Congress needs to approve a new CR by Friday to avoid a government shutdown
Sharp drop in WTI front-end crude oil futures prices sparks sell-off in oil stocks but supports T-note prices
U.S. unemployment claims expected to remain favorable
Congress needs to approve a new CR by Friday to avoid a government shutdown — The House Rules Committee on Wednesday approved a short-term continuing resolution (CR) to pave the way for the House to vote as early as today on a CR that would last until Dec 22. The Senate would then have Friday to approve the CR in order to avoid a partial U.S. government shutdown on Friday night at midnight when the current CR expires.
House Speaker Ryan apparently got his Freedom Caucus on board for a CR that extends spending authority to Dec 22 rather than their preference for Dec 30. If there is a Republican-Democrat deadlock ahead of the Dec 22 CR expiration, there has already been talk of another CR that could last into January to give more time for negotiations.
The markets will be watching to see how today’s meeting goes when President Trump is due to meet with Ryan/McConnell and Pelosi/Schumer to discuss a 2018 spending bill and other year-end legislation. Pelosi/Schumer canceled their appearance at last week’s White House meeting after a morning tweet by President Trump threw cold water on the chances for a deal.
The odds for an eventual U.S. government shutdown appear to be rising due to Democrats’ demand for a Dreamer solution and President Trump’s desire to get a win by not giving anything to Democrats and trying to get some border-wall funding as well. Mr. Trump has already broached the idea that a government shutdown might be good for him politically because he believes he can successfully blame it on the Democrats.
Meanwhile on the tax reform bill, House and Senate leaders are negotiating behind the scenes to produce a common Republican tax bill that can pass both the House and the Senate. The Washington Post on Wednesday reported that negotiators are now looking at the idea of cutting the corporate tax rate to only 22% rather 20%. Negotiators are under pressure to produce revenue for compromises such as dropping the alternative minimum tax and preserving more individual deductions for state and local taxes.
The stock market will be less enthused if the corporate tax rate is cut to only 22% rather than 20%. However, that disappointment would be reduced if the corporate tax cut becomes effective in 2018, as in the House bill (rather than 2019, as in the Senate bill) or if the corporate alternative minimum tax (AMT) is dropped. The Senate’s placement of a 20% corporate AMT% in its bill has been widely criticized and efforts are being made to drop the corporate AMT altogether.
The latest betting odds are 75% for a corporate tax cut by year-end and 88% for a cut by March 31, 2018, according to PredictIt.org.
Sharp drop in WTI front-end crude oil futures prices sparks sell-off in oil stocks but supports T-note prices — Front-month WTI futures contracts have faded since last Thursday’s OPEC/non-OPEC agreement to extend their 1.8 million bpd production cut by nine months until the end of 2018. Since last Thursday’s meeting, the front-month Jan WTI crude oil futures contract has fallen by a net $1.44 (-2.5%). That drop was due to Wednesday’s -$1.66 (-2.8%) decline, which was sparked by (1) the large 6.8 million bbl (+3.2%) rise in gasoline inventories, (2) the +0.3% w/w rise in U.S. crude oil production to a new 46-year high of 9.707 million bpd, and (3) long liquidation pressure with Jan crude oil prices showing technical weakness by slumping to a new 2-week low.
The nearby chart illustrates how the decline in WTI crude oil futures since last week has been concentrated in the near-term futures months. The back months have shown little change.
Wednesday’s sharp -2.88% sell-off in Jan WTI crude oil prices helped push the 10-year breakeven inflation expectation rate lower by -1.0 bp to a 6-session low of 1.876%. The decline in the breakeven rate, in turn, was supportive for T-note prices with the 10-year T-note yield on Wednesday falling by -1.2 bp to 2.339%.
Wednesday’s sharp sell-off in WTI crude oil prices pushed oil stocks sharply lower. The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) on Wednesday fell sharply by -3.06%, which was a much larger decline than the -0.01% decline in the S&P 500 index.
U.S. unemployment claims expected to remain favorable — The unemployment claims data has risen a bit in recent weeks but continues to illustrate a tight labor market where businesses are holding on tightly to their employees. The initial claims series is only +15,000 above the 44-1/2 year low of 223,000 posted in October and the continuing claims series is +89,000 above the 44-year low of 1.868 million posted in early November. The market consensus for today’s report is for a +2,000 increase to 240,000 for initial claims (after last week’s -2,000 to 238,000) and for a -38,000 decline to 1.919 million in continuing claims (after last week’s +42,000 to 1.957 million.
On the labor front, the market is mainly looking ahead to Friday’s unemployment report. The consensus is for Friday’s Nov payroll report to show a solid increase of +197,000. Wednesday’s Nov ADP report of +190,000 was in line with market expectations and supported ideas for a firm payroll report on Friday. The consensus is for Friday’s Nov unemployment rate to be unchanged at 4.1%. The unemployment rate in October fell to a 16-3/4 year low of 4.1%, providing another indication of the tight U.S. labor market.