US: Focus on tax reform and Fed speak this week – BBH

Analysts at BBH suggest that in the US, the focus will remain very much on tax reform and revisions to the bill are expected to be unveiled early in the new week so the House Ways and Means Committee can debate it and mark it up before voting on it.  

Key Quotes

“After the Committee votes on it and given the composition (the majority are Republicans), the bill will eventually pass.  Then it goes to the entire House floor.  Meanwhile, the Senate is working on their own version.”  

“With the passing of the FOMC meeting, the quiet period ends and several Fed officials will be speaking this week.  We do not anticipate new news, and the Fed funds futures market implies a December hike remains largely discounted.  We estimate that the implied interest rate of the December contract of 1.295% would be fair value assuming a rate hike, and the contract settled at 1.28% before the weekend.  We suspect the market will be most keen to hear from the newest Fed Governor Quarles, whose views are not known, though he voted all the other FOMC members last week.   Reports suggest Treasury Secretary Mnuchin convinced President Trump not to re-appoint Yellen.  Similarly, reports suggested that Quarles threatened to resign if Warsh was picked as Chair.”

“We did get one Fed surprise over the weekend with reports that NY Fed President Dudley will announce his resignation soon.  His term does not end until January 2019.  Keep in mind that the regional Fed Presidents are all chosen by their respective boards, not by the US President.  Still, Dudley’s departure would add to the overhaul of the FOMC, as the NY Fed President always sits on that policy-making committee.”        

“Given the light news stream, we suspect the week ahead will be largely consolidative in nature.  Although we remain favorable the dollar based on continued divergence (peak is not a 2018 story but 2019), the technical condition makes us suspicious that near-term dollar gains might not be sustained without stronger interest rate support or negative developments abroad.”