US stocks have drifted back from their record highs overnight as the market awaits the House vote on the US tax bill later today ahead of the Senate vote tomorrow. Global bond yields moved higher after some hawkish comments from ECB members and better than expected US housing data. But low liquidity probably exacerbated the moves.
The market now fully expects the Senate vote on the US tax bill tomorrow to be successful after senators Lee and Collins declared their intention to support the bill. Lee and Collins had previously expressed reservations about certain aspects of the bill, but their support seems to give the Republicans the required numbers to pass the bill in the Senate. US stocks initially moved to new highs in the morning, before drifting lower overnight, which probably signals that the enactment of the tax plan is fully priced-in now. After finishing with the tax bill, Republicans will then need to shift focus to agreeing a spending plan by the end of the week. Republicans need Democrat support in the Senate to pass the spending bill and prevent a government shutdown this Friday. Even if a spending plan isn’t agreed later this week, it wouldn’t be the first time the market has seen temporary government shutdown so the impact will probably be relatively modest (although thin liquidity over Christmas always means there is the risk of unpredictable moves).
Global bond yields moved higher overnight, with the 10 year US Treasury yield up 6 basis points to 2.46%, its highest level in 2 months. Several factors contributed to the move higher in yields. US housing data beat expectations overnight while European bond yields also moved sharply higher, supposedly in response to some hawkish comments from ECB members. ECB member Makuch said Governing Council discussions were “shifting from asset purchases to possible future use of interest rates to regulate the economy.” Another ECB member, Hansson, said he expected the ECB to adjust their communication in the first half of 2018. We wouldn’t necessarily read too much into the comments from well-known hawkish members of the ECB; unless core inflation picks up in Europe, President Draghi and the more dovish committee members are unlikely to adopt a markedly more hawkish policy. Thin liquidity in bond markets probably exacerbated the move higher in yields.
The USD is stronger against most currencies overnight, helped by the strong US housing data, although most currencies remain relatively range-bound. The euro was the best performing major currency, with the aforementioned hawkish comments from ECB members providing some support. The German IFO survey was a touch lower than market expectations, but continued to point towards robust economic momentum in the euro area.
The NZD remains stuck around 0.70, having traded a tight 0.6980 to 0.7020 range overnight. The ANZ Business Survey released yesterday rebounded a bit from its sharp fall last month, and this provided a short-term boost to the NZD. The Survey remains below its long-term average, although we think the real economy is doing better than implied by the Survey. The Global Dairy Trade auction overnight showed dairy prices, including for whole milk powder, fell from a fortnight ago. But there was little impact on the NZD. Today, we receive net migration and the trade balance but the market is more focused on Q3 GDP which is released tomorrow.
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