Daily Comment (October 18, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

Tax reform: Senate Republicans are moving closer to tax reform as 50 senators have agreed to begin debate on a budget resolution. In order for tax reform to happen, the Senate must first pass a budget appropriations bill. Currently, there appear to be a few holdouts that might prevent the budget resolution from passing through the Senate. Senator Rand Paul is the most vocal Republican holdout, stating that the bill fails to meet the budget cap requirement established in the 2011 Budget Control Act; Senator Bob Corker has also voiced similar concerns. In addition, there are still concerns about whether Senator Thad Cochran is healthy enough to vote as he has been recovering from an infection over the past few weeks. The GOP can only afford to lose two votes if they plan on passing a tax bill without help from the Democrats. That being said, there is growing speculation that tax reform will not get done by the end of the year. We continue to closely monitor this situation.

Return of the subsidies: Senators Lamar Alexander and Patty Murray reached a bipartisan deal that would fund healthcare subsidies for two years in exchange for giving states more regulatory flexibility with the law. Last week, Trump signed an executive order that would have ended subsidies that reimburse insurance companies for lowering deductibles, co-payments and other out-of-pocket costs for low income customers. At this moment, it is uncertain if it has enough support to become law; Senator McCain has expressed his support of the bill, while President Trump has backtracked on his initial support.[1] It is unclear whether Democrats are in favor of the bill, but it is widely perceived that Republicans will largely oppose it.

NAFTA stalemate: Renegotiations between the three-member trade alliance NAFTA ended at an impasse on Tuesday as Canada and Mexico were unwilling to give into U.S. trade demands. The countries will meet again next month for continued negotiations. During the negotiations, the U.S. asked for more flexibility to place import tariffs on certain goods such as automobiles, dairy and seasonal produce. The U.S. trade representative, Robert Lighthizer, told reporters that Canada and Mexico were being obstructionist and should be willing to “give up a little bit of candy” in order to secure a deal. We believe that this administration is possibly positioning itself for an eventual withdrawal from NAFTA. Furthermore, the Washington Post reported[2] that Peter Navarro, director of the White House Office of Trade and Manufacturing Policy, circulated a memo alleging that manufacturing jobs lost through trade contribute to increased abortions, divorces and spousal abuse; there was no data supporting the claim in the memo. A withdrawal from NAFTA could be bearish for U.S. equities.

Raqqa falls, what’s next? An American-backed militia, the Syrian Democratic Forces, claimed to have recaptured the northern Syrian city of Raqqa from the Islamic State. Raqqa is considered the capital for ISIS and its recapture represents a stunning blow to the dwindling group. The United States Central Command stopped short of claiming victory over ISIS, but has stated that the American-backed forces have wrested control away from ISIS. Despite the victory, there are concerns about how the U.S. plans to rebuild the areas formerly under ISIS control. Many fear that the defeat of ISIS could lead to a new power vacuum that could be filled by another militant group hostile to the U.S. As of right now, it appears that there are no detailed plans to rebuild the areas. President Trump’s insistence that the U.S. will no longer participate in nation-building further complicates the issue. We will continue to monitor this situation.

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[1] http://thehill.com/homenews/administration/355985-trump-reverses-course-indicates-opposition-to-obamacare-deal

[2] https://www.washingtonpost.com/news/business/wp/2017/10/17/internal-white-house-documents-allege-manufacturing-decline-increases-abortions-infertility-and-spousal-abuse/?utm_term=.3b993b21ad12