Credit Agricole: Trump may struggle to revive the ‘Trump trade’
US President will address Congress late on Tuesday and according to some reports he is expected to outline the progress made so far and urge lawmakers to follow up with legislation to maintain forward momentum. The list of topics is expected to be broad, including public safety, healthcare, tax reform and deregulation. Investors are likely to focus in particular on any details of the ‘phenomenal’ tax package signaled earlier by the President, particularly as the Treasury Secretary and members of Congress have recently cautioned not to expect legislation to be implemented before next year. Given that Republicans control both houses, the optics of the President’s appearance in front of lawmakers are likely to be constructive but the lack of significant policy detail in the speech will likely prevent a sustained revival of the long-USD ‘Trump trade’.
BTMU: Scope for disappointment on tax reform; USD/JPY to drift lower.
In a speech yesterday, President Trump stated that his first budget will focus on public safety and national security. He is seeking to increase defence spending by USD54 billion which would be offset by savings elsewhere. He added that he will make a big statement on infrastructure spending when he addresses Congress today, and that he is going to be moving very quickly on regulatory reform. However, there appears some scope for disappointment on tax reform at least in terms of timing as President Trump stated that his tax plan will only be released once they have released their proposal on Obamacare and have a clearer indication of the costs involved. USD/JPY is likely to continue to drift lower in the near-term if President Trump fails to provide fresh impetus for reflation trades today.
TD: Fade A USD bounce if no details on Border Adjustment Tax ‘BAT’
The market remains sensitive to the news flow ahead of the unofficial SOTU. Ultimately, we believe that market participants looking for details will likely be disappointed, especially with market expectations of a Mar rate hike bouncing to nearly 50% in recent days. Recent news headlines have shown an emphasis on budget proposals with anti-terrorism and infrastructure the key features. This comes with a little focus on the fiscal agenda, which we view is an exercise in managing expectations. We think that the lack of consensus on how to handle Obamacare and implement broader tax reform has left the administration trying to lower bar for the speech. For the FX market, the drivers will be whether the speech keeps the equity rally going or there is an endorsement of BAT. A positive tone that encourages cooperation could benefit risk assets and the USD but would prefer to fade a USD bounce without discussions on BAT.
Barclays: Policy announcement might not come
Trump will deliver his long-awaited speech to a joint session of Congress on Tuesday (9 PM EST). Although market attention will be keenly focused on the speech, it is unlikely that new details regarding fiscal stimulus, tax reform or trade policy will be provided. The administration intends to push forward fiscal reforms before August, according to Treasury Secretary Mnuchin, but details on tax policy are likely to come after March, when Congress finishes working on repealing and replacing the Affordable Care Act.
BNPP: Risk-reward attractive for long USD ahead of this week’s 3 major events.
There are three key events in the US this week: US President Trump will address a joint session of Congress (28 February), January Core PCE data (1 March) and Fed Chair Yellen’s speech (3 March). Trump is expected to reveal his fiscal plans, the market expects core PCE to rise further to just 0.2pp below the Fed’s 2% target, and Yellen’s speech will be her last before the blackout period ahead of the 15 March FOMC meeting. Pricing for a 25bp March rate hike stands at around 35% and in total there are only two hikes priced for 2017. In our view – following continued rhetoric from several FOMC voters that a March hike should not be taken off the table – the risk heading into the three events are skewed towards the market needing to increase pricing for Fed tightening and the USD strengthening in sympathy.
BofA Merrill: Risk of lack of sufficient details.
It feels like it has been a very long time coming, but markets will finally hear from President Trump at next week’s address to Congress. Anticipation is running high, and investors will be looking for clarity on the new administrations agenda. As we argued earlier this week, if fiscal progress is delivered, rates and the USD should move higher. The risk is that we do not get the level of detail on policies markets are waiting for.
Goldman Sachs: Political picture looking a little less rosy.
With President Trump set to address Congress tonight, the difficulty congressional Republicans have had on Obamacare does not bode well for quick progress on tax reform or infrastructure funding. This reinforces our view that a fiscal boost worth about 1% of GDP (largely via tax cuts) is primarily a 2018 story. In the meantime, Mr. Trump’s administrative actions on trade and immigration present downside risks to growth.
NAB: Difficult to see how Trump can offer real specifics?
All up, it is difficult to see how Trump can offer real specifics on how his programs will be financed – if that is what markets want to avoid a further clear-out of positions. By definition, what we’ve learnt so far suggests the details today will be sketchy – long on vision and passion, but short on specifics. That does not mean yields and the USD won’t get another small nudge up immediately, but price-action in recent weeks suggests markets want more and positioning, especially in bond markets, is weighing. Disappointment could set in fairly soon after. Then again perhaps we might have to wait until soon-to-be-seen headlines on the looming debt ceiling deadline of 15 March appear? Any move lower in yields will impact the USD and if the resulting market turbulence is sufficient, perhaps the Fed too, scotching any ideas of a March 15 hike.
UniCredit: Market response depend on the question of border-adjustment taxes.
Today’s highlight is President Trump’s speech to Congress with everyone hoping for him to go beyond rhetoric and disclose some details of the new administration’s planned tax reform. As Andreas Rees highlighted in the Sunday Wrap, it is highly speculative to come up with a clear picture for markets ahead of any detailed announcement and the market response may heavily depend on the question of border-adjustment taxes, which in our view would have negative consequences not just for the main US trading partners but for the US itself. In the end, it would not be surprising to see US yields moving slightly higher across the curve due to a revival of the reflation trade story.
Lloyds: Too early to expect much.
Markets will be looking for more detail on both trade policy and his tax and spending plans. But, it may be too early to expect much, as reports suggest the administration have yet to fully agree on specifics. For now, agreement seems limited to some specific spending measures – an increase in defence expenditure but a reduction in environmental protection. A more comprehensive package, including tax changes, may only come later in the year. Even after that, the administration will need to get the agreement of Congress. Last week, the new Treasury Secretary Mnuchin said he hoped to reach agreement on tax changes before August, but warned it could take longer. All this suggests that the President may not have much to report, although he will likely be his usual combative self.
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