Trump still has a long way to go to finish filling Fed’s Board of Governors
House tax bill is positive for U.S. stocks
U.S. labor market expected to return to strength after hurricane disruptions
U.S. ISM non-manufacturing index expected to remain near 12-year high
U.S. trade deficit expected to remain wide
Trump still has a long way to go to finish filling Fed’s Board of Governors — President Trump on Thursday met market expectations by appointing Fed Governor Powell as the new Fed Chair starting when Ms. Yellen’s term expires in February 2018. Mr. Powell is not expected to have any problem getting confirmed by the Senate since he has already been confirmed twice by the Senate by wide margins for temporary and permanent Fed governor positions.
While Mr. Trump has now filled the Fed chair position, he still has a long way to go to finish replenishing the whole Fed Board of Governors, which includes the Fed Chair, Fed Vice Chair, and 5 Fed governors. Assuming that Ms. Yellen steps down from her Fed Governor term (which lasts until 2024) when her chair term expires in Feb 2018, there will be only two Fed Governors that will carry-on in 2018, i.e., Lael Brainard and Randy Quarles. That means Mr. Trump now needs to appoint a Fed Vice Chair and three new Fed Governors to get the Board back to full strength.
The make-up of the FOMC voting members will therefore be very different in 2018 since (1) Mr. Trump still needs to appoint 4 of the 7 members of the Fed Board of Governors, and (2) there will be the normal annual rotation of regional Fed presidents who are voters in 2018. That means that there is a fair amount of uncertainty at this point about how the FOMC will actually vote in 2018.
House tax bill is positive for U.S. stocks — The House tax bill released on Thursday was positive for the U.S. stock market, but was also in line with market expectations and therefore had little net market effect. On the deficit front, the tax bill is negative since it would add $1.5 trillion to the national debt over 10 years, reduced to some extent if the plan actually boosts economic growth and creates tax revenues above current projections.
The bill would cut the top U.S. corporate tax rate to 20% from the current level of 35%. In some good news for stocks, the cut to 20% would be permanent, contrary to some reports earlier this week that Republicans were considering making the cut only temporary for 10 years.
A cut in a top corporate tax rate of 20% would make the U.S. much more competitive relative to other nations since the new rate would be lower than the global median of 23%. A cut in corporate taxes is directly bullish for stocks since lower taxes mean higher after-tax earnings, which go directly to the bottom line and boost stock prices.
The tax bill should also stimulate increased capital spending since it would allow businesses to immediately deduct the full value of capital investments, as opposed to the current method of a depreciation write-off over a number of years. However, that full-expensing provision expires after 5 years.
The tax bill places a mandatory one-time tax of 12% on the $2.6 trillion of U.S. corporate cash held overseas. If this provision eventually receives final approval by Congress, the markets can expect that the majority of the repatriated cash will go toward stock buybacks, which happened in previous repatriation episodes.
U.S. labor market expected to return to strength after hurricane disruptions — Today’s Oct unemployment report is expected to show that U.S. labor market returned to strength after the dip seen in September’s report from Hurricane Harvey (landfall Aug 25) and Hurricane Irma (landfall Sep 10). The consensus is for today’s Oct payroll report to show an increase of +312,000, rebounding higher from Sep’s decline of -33,000. Before the hurricane disruptions, payroll growth was respectable in June-Aug with a 3-month average of +172,000. Expectations for a solid payroll report today were bolstered by Wednesday’s news that Oct ADP jobs rose by +235,000, which was mildly stronger than market expectations of +200,000.
Meanwhile, the consensus is that today’s Oct unemployment rate will be unchanged at 4.2%, maintaining Sep’s -0.2 point decline to that 17-year low. The current unemployment rate of 4.2% is already below the FOMC’s forecast for an end-2017 unemployment rate of 4.3% and is only +0.1 point above the FOMC’s forecast for a 4.1% unemployment rate in 2018-19. The current unemployment rate of 4.2% is below the Fed’s estimate of a natural unemployment rate of 4.6%, which illustrates how the Fed believes the current labor market is tight and should be putting upward pressure on wages.
The markets are expecting today’s Oct average hourly earnings report to ease to +2.7% y/y from +2.9% in September. Average hourly earnings in September rose by +0.2 points to match the 8-1/2 year high of +2.9% y/y originally posted in Dec 2016.
U.S. ISM non-manufacturing index expected to remain near 12-year high — The market consensus is for today’s Oct ISM non-manufacturing index to show a -1.3 point decline to to 58.5, reversing part of September’s surge of +4.5 points to the 12-year high of 59.8. Even if the index shows today’s expected decline, non-manufacturing business confidence will remain in strong territory, suggesting continued strong hiring and capital investment.
U.S. trade deficit expected to remain wide — The market consensus is for today’s Sep U.S. trade deficit to widen modestly to -$43.3 billion from Aug’s level of -$42.4 billion, which would leave the deficit below the 12-month trend average of -$44.5 billion. Both exports and imports are up by roughly the same amount over the past year, keeping the U.S. deficit moving sideways. In August, exports were up +4.2% y/y and imports were up +4.0%. The trade deficit continues to be of keen interest for the White House where a wider deficit increases the chances for trade sanctions.