27 November to 3 December – Setting the Stage

After a mad dash on Friday, the US Senate passed their version of the “Tax Cuts and Jobs Act” by 51 votes to 49. Senator Bob Corker was the only Republican to vote against the bill. Although considered the other two potential dissenters, Flake and McCain also gave their support. A conference committee will now be tasked with eliminating the differences between this Senate bill and that proposed by the House.

The consensus view of Trump’s flagship reform is that it will help stimulate near-term growth and is likely to prompt an upgrade to FED forecasts, therefore raising the potential for rate hikes next year. The market is currently pricing around a 0.4% increase in rates for 2018. However, as we discussed last week, the overall value of the measures is widely debated. Trump has tweeted a letter signed by 137 “economists” strongly endorsing the initiative, but the quality of those lending their support is comical; some have been shown not to exist, others are not economists and almost none are well known. In contrast, a survey by the University of Chicago amongst the IGM Economic Experts Panel, some of the most respected academic economists in the world, showed 100% consensus that the bill will raise US debt-to-GDP substantially and 98% consensus that GDP will not be substantially higher than under the status quo. As Oliver Hart of Harvard commented “many of the changes look like handouts to the rich”.

In any case, a final agreement by the end of the year is possible and could set the stage for an interesting 2018. Whist strong growth momentum will not dissipate in a hurry, the economic backdrop for markets has probably now peaked.

As expected, OPEC and the group of non-OPEC countries led by Russia agreed to extend production cuts for 9 months through to the end of 2018, subject to a 6-month review. Oil prices were largely unchanged.

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