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Senate's tax bill disappoints on corporate tax cut
U.S. consumer sentiment expected to edge to new 13-3/4 year high
Japanese stock gyrations may indicate period of consolidation

Senate's tax bill disappoints on corporate tax cut -- The Senate Finance Committee's tax reform bill, released on Thursday, was a disappointment for the stock market since it would delay a corporate tax cut until 2019. The delay wasn't a big surprise for the markets since there were reports earlier this week that the Senate was considering such a delay. Another negative tax development on Thursday was that the House in its bill raised the one-time mandatory tax on overseas corporate cash to 14% from 12%.

The good news, however, is that the Senate at least wants to cut the corporate tax rate to 20%, which is the same level as the House. A 20% corporate tax rate would be below the global average of 23% and would slow the flight of U.S companies to lower-tax jurisdictions.

Another piece of good news was that the Senate plans to make the corporate tax rate cut permanent. That is much better than earlier talk of making the corporate tax cut effective for only 10 years, which would be a little use for large corporations that take a long view of taxation and investment.

Meanwhile, the House Ways and Means Committee on Thursday approved its tax reform bill and forwarded the bill to the House floor for a vote next week. Regarding the Senate bill, Senator Cornyn on Thursday said that the Senate is likely to take up the bill on the floor in the week after Thanksgiving. The two houses of Congress will then have to work on meshing the bills into a single bill that can pass both the House and Senate.

The betting odds for the passage of a corporate tax cut by year-end fell by another -1 point to 20% on Thursday, adding to the combined -13 point drop on Tue-Wed. Congress is making progress on tax bills, but the fact remains that time is getting very short for approval before the end of the year. However, the end-year deadline is only a goal and Congress can easily take the tax bill up again after the Christmas holiday. Indeed, 75% of economists recently surveyed by Bloomberg believe that Republicans will end up passing some version of tax reform.

Tax reform will be disruptive to efforts to pass a new spending bill when the current continuing resolution expires on Dec 8. There will be a U.S. government shutdown on Dec 9 if a spending bill gets hung up by (1) White House demands for border wall funding, (2) Democratic demands for a DACA fix and a reinstatement of Obamacare cost sharing payments, or (3) Republican spending-cut demands or social riders. Congress may decide to just pass another continuing resolution to punt all those issues into early 2018 after Republicans hope to finish tax reform in December.

U.S. consumer sentiment expected to edge to new 13-3/4 year high -- The market consensus is for today's University of Michigan preliminary-Nov U.S. consumer sentiment index to show a small increase of +0.2 to 100.9, edging higher after Oct's +5.6 point surge to 100.7.

U.S. consumer confidence in September was very strong with the University of Michigan's index reaching a 13-3/4 year high and the Conference Board's index reaching a 16-3/4 year high. U.S. consumer confidence is seeing support from (1) record highs in the U.S. stock market, (2) hopes for a personal tax cut, (3) rising household wealth with rising stocks and home prices, and (4) the strong labor market with the Oct U.S. unemployment rate falling to a 16-3/4 year low of 4.1%.

Negative factors for U.S. consumer sentiment include (1) Washington political uncertainty with the Russian investigation, (2) geopolitical concerns with North Korea and the Middle East, and (3) the Fed's rate-hike regime.

Japanese stock gyrations may indicate period of consolidation -- The Japanese stock market on Thursday showed some extreme volatility, suggesting that investors are getting cold feet about a market that has soared by an overall +21.5% in just the past two months. The index on Thursday initially rallied sharply by +2.0% to a new 25-3/4 year high, but then plunged by -3.6% in a matter of 74 minutes and was down by -1.7% on the daily low. The index closed the day mildly lower by -0.20%.

There was no obvious news to explain the downdraft, which suggested that the downdraft was due simply to a lack of buyers and a heavy bout of long liquidation pressure.

The sharp intraday sell-off is likely to discourage investors from continuing to buy Japanese stocks at such high levels. Indeed, a period of consolidation seems likely after the extraordinary 2-month rally. Moreover, the rally urge has been due mainly to optimism about Prime Minister Abe's decisive election victory on Oct 22, which meant an extension of Japan's easy monetary policy outlook but perhaps wasn't bullish enough by itself to justify a +21.5% rally.

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