The Trump administration unveils an ambitious tax plan and risk-on impulse fades after Macron’s first round victory
The results of the first round of the French election were pretty much in line with both the polls and our expectations. Emmanuel Macron comfortably won the first round with 24% with Marine Le Pen coming in second at 21%. The price action out of the gate on Monday morning was very encouraging with equity markets jumping higher, credit spreads gapping tighter and core rates re-rating higher. Over the course of the week, the risk-on impulse has faded and there has not been as much following through as we would have expected. Yields in the US have fallen back somewhat and the risk rally in credit and equities has stalled. The other big news this week was the release on Wednesday of the Trump administration’s tax plan. After months of inertia, the US congress has got back to work after the Easter holiday recess and there has been a flurry of activity. Thus far, you could be forgiven for scoring both the Trump administration and the Republican Congress very poorly in the context of delivery of any kind of policy momentum. Contrary to promises made on the election trail, Mr Trump has not been doing a lot of winning since taking office in January. The tax plan was all of one page and only sketched out the major principles of what they intend to achieve over the summer. However, the scope and ambition of the plan cannot be faulted. The broad outline involves cutting corporate and personal income taxes substantially, simplifying the tax code and incentivising multi-national corporations to repatriate offshore funds back to the US. Detail, however, is lacking and there have been many snide comments about what Mr Mnuchin’s former bosses at Goldman Sachs would have thought of such a vague and woolly business plan. It’s almost a footnote to mention the European Central Bank meeting yesterday, but given the uncertainty presented by the election cycle Mario Draghi was at pains to tread a very neutral, uncontroversial path, and push out important decisions on tapering and the deposit rate until later in the year.
On our trip, we picked up very clear signals that delivery of substantial tax relief to Americans is the primary goal of both the Trump administration and the Republican Congress.
Mark Bathgate and I have just spent five productive days in Washington, attending the IMF spring conference and meeting with policy makers at the Federal Reserve, in the Trump administration and in Congress. Our sense is that there is now a greater sense of urgency to get some policy traction in Washington. The leadership of the Republican Party are very aware of the rarity of having control of all three branches of Government, and the cost of failing to get anything done. We know how important “winning” is to Trump. In the context of very low expectations, we have cautious optimism that momentum will start to build. Starting this weekend, policy makers have to pass a Continuing Resolution to avoid a government shutdown. Thereafter, it appears there will be another attempt to get the replacement for Obamacare through the House. Most important, there is the tax plan, the contours of which will become clearer over the summer. On our trip, we picked up very clear signals that delivery of substantial tax relief to Americans is the primary goal of both the Trump administration and the Republican Congress. There has been a lot of lip service paid to budget neutrality, and ensuring that any tax reform is paid for. We have high conviction that tax cuts are far more important than budget neutrality and if it is necessary to fund them through deficit spending, so be it. What is not going to change is the dysfunctional nature of policy making in Washington in general; it is going to remain messy and noisy.
Looking ahead, our major macro thematics are unchanged. We remain confident in a constructive outcome in the French election and believe the subsequent relief rally will see further substantial compression of spreads. We are not blind to the threat of geopolitics, especially where North Korea is concerned. For now, this remains a tail risk event.