The perception of progress in US tax reform remains a key driver of financial markets with CPI inflation in focus. Treasury yields are still a key factor in how the US dollar trades and for this tax reform plays a key role. We take a look at the outlook for forex, equities and commodities markets this week.
With President Trump away in Asia and a dearth of economic data last week the focus has been on the progress of US tax reform. The committee stage of the bill is revealing differences within the Republican Party over the content of the bill. However, expectations already seen to be being scaled back as suggestions that the Senate GOP version would delay the corporate tax from 35% to 20% by a year. Already flattening to 10 year lows, the US yield curve seems to already questioning the longer term benefits to growth. Increasing the deficit by $1.5 trillion over 10 years is certainly a concern. Can Republicans agree on a tax rate for repatriation of corporate overseas profits? Differences between the GOP Senate and Republicans over the treatment of standard deductions and income tax brackets also could delay a final vote which has been expected before Thanksgiving (23rd November) whilst hopes of Donald Trump signing tax reform into law this year seem tentative. The real impact of this slippage could be seen on Wall Street in the coming weeks. With earnings season in its dotage, fully valued equities could be at risk of a correction. As for the yield curve, focus is back on the data this week, with the release of CPI inflation and retail sales. Subdued inflation is a key reason behind the flattening yield curve, however there could be a boost were there to be a positive surprise on core inflation. This could also give a flagging dollar rally another shot in the arm.