US: GOP tax plan unlikely to prompt re-pricing of reflation prospects - ING

There were enough ‘ifs and buts’ in Chair Yellen's speech for both market hawks and doves to cling onto their a priori views on Fed policy and While it seems as if the Fed Chair is intending to sign off on her term with one final rate hike in Dec, this story is now all but priced into short-term US rates, according to Viraj Pael, Research Analyst at ING.

Key Quotes

“In fact, the ≈70% probability of a Dec hike priced into markets presents a near-term headwind for the $, with only the slightest whiff of bad news – from either soft US inflation data or political uncertainty – prompting markets to lower their expectations of a year-end hike.”

“The spotlight today will be on the unveiling of the GOP ‘Big Six’ tax plan; there is no set time for the release, though we note that President Trump will be giving a speech on this in Indiana around 1700 ET (2100 GMT). While we may see some headline-driven moves in US yields and the dollar, we think markets have learnt their lesson from earlier this year of buying into tax reform promises too early.”

“We stick to two basic ‘trading principles’: (i) the economic benefits of tax reforms supersede tax cuts and (ii) a tax plan has to make political and economic sense.

• On the political front, with the failed Obamacare repeals still fresh in investors' minds, there needs to be enough credible revenue raising measures (beyond dynamic scoring) for the deficit hawks in Congress to sign off on the tax plan.
• On the economics, reforms like shifting to a territorial tax system and allowing for full capital expensing would be positives for long-run US investment.”

“We're not holding our breath on today's tax plan ticking our ‘trading principles’ at this stage and prompting markets to seriously reprice US reflation prospects. But with the USD in ‘correction mode’, sentiment may drive it higher (DXY to 93.50/60). The true test, however, will be how far the US 10Y yield – as well as metrics like the US 5Y5Y inflation breakeven rate – can move on today’s tax plan unveiling.”