Week 46 In Review – US Tax Bill Clears First Legislative Hurdle

GOP tax bills passed by House, Senate committee
Japan economy expands for 7^th quarter
Eurozone reports solid growth, inflation pace slows
ECB warns economy still reliant on stimulus

Global equities edged slightly lower this week amid an uptick in volatility. Yields on benchmark US 10-year Treasury notes slipped 3 basis points, to 2.35%, while the price of a barrel of West Texas Intermediate crude oil fell about $1 to $56.10. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 11.60 from 11.10 a week ago, but traded as high as 14.5 at midweek.

MACRO NEWS

US House passes tax cut; Senate bill passes committee

The US House of Representatives passed its version of the Republican tax bill by a vote of 227–205, with 13 Northeast Republicans, angered by the loss of tax deductibility of state and local taxes, voting no, along with all the Democrats The Senate Finance Committee passed its version of the bill late Thursday, with the full Senate expected to vote after the Thanksgiving holiday.

If the Senate passes its version, the differences in the two bills could be ironed out in a conference committee before a final vote. GOP leaders hope to complete the process by Christmas, though it could linger into early 2018 if the two versions of the bill cannot be reconciled quickly.

Japan growth streak continues

Japan reported its seventh consecutive quarter of growth in the third quarter, the longest streak in more than 15 years. The economy expanded at a 1.4% annual pace last quarter, down from a growth rate of 2.6% in the April–June period. Rising exports were the main contributor to growth, the government reported.

Eurozone maintains solid growth

Europe is experiencing the fastest growth rate in a decade, rising 2.5% year over year, which is a faster pace than the 2.3% US rate. The United States, however, experienced stronger growth in Q3 than the Eurozone. While growth is solid around the world, inflation remains below central bank targets.

Eurozone core inflation rose a scant 1.4% in October, well below the European Central Bank’s target of near 2%. Growth in the United Kingdom was more subdued than on the continent, coming in at 1.5% annually.

ECB’s Draghi: Robust recovery reliant on stimulus

Europe’s economic recovery is robust and the fall in unemployment has been remarkable, European Central Bank president Mario Draghi said on Friday, but inflation is not at a point where it can be self-sustaining without stimulus.

Venezuelan bondholders in limbo

Venezuela and state-owned oil company Petróleos de Venezuela (PDVSA) were declared to be in selective default by the three major credit rating agencies this week. Meanwhile, Russia agreed to restructure nearly $3.2 billion in Venezuelan debt, while China said it has confidence that Venezuela will be able to properly handle its debt issues. In an effort to assuage bondholders’ concerns, PDVSA reportedly this week made an $80 million interest payment that was due on 12 October.

May’s continued leadership in focus

UK prime minister Theresa May’s continued leadership of the Conservative Party was called into question last weekend as the Sunday Times reported that 40 members of her party have agreed to sign a letter of no confidence. Forty-eight signatures are needed to spark a leadership vote.

May’s grip on power remains tenuous, but with no obvious replacement waiting in the wings she may be able to hang on to her post as the Brexit process unfolds.

EARNINGS NEWS

Earnings growth faster for multinationals

According to FactSet Research, companies who make more than 50% of their sales outside the US showed much faster earnings growth in the third quarter than companies whose overseas sales come in at less than 50%. For the S&P 500 Index as a whole, earnings growth is running around 6.1%. For companies with the majority of their sales outside the US, that figure jumps to 13.4%.

Companies whose sales are mainly inside the US saw their earnings grow just 2.3%. The revenue story is similar. Those with greater sales outside the US saw Q3 revenues jump 10% year over year, while those with mostly US sales rose 4.2%. The technology and energy sectors, with their heavy global exposure, were responsible for much of the out-performance, FactSet said.

The Week Ahead