by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EST] Financial markets are relatively quiet this morning. We are watching the following news events:
Senate tax bill: Today, the Senate’s tax reform bill awaits approval from the Senate Budget Committee. Although approval from the committee is usually a formality, there is growing speculation that the bill might not achieve the majority votes needed to make it through. Senators Ron Johnson (R-WI) and Bob Corker (R-TN) have publicly come out against the bill in its current form. Sen. Johnson would like deeper tax cuts for pass-through businesses, while Sen. Corker would like to place a penalty provision in the bill that would raise taxes if economic growth fails to ensure the bill remains revenue-neutral. These demands seem steep given the political factions that exist within the Republican Party. The budget committee is split between 12 Republicans and 11 Democrats, so the bill needs support from both Republican senators as the Democrats have refused to support it. If this bill fails to make it out of committee, it will further delay tax reform.
Tension before coalition talks: Yesterday, the European Commission voted to renew the license for the controversial weed killer glyphosate. Germany was not expected to support the renewal so the approval came as a surprise (Germany had abstained from the previous vote when the license was rejected). Upon approval of the license, France and Italy maintained they would continue to ban the use of glyphosate in their respective countries. Glyphosate is a substance used in weed killer that became controversial after a WHO report claimed the substance was “probably carcinogenic.” The vote could complicate talks for a coalition government in Germany between the CDU/CSU and the SPD as the SPD has consistently supported the ban on glyphosate. Although this issue may have damaged trust between the sides, it appears that talks to form a coalition government will continue. So far, the euro has remained stable which suggests there is still optimism that a deal will be struck. We will continue to monitor the situation.
The return of AMLO: In Mexico, Andres Manuel Lopez Obrador (AMLO) is currently leading the polls for the presidential election planned for July 1, 2018. AMLO, a populist candidate with a loyal following, is expected to finish within the top two contenders for the third consecutive election. In the previous two elections, AMLO led in the polls early only to lose in the general election. A win by AMLO would increase the likelihood that Mexico will exit NAFTA as AMLO believes the agreement hurts Mexican farmers. That being said, it is widely believed the establishment parties, PAN and PRI, will do everything in their power to ensure AMLO does not win the presidency. These parties have recently seen a dip in support on corruption suspicions.
Jerome Powell: Later today, Fed chair nominee Jerome Powell is expected to meet with the Senate Banking Committee to begin his confirmation hearing. Prior to the hearing, he sent a statement to the committee in which he expressed broad support for Chair Yellen’s agenda and signaled that he will continue down the path of gradual rate increases and shrinking the Fed balance sheet. He also mentioned that he would be open to considering “appropriate ways” to ease rules on banks. After making it through two confirmation hearings without resistance, Powell is expected to be confirmed, replacing Yellen when her term ends in February.