Hatch says Senate committee will cut U.S. corporate tax rate to 20% to match House
U.S. job openings expected to remain strong
3-year T-note auction to yield near 1.74%
Stock and T-note volatility rebounds a bit higher from last Friday’s record lows
Hatch says Senate committee will cut U.S. corporate tax rate to 20% to match House — The House Ways and Means Committee on Monday began marking up the House tax bill and the Committee hopes to approve the bill on Thursday. Speaker Ryan then expects to get the bill on the House floor next week and hold a vote before the Thanksgiving holiday. Meanwhile, the Senate Finance Committee hopes to release the Senate’s version of the tax bill this Thursday.
The Senate’s tax bill will cut the corporate tax rate to 20% from the current 35%, according to Senate Finance Committee Chairman Hatch. A permanent corporate tax cut to 20% would be very favorable for the stock market since lower corporate taxes mean higher after-tax profits and thus higher stock prices.
The betting odds for passage of a tax bill by year-end on Monday were unchanged at 35%, up by 20 points from the record low of 15% posted just three weeks ago in mid-October. Market optimism for a deal have improved after the House and Senate approved a 2018 budget resolution and after the House Ways and Means Committee last week produced a detailed bill. There is very little time for a deal to get done by year-end, but the odds substantially improve in 2018 for some type of deal since Republicans cannot afford to fail on delivering tax cuts before facing voters in the mid-term elections in Nov 2018.
U.S. job openings expected to remain strong — The market consensus is for today’s Sep JOLTS job openings report to show a -29,000 decline to 2.053 million, adding to Aug’s decline of -58,000 to 6.082 million. Despite the expected back-to-back decline, the series would remain in very strong shape. The series in August was only -58,000 below July’s record high of 6.140 million. The near-record high level of job openings is a strong leading indicator for the payroll report since the majority of job openings will turn into actual jobs after the hiring process is complete.
On the labor front, the markets were satisfied with last Friday’s Oct payroll report of +261,000, which rebounded upward from the hurricane-reduced Sep report of only +18,000. Payroll growth has averaged +163,00 over the last 6 months, illustrating a solid labor market. The Oct unemployment rate fell to a new 16-3/4 year low of 4.1%, which matches the FOMC’s forecast for 2018-19 and is substantially tighter than the FOMC’s long-run forecast of 4.6%.
3-year T-note auction to yield near 1.74% — The Treasury today will kick off its $62 billion quarterly refunding operation by selling $24 billion of 3-year T-notes. The Treasury will then sell $23 billion of 10-year T-notes on Wednesday and $15 billion of 30-year bonds on Thursday. The Treasury this week will sell new 10-year and 30-year issues, as opposed to reopening existing issues.
Today’s 3-year T-note was trading at 1.74% in when-issued trading late Monday afternoon, which implies a negligible 0.02% inflation-adjusted yield against the current 3-year breakeven inflation expectations rate of 1.72%. The 12-auction averages for the 3-year are as follows: 2.81 bid cover ratio, $56 million in non-competitive bids, 4.6 bp tail to the median yield, 20.0 bp tail to the low yield, and 54% taken at the high yield. The 3-year T-note is the second least popular security among foreign investors and central banks behind the 2-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of only 52.7% of the last twelve 3-year T-note auctions, which is well below the average of 61.5% for all recent Treasury coupon auctions.
Stock and T-note volatility rebounds a bit higher from last Friday’s record lows — The S&P 500 VIX volatility index on Monday rebounded slightly higher to 9.40 after falling to a record closing-low of 9.14 last Friday. The TYVIX index, which measures volatility of the CBOT 10-year T-note futures contract, also rebounded a bit higher on Monday to 3.71 from last Friday’s record low of 3.55.
Stock and bond volatility is very low due to expectations for calm markets over the next few months. There is little excitement on the monetary policy front since ECB and BOJ policies are not expected to show any change at least through Q3-2018. Meanwhile, the markets have already discounted a 100% chance of a Fed rate hike in December and the Fed has already put its balance sheet reduction plan on autopilot. Yet there is potential for FOMC volatility in 2018 due to an almost complete changeover of FOMC voters and new leadership under Jerome Powell.
Despite the current low volatility figures, there are many things that could happen that would shake up the markets. In Asia, any military provocation by North Korea that prompts a U.S. military response would of course be a massive volatility driver. Separately, there is the possibility of a further rally in oil prices that would drive inflation expectations higher and perhaps drive bond yields higher.
On the macro front, there is strong concern about China’s debt levels, particularly after PBOC Governor Zhao with his recent warnings about debt seems to be favoring a more aggressive deleveraging campaign. In Europe, the Spanish central government has put down the independence movement in Catalonia for the time being. However, Italy must hold elections by spring 2018 and there is a chance that the anti-EU Five Star Movement could get into the government. In the U.S., there is mostly political uncertainty with the Russian investigation and with the Trump administration still threatening various trade measures such as withdrawing from NAFTA that could cause a significant stock market sell-off. There is also the possibility that the Republican tax cut effort could fail in the end, which would cause a significant downward correction in U.S. stocks.