US: Trump tax package still nowhere near the endzone – ING

Congressional leaders in the US (the 'Big Six') have promised to unveil more details on proposed tax reforms this week and leaks on Capitol Hill suggest that the package will contain household tax cuts – including a lower top individual rate, with the corporate tax rate being cut to 20%, notes the research team at ING.

Key Quotes

“While such a tax plan is unlikely to be revenue-neutral, last week's deal by Senate Budget Committee members to allow for a $1.5 trillion increase to the budget deficit over the next 10 years has given the Big Six some fiscal leeway.”

“We take the view that tax reforms have to make both political and economic sense for markets to seriously reprice US reflation prospects. On the political front, deficit hawks are unlikely to be convinced by dynamic scoring as a way to balance the books, while GOP centrists won't be overly happy to see tax cuts for corporate America and the wealthy. On the economics of tax reforms, policies that fail to address the low productivity and infrastructure issues facing the US economy are unlikely to yield the same long-run growth benefits as straight tax cuts. Overall, the lack of credible details on how lower taxes will be paid for means that we are not expecting any change in the current sceptic tone within markets over a Trump tax package.” 

“Elsewhere, the Fed story is a major risk to the dollar this week. We suspect markets may have misinterpreted the signal from the dots last week, with the market-implied probability of a December rate hike shooting up to 60-65%. Fed talk this week – including a speech by Chair Yellen (Tuesday) – may show that the dots are not a firm commitment to a December rate hike. We think that the flattening bias in the US rate curve is set to remain in place – especially with Fed officials downgrading their neutral rate estimates by 25bps and signalling greater uncertainty over the extent of current hiking cycle. The bottom line is that chasing dollar strength on any Fed tightening hopes has limited upside potential and will ultimately prove unfruitful.”