Senate Republican health insurance bill may be a step forward towards a tax bill
U.S. new home sales expected to move back up towards April’s 9-1/2 year high
June Markit U.S. PMI reports expected to show moderate business confidence
Senate Republican health insurance bill may be a step forward towards a tax bill — The Senate Republican leadership on Thursday released its health insurance bill, which would partially repeal Obamacare, roll back Medicaid, and cut about $900 billion in Obamacare taxes. Passage of the health insurance bill is critically important for the Republican’s tax reform plan because it provides about $900 billion of extra room for cutting taxes in the tax reform legislation.
Offsets like repealing Obamacare are particularly important for tax reform since Speaker Ryan’s proposals for a border adjustment tax and an end to the business deductibility of interest appear to be dead. Without such offsets, Republicans would be limited to a small tax reform package or only temporary tax cuts in order to stay within the bounds of the reconciliation process.
Congressional Republicans will have a difficult time passing a health insurance bill since Senate Republicans can afford to lose only two of their 52 Senators. Even if Senate Republicans pass a bill, then a joint bill has to be found that can pass both the House and the Senate. Yet we suspect the odds that Congressional Republicans will pass a health insurance bill of some kind might be higher than the market expects simply because Republicans face an almost existential threat if they fail to repeal Obamacare after spending 8 years telling their base that was their highest priority.
The betting odds that Congress will pass a health insurance bill by the end of 2017 that at least repeals the individual mandate jumped to 41% on Thursday from 37% on Wednesday, according to PredictIt.org.
If Senate Republicans can make progress towards approving a health insurance bill, then the markets might start getting a little more excited about tax reform. Up until a week ago, the markets had pretty much given up hope for a tax bill this year. The stock market would be pleased with any tax bill that cuts the corporate tax rate, which in turn would directly support stock prices by increasing the after-tax profits available to investors. The stock market would also be pleased with a tax break to force the repatriation of cash that U.S. corporations have stashed overseas since much of that cash is likely to be used for stock buy-backs. The betting odds that there will be a corporate tax cut by the end of 2017 have risen this week by a dramatic 19 points to 52% from 33% last Friday, according to PredictIt.org.
Aside from the health insurance and tax reform bills, Republicans have a full plate with the need for a 2018 budget resolution and a debt ceiling increase. There has been talk that Congress might try to vote on a debt ceiling hike in July before leaving for their August recess. Based on precedent, however, Congress will not vote on a debt ceiling hike until a few days before the Treasury could potentially default. Both Republicans and Democrats seem to be itching for a fight this autumn over the 2018 budget and the debt ceiling, which almost ensures some drama for the markets.
Treasury Secretary Mnuchin has so far disclosed only that the Treasury can make in into early September without a debt ceiling hike. The Treasury has not yet estimated the “X-Date” on which the Treasury will run out of cash and will be forced to start deferring financial obligations, potentially even interest and principal on Treasury securities.
The Bipartisan Policy Center on June 12 reaffirmed its view that the X-Date will fall somewhere in Oct or Nov, with Oct 2 being mentioned as a dangerous date since a big payment is due on that day to the military retirement trust fund. The Treasury has said that tax revenues are coming in a bit slower than usual, which is raising the risks for an earlier-than-expected X-date.
U.S. new home sales expected to move back up towards April’s 9-1/2 year high — The market consensus for today’s May new home sales report is for a +3.7% increase to 590,000, reversing part of April’s -11.4% drop to 569,000. New home sales April posted a new 9-1/2 year high.
The May existing home sales report, released earlier this week, was mildly stronger than expected at +1.1%, which bodes well for today’s new home sales report. The May existing home sales level of 5.62 million units was very strong at only -1.4% below the 10-year high of 5.70 million units posted in March. New and existing home sales both continue to see strength due to strong consumer confidence, rising household wealth, and continued low mortgage rates.
Home builder stocks have recently shown additional strength due to the drop in mortgage rates. The SPDR S&P Homebuilder ETF (XHB) on Tuesday matched the 10-year high of 39.22 first posted in Aug 2015.
June Markit U.S. PMI reports expected to show moderate business confidence — The Markit manufacturing and service PMI indexes surged following the November election but topped out in January and then fell back. Both indexes remain in comfortable territory, however, illustrating that businesses remain moderately confident about the outlook for their respective industries.
The consensus is for today’s June Markit manufacturing PMI to show a +0.3 point increase to 53.0, more than offsetting May’s small -0.1 point decline to May’s 6-month low of 52.7. The consensus for today’s June Markit services PMI is for a small -0.1 point decline to 53.5, falling back a bit after May’s solid +0.9 point increase to 54.0.