US tax cuts take focus - but border tax may be abandoned. Implications for US deficits queried. US Fed says still on track for two more 2017 rate increases

By Jason Wong

Trump told the Associated Press the White House will release a tax plan "next week" (Wednesday). He said businesses and individuals will receive a "massive tax cut," but didn’t provide more details. The cuts will be “bigger I believe than any tax cut ever,” he said.

The market has heard all this before and barely reacted.

Of note, it seems that the proposed border tax will not go ahead, which would reduce the ability to cut taxes, without an adverse impact on the projected fiscal deficit.

Fed Vice-Chair Fischer said a recent patch of weak economic data likely won’t throw the Fed off track for two more interest-rate increases this year.  He also played down the fall in the CPI in March, seeing it as a one-time shock which he believes has little impact on the inflation outlook.  

UST rates showed a slight bias to steepen, with the 2-year rate flat at 1.18% and the 10-year rate up 1.5 bps to 2.25%.  The 10-year rates has now drifted up over the past few sessions, with last week’s low around 2.16% now becoming an area of technical support as traders contemplate the week ahead.

A number of US data releases are due this week, with the highlight being Q1 GDP figures on Friday.  The current Bloomberg consensus for that release is a fairly soft 1.1% annualised.  Trump’s tax announcement ahead of that release and any geo-political news will be on the radar for the market.

The local rates market saw a steeper curve on Friday, with the 2-year swap rate unchanged at 2.32% and the 10-year rate up 3.5 bps to 3.33%.

The short end of the curve is likely to remain tightly range-bound until the next key event, the RBNZ’s MPS on 11 May. Meanwhile global forces will continue to drive the longer end of the curve. There is little on the economic calendar as the new week begins.

Jason Wong is on the BNZ Research team. All its research is available here.