This week, the US Congress would need to decide on government funding for the rest of the fiscal year. Otherwise, it would trigger a partial government shutdown on April 29th, the 100th day of Trump's presidency. After the first 100 days of Trump administration, tax reform progress is still under market spotlight.
Optimistic confidence back to reality
Since Donald Trump became the president of the U.S., there have been some debates between confidence (soft data) and reality (hard data). First of all, Trump trade, which includes bank and high-tax basket index no longer outperform. Secondly, confidence indicators seem to have peaked and revert to the reality. Moreover, increasing inflation expectation weakens and US 10-year treasury yields were at the bottom of range bound. The market may conclude that inflation expectation will be moderate after commodity base effect has faded.
High tax basket (green) and bank index (blue)
Source: Amundi; Bloomberg
To maintain current valuation, earning growth of US companies must be in line with forecast. Although earnings may not have included the tax benefit right now, no tax cut is still the base case. However, without tax reform, earnings in 2018 will likely disappoint. On the other hand, market sentiment would be hurt should tax reform progress lag behind expectations.
Tax reform timetable
Investors should focus on the timetable of tax reform in the future. In this week, the government should decide whether to maintain the route map of finishing the tax reform before August 2017. It is a very difficult task as some opponents in GOP did not agree on the health care reform act before. It will be more realistic to drop the route map for passing the funding this week.
So the second deadline will be 28th April, the discussion of passing the government funding. Should the government shut down in summer, the congress will come to a deadlock. Two parties will thrust some new proposals into talks to avoid shutdown of the government, which may lead to endless negotiations.
The third date to watch will be 4th September. As the winter discussion in congress will be increasing debt ceiling, tax reform must finish before the summer discussion period. However, as Trump stepped into Syria and North Korea, his policy focus might have already shifted from economy to foreign policy.
Resume modest growth case
The GOP leadership knows that it cannot afford another major failure before the mid-term elections of 2018. As a result, investors should not underestimate the change of tax reform in the early stage of 2018.
But for now, it will be better shift focus to economic growth. We see political events providing a better entry levels for the Trump trades. Some Trump trade may be disappointing due to legislative arena, but others will be benefit from de-regulation from Trump policy. For example, US bank industry will still benefit from de-regulation environment.