 million units posted in Oct 2016.  U.S. home builder confidence has also tailed off since April and has entirely erased the post-election bump.  Specifically, the National Association of Home Builders’ housing market index has fallen by a net -7 points to 64 in July from the 12-year high of 71 posted in March.

Still the overall level of home builder confidence and construction remains historically high and is still providing support for the overall economy.  U.S home builder stock prices remain in good shape.  The SPDR Homebuilders ETF (XHB) is trading only -1.6% below June’s 2-year high.

Weekly EIA report —  The market consensus for today’s weekly EIA report is for a -3.5 million bbl decline in U.S. crude oil inventories, a -1.3 million bbl decline in gasoline inventories, a +1.2 million bbl increase in distillate inventories, and a +0.3 point increase in the refinery utilization rate to 94.8%.  U.S. crude inventories are currently -25.3% above the 5-year average, which is still a glut but is at least down from Feb’s peak of +40.7%.  U.S. oil production in last week’s EIA report rose by +0.6% to a new 2-year high of 9.397 million bpd.

 

 

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