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Fed's December Rate Hike Is '99 Percent Certainty' for Investors

Fed's December Rate Hike Is '99 Percent Certainty' for Investors
(Dollar Photo Club)

By    |   Thursday, 12 October 2017 07:11 AM

President Trump has been bringing all of his political skills to bear on the issue of passing tax cuts.

The difficult negotiations with Congress, an equal part of the U.S. constitution to the U.S. President was summed up in Pennsylvania in Trump’s words when speaking about his plan for tax reform: “To all of our great congressmen, congresswomen ... all I can say, is, you better get it passed.”

Part of the problem is that we still don’t know what “it” is the President having promised changes the rather scanty details of the tax bill.

The issue for investors is that the tax changes are by no means certain, and that does have a bearing on asset prices.

One could reasonably expect something like a 5 percent drop in U.S. equities if no tax cuts were forthcoming. Economic growth and deregulation would still be positives in that scenario and would be limiting the decline.

In the meantime, it’s noteworthy that the IMF catches up to the prospect that President Trump won't deliver tax cuts.

The just released IMF staff's WEO macroeconomic forecast reads on the U.S.: “The downward revision relative to the April WEO forecasts (of 2.3 and 2.5 percent for 2017 and 2018, respectively) reflects a major correction in U.S. fiscal policy assumptions. Given the significant policy uncertainty, IMF staff ’s macroeconomic forecast now uses a baseline assumption of unchanged policies, whereas the April 2017 WEO built in a fiscal stimulus from anticipated tax cuts.”

Of course, in the political arena, the failure to cut taxes may also raise questions about the outcome of the 2018 mid-term elections that will take place on November 6 next year, which is also market relevant.

Maybe, it could also be helpful to keep in mind that midterm elections usually generate lower voter turnout than presidential elections. While the latter have had turnouts of about 50–60 percent over the past 60 years, only about 40 percent of those eligible to vote actually go to the polls in midterm elections. Midterm elections usually see the president's party lose seats in Congress, and also frequently see the president's intraparty opponents gain power.

Besides all that, in the just released minutes of the September 19-20 Federal Open Market Committee (FOMC) meeting we read: “Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term. In addition, many judged that at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time … On balance, participants continued to forecast that PCE price inflation would stabilize around the Committee’s 2 percent objective over the medium term.”

As an investor, I would take a December rate hike for sure at 99 percent. What comes thereafter is still too early to tell.

Over in Europe, there are reports that the Brexit proceedings are now going backwards, but not in the sense that the decision to divorce is likely to be reversed

The latest round of negotiations concludes today.

This is not necessarily a positive development overall, although it is consistent with the grand traditions of the European Union (EU) where everything of any importance is left to the last minute.

The problem here is that markets are probably not going to wait for the last minute to deliver their verdict and to some extent markets can force the shape of any outcome.

Meanwhile in Spain, and after the Catalan leader Carles Puigdemont issued a symbolic declaration of independence from Spain on Tuesday night, but then immediately suspended it and called for negotiations with the Madrid government, yesterday, the Spanish Prime Minister Mariano Rajoy gave the Catalan government 8 days to drop its independence bid, failing which he would suspend Catalonia’s political autonomy and rule the region directly.

The stakes are high in this dispute that goes back to 1469 between what we call today Spain and Catalonia.

Economically speaking and if a crisis develops, it will be a lose-lose situation for both and that will have consequences for investors.

Yes, also for Spain that losing Catalonia would deprive Spain of a fifth of its economic output and more than a quarter of its exports.

At present, it is impossible to tell what will come out.

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

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The issue for investors is that the tax changes are by no means certain, and that does have a bearing on asset prices.
fed, rate, hike, investors
Thursday, 12 October 2017 07:11 AM
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