- Tax bill set to be released tomorrow will help markets more accurately price future expectations
- Beyond immediate impact, details will suggest where Republicans have agreed to compromise
- Lots of factors working in favor of the dollar, fiscal policy likely to become a new driver
Tomorrow, Republicans in the House of Representatives are expected to unveil the first draft of Trump’s tax reforms.The bill will both ouline the likely impact from tax cuts in some detail, and may foreshadow the trajectory of Trump’s broader economic agenda. Thus, the proposed changes and associated deficit projections are important for a few reasons.
Beyond immediate impact of tax cuts, markets will be pricing in Trump’s agenda
Firstly, specifics regarding tax reforms have been limited in recent history. Trump has a strategy of starting with an open slate in order to please as many parties as possible, a factor we covered in our preview of the tax announcement in late September. This is the first time markets will be able to accurately assess the future impact of expected tax reforms. While previous studies have made various claims regarding the expected changes, the reality is that there have not been enough hard details to back up these claims. Secondly, the draft bill will contain important clues regarding Trump’s future economic plans. More specifically, the draft bill will help illustrate where House and Senate Republicans are willing to compromise. Previous efforts to reform healthcare failed as key Republicans did not support the Graham-Cassidy bill. This time, the White House is walking a fine line of appeasing deficit hawks while trying to lower the tax burden. Given that Trump campaigned on an economic agenda that includes higher fiscal spending (i.e. higher deficits), markets will adjust their future expectations based on the content of the upcoming tax bill.
Similar to the budget vote, House and Senate expected to work in unison
One of the reasons the recent budget reconciliation was approved by Congress is because both chambers worked together. This is why Trump publicly thanked Diane Black of the House Budget Committee after the budget was passed. This time, the House and Senate are again expected to work together in order to get the tax bill through Congress smoothly. Specifically, the tax-writing committees (Ways and Means Committee in the House and the Senate Finance Committee) are likely to produce tax bills that are largely similar.
In terms of process, the House bill will be subject to various amendments before it is subject to a full vote. It will then be sent to the Senate, where it will again face a vote. If the bill passes both chambers, it will then be sent to the President for his signature. If the Senate makes any changes to the bill prior to passing it, the new bill will have to be reconciled in a ‘conference committee’. At this point, the bill will be sent back to the House and the Senate, before once again reaching the President’s desk. As House and Senate tax-writing committees are already working together, the White House is seeking to avoid any possible delays to getting tax changes through Congress.
Tax reforms and the dollar
Earlier today, we wrote that the dollar continues to look overbought in the short-term time frame. Given the importance of tax reforms in shaping future inflation expectations, we believe that the dollar can push higher from current levels despite looking overbought. While the dollar may fall if tomorrow’s tax bill fails to meet expectations, we wouldn’t expect much more than a short-term dip. When looking at a longer time frame, the dollar is far from overbought conditions, and can strengthen from here without running into much resistance.
Ultimately, most high-level drivers today are working in favor of the dollar. Growth, and now inflation, are accelerating in tandem. Looking at monetary policy, interest rates are set to go higher in December while rate hike expectations are likely to climb if inflation numbers keep rising. Lastly, speculators remain fairly bearish towards the USD and have yet to change their positioning. After a long time, US government fiscal policy may finally be working in the currency’s favor. We remain US dollar bulls.