House Approves Budget Plan and Rates Move Higher

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Published Date 10/26/2017

Stock indexes higher, interest rates started this morning looking OK but as the indexes improved MBS and treasury prices eroded. Shouldn’t be any surprise, we have been warning that interest rates have a negative outlook after the bellwether 10 yr note moved above 2.40% last Friday; furthermore, we have been bearish going back a month ago when the 10 yr moved above 2.23%. Since then the technical supports have fallen like leaves on a Fall oak tree.

The possibility of tax cuts have driven equity markets 2K points from when the tax cuts took center stage. The bullish outlook that the economy will grow to over 3.5% GDP growth 2.7% currently). Deficits are likely to increase. The massive bet being made is that consumers will increase spending and wages are about to move higher. In the bond market the concern about inflation may be heating up, but still, the view in that market is somewhat benign on inflation increases.

The House barely passed a budget plan today (216 – 212). Barely, and we suspect it doesn’t bode well for the tax cuts that still have not been entirely thought out. There will be cuts but not likely as deep as presently believed. That a budget blueprint was a close vote and with the turmoil in Republican ranks, markets should be somewhat nervous given the bets laid….but that isn’t the case at the moment. Democrats were unified in their opposition, and 20 Republicans voted against the bill, many to express disapproval of a provision in Trump’s tax outline that would repeal an income tax deduction for state and local taxes. The other problem facing legislators; provisions to scale back a popular tax-deferred U.S. retirement savings program. Both those provisions are aimed at offsetting revenue losses that would result from the planned sweeping tax cuts.

Tomorrow markets will get the first look at Q3 GDP with the release of the advance report, the first of three looks with the best look coming in a month with the preliminary Q3 release. Also tomorrow the U. of Michigan consumer sentiment index, expected at 101.0 from 101.1 two weeks ago. Like lemmings going over that cliff, markets do pay attention to the report but as we have noted numerous times here; we don’t put much emphasis on it. We believe consumers’ sentiments are largely driven by how the equity markets are doing; no wage increase so far but consumers overall believe the government and politicians will make it happen.

The European Central Bank will extend its bond-buying scheme until at least September next year and possibly beyond to keep the euro-zone recovery on track but will halve its rate of purchases to €30B a month. The ECB struck a dovish tone, saying it stood ready to extend QE beyond September or even raise the level of monthly purchases should circumstances worsen again. It also stuck to its line about keeping rates lower until well after it stops its bond purchases.

Source: TBWS

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