Republicans’ 20% corporate tax rate would put the U.S. on a favorable competitive footing
U.S. durable goods orders expected to show continued strength
5-year T-note auction to yield near 1.87%
EIA report should show some further recovery in refineries after Harvey
Republicans’ 20% corporate tax rate would put the U.S. on a favorable competitive footing — President Trump today is scheduled to unveil the Republicans’ tax plan at a speech in Indiana. The main parameters of the plan have already been leaked to the press and reportedly including a cut in the corporate tax rate to 20%. A 20% corporate tax rate would be higher than Mr. Trump’s preference for a 15% rate, but would be better than market ideas that Republicans might only be able to cut the rate to the mid or high-20’s because of insufficient pay-fors. The current top U.S. corporate tax rate of 35% is the highest in the developed world.
A new U.S. 20% corporate tax rate, if Republicans can actually cut it that far, would be a very competitive rate that would encourage corporations to keep their headquarters in the U.S. rather than move to lower-tax-rate countries. A new U.S. 20% rate would be mildly below the worldwide average rate of 22.5% and well below the world GDP-weighted average of 29.5% according to the Tax Foundation. A 20% corporate tax rate would be slightly above Europe’s average of 18.9% but below Europe’s GDP-weighted average of 26.2%.
In the tax plan, the stock market’s main item of interest is the corporate tax rate since any cut in corporate taxes would directly support stock prices by increasing after-tax profits. The stock market is also keying on the program for causing U.S. corporations to repatriate some or all of the $2.6 trillion of cash they have stashed overseas since much of that cash is likely to end up being used for stock buybacks, as it has in past repatriation programs. The stock market is also hoping for a personal tax reform program that is stimulative for consumer spending and for the economy as whole. Meanwhile, the bond market is worried about the extent to which the Republican’s tax plan may boost the budget deficit and the national debt.
President Trump today is expected to announce a timeline for House approval of a tax bill by October and for Senate approval by December. However, the betting odds for a corporate tax cut by year-end remain relatively slim at 30% at PredictIt.org. The odds were higher at 60% this past spring, but then dipped to the current 30% area after the divisions within the Republican party were laid bare by recent budget debates and the failed attempts to repeal Obamacare.
We remain relatively optimistic that Republicans will eventually be able to pass at least a moderate-sized tax cut with some pay-fors as a common-denominator plan for the Republican caucus. After failing on an Obamacare repeal, Republicans know that they must either pass some type of tax cut or face a potentially existential threat going into the 2018 and 2020 elections.
U.S. durable goods orders expected to show continued strength — The market consensus is for today’s Aug durable goods orders report to show an increase of +0.9% and +0.3% ex-transportation following July’s report of -6.8% and +0.6 ex-transportation. Meanwhile, Aug core capital goods orders are expected to show an increase of +0.3% m/m, adding to July’s +1.0% increase.
Durable goods, excluding the volatile transportation sector, have been strong this year and were up by +5.6% y/y in July. Confidence about manufacturing orders can be seen in the ISM manufacturing new orders sub-index, which was strong at 60.3 in August, just mildly below the 8-year high of 65.1 posted in February. U.S. manufacturing orders are strong due to (1) the solid U.S. economy and (2) favorable overseas orders tied to the weak dollar and stronger overseas economic growth.
5-year T-note auction to yield near 1.87% — The Treasury today will sell $13 billion of 2-year floating rate notes and $34 billion of 5-year T-notes. The Treasury will then conclude this week’s $101 billion T-note package by selling $28 billion of 7-year T-notes on Thursday. Today’s 5-year T-note issue was trading at 1.86% in when-issued trading late Tuesday afternoon, which translates to an inflation-adjusted yield of 0.08% against the current 5-year breakeven inflation expectations rate of 1.78%. The 12-auction averages for the 5-year are: 2.47 bid cover ratio, 4.9 bp tail to the median yield, 15.0 bp tail to the low yield, and 33% taken at the high yield. The 5-year T-note is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.8% of the last twelve 5-year T-note auctions, which is moderately above the average of 60.9% for all recent Treasury coupon auctions.
EIA report should show some further recovery in refineries after Harvey — The market consensus for today’s weekly EIA report is for a +2.5 million bbl rise in U.S. crude oil inventories, a -1.5 million bbl decline in gasoline inventories, a -2.1 million bbl decline in distillate inventories, and a +2.7 point increase in the refinery utilization rate to 85.9%.
Today’s weekly EIA data (for the week ended Sep 22) will see distortions from Hurricane Harvey (that hit Texas on Aug 25) and to a much lesser extent from Hurricane Irma (that hit Florida on Sep 15). The refinery utilization rate in last week’s EIA report of 83.2% was up by +5.5 points from the previous week’s trough of 77.7%, but was still -13.4 points below the pre-Harvey level of 96.6% and -8.9 points below the 5-year average. The continued dent in refinery activity shows that demand for crude and gasoline production remains well below normal. Meanwhile, U.S. oil production has now recovered by +8.2% in the past two weeks from the Harvey-induced drop of -7.9% seen in the week ended Sep 1. U.S. oil production of 9.510 million bpd in last week’s report was just slightly below the 2-1/4 year high of 9.530 million bpd posted Aug 25.