- Markets remain on edge about whether the House can pass an Obamacare repeal-and-replace bill
- Today’s Feb durable goods orders report needs to show a solid gain to prove confidence is producing real orders
Markets remain on edge about whether the House can pass an Obamacare repeal-and-replace bill — The S&P 500 index on Thursday gave up some mid-day gains and closed mildly lower by -0.11% after the news broke that House Speaker Ryan postponed his Thursday night vote on the American Health Care Act (AHCA). The stock market showed only a modestly negative reaction to the postponed vote since Mr. Ryan and the White House indicated that they now expect to hold a vote on Friday.
The markets seemed to take the one-day delay for the bill in stride, but only under the assumption that the bill does in fact get passed on Friday. Mr. Ryan may still be able to wrangle a bill through the House, if only because the personal costs of failure would be high for both Mr. Ryan and President Trump.
At this point, the exact content of the House bill is of secondary importance because the Senate is going to have its own version of the bill anyway and the two versions will have to be ironed out in conference. However, if Mr. Ryan cannot even push a place-holder AHCA bill through the House, then the stock market is likely to fall quickly as it discounts a much more modest overall Republican agenda.
Yet, it could be argued that the markets might not panic even if the Obamacare repeal-and-replace process fails altogether because the markets care mostly about getting corporate tax reform and infrastructure approved by Congress. Obamacare matters for politics and for health care stocks, but its macro implications for the stock market are limited.
If the House Obamacare repeal process fails altogether, there will obviously be negative political repercussions. However, there could be a silver lining for the markets if a failure on Obamacare-repeal then causes Republican leaders to immediately switch to quickly pushing a tax reform bill through Congress to redeem themselves.
Corporate tax reform could be relatively easy to push through Congress if Speaker Ryan doesn’t shoot for the moon with his Better Way proposal and instead offers a moderate-sized package that stays away from controversial provisions like the border adjustment tax system and ending the expense-deduction for interest. Yet Mr. Ryan so far sounds wedded to the border adjustment tax system. If he pushes for that system, then corporate tax reform is likely to get bogged down in the Senate where there is significant opposition from some Republican Senators.
Today’s Feb durable goods orders report needs to show a solid gain to prove confidence is producing real orders — The market is expecting today’s Feb durable goods orders report to show an increase of +1.4% and +0.6% ex-transportation following Jan’s report of +2.0% headline and unchanged ex-transportation. Durable goods orders, excluding transportation, rose by +2.5% y/y in January, which was good news relative to the year-on-year declines seen during most of 2016.
The market needs to see an improvement in the hard economic data such as durable goods orders, not just in the soft data such as the ISM business confidence data. Business confidence has improved sharply since the election due to stronger economic growth overseas and also due to expectations for the U.S. economy to benefit from lower tax rates, reduced regulations, and an infrastructure spending program.
On the confidence front, the ISM manufacturing index has risen sharply by +5.5 points since the election to post a 2-1/2 year high of 57.7 in February. Meanwhile, the ISM manufacturing orders sub-index has shown an even larger improvement, rising by +11.0 points to post a 7-1/2 year high of 65.1 to suggest that the orders pipeline is filling up.
Looking ahead to the March manufacturing confidence data, the consensus is for today’s March Markit U.S. manufacturing PMI to show a +0.5 point increase to 54.7, reversing part of Feb’s -0.8 decline to 54.2.
Regarding capital spending, today’s Feb capital goods new orders non-defense ex-aircraft series (which is a proxy for capital spending) is expected to show an increase of +0.5% following Jan’s disappointing report of -0.1%. That series was up by only +0.5% on a year-on-year basis in January, illustrating continued weakness in business investment.
The markets are watching for hard evidence that businesses are responding to improved confidence with actual capital investment, which is necessary to help boost U.S. GDP growth. Fixed investment contributed +0.51 points to the overall Q4 GDP report of +1.9%, which was a step in the right direction. However, the U.S. economy needs business investment to really kick into gear so that the economy does not remain solely reliant on consumer spending whims.
