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Investors Must Remember: 'Trump Proposes, Congress Disposes'

Investors Must Remember: 'Trump Proposes, Congress Disposes'

By    |   Thursday, 28 September 2017 08:08 AM

President Donald Trump has proposed a long list of tax cuts, which was cheered by the financial markets, as well it might as large listed companies would benefit.

In particular, a corporation tax rate of 20 percent has been put forward. Trump stated: “We will reduce the corporate tax rate to no higher than 20 percent. That's way down from 35 and 39, which is substantially below the average of other industrialized nations.”

However, and as Republican Rep. Charlie Dent of Pennsylvania, who is an outspoken leader of the Republican Party’s dwindling moderate wing, said in March: “Trump proposes, but Congress disposes.”

Before the euphoria hits Wall Street too hard, it is worth remembering that Trump has had a less than 100 percent success rate in getting proposed legislation through Congress.

True, this is a little different from building a wall or introducing Trumpcare healthcare, but the Republican members of Congress will be very keen to have some kind of legislative success to present to the voters at the mid-term election in November next year when all 435 seats in the U.S. House of Representatives and 33 of the 100 seats in the U.S. Senate will be contested. Also, 39 state and territorial governorships and numerous other state and local elections will be contested at the mid-term election.

Some kind of tax cut package is therefore likely, but it is unlikely to be yesterday’s proposed tax cut package.

Enter the Congressional Budget Committees, the true rulers of the Republic, attention must now focus on Congress. If House and Senate Committees can pass resolutions in favor of a more significant tax cut, then the balance of probabilities may tilt in favor of yesterday’s proposals. If not, something far more muted is likely.

Besides all that, data today has a little bit of inflation spin twit.

The Euro area starts things of with the Spanish and the assorted German Lander giving out their inflation numbers.

German consumer prices rose 1.8 percent year-on-year in August, following a 1.7 percent gain in the previous month. It was the highest inflation rate since April, as cost of energy and food went up at a faster pace.

Of course, the latest rise in oil prices will not have filtered through to consumer price inflation (CPI) completely as there is some lag in oil price effects, although generally it’s a lag of weeks rather than months. Also, it’s refined oil products and their prices that matter.

Today, we will also get the U.S. revised GDP data for the second quarter.

Revisions to these data are getting more and more significant as economic data is getting less and less reliable.

Economists know this, but financial investors seem strangely reluctant to pay as much attention to these data revisions as they should.

The inflation angle here is the PCE deflator, which is the Fed’s favored inflation indicator. The PCE deflator is not a perfect inflation indicator, but it does have fewer adjustments in the price component than does consumer price inflation (CPI).

There is a lot of Federal Reserve chatter taking place.

Fed Chair Janet Yellen has preempted some of this with a pretty comprehensive speech she gave on Tuesday and that was titled: “Inflation, Uncertainty, and Monetary Policy.”

In her speech, Yellen rightly dismissed inflation linked securities as a reflection of inflation expectations and pointed out the difficulties of forecasting inflation for a central bank.

With a large proportion of reported inflation coming from calculated and administered prices, rather than from economically determined prices driven by market forces, this forecasting problem is a valid concern.

The lower inflation environment today compared to 20 or 30 years ago also makes administered prices potentially a more visible part of the inflation calculation.

Nonetheless, these Fed speakers will all be jostling for attention:

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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President Donald Trump has proposed a long list of tax cuts, which was cheered by the financial markets, as well it might as large listed companies would benefit.
investors, trump, congress, tax, economy
Thursday, 28 September 2017 08:08 AM
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