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Putting the spotlight back on tax reform and away from North Korea (and the NFL!) gave U.S. equities and the dollar a boost while the Canadian dollar retreated on a more cautious tone from BOC head Poloz.

  • U.S. headline durable goods orders up 1.7% vs. 1.0% forecast
  • U.S. core durable goods orders up by 0.2% as expected
  • EIA crude oil inventories dropped by 1.8M barrels vs. projected 2.9M gain
  • U.S. pending home sales down by 2.6% vs. projected 0.5% dip
  • BOC Gov Poloz: No predetermined path for interest rates
  • Poloz: Policy adjustments will continue to be data-dependent
  • Poloz: Inflation has been below target for years, risks from housing sector
  • U.S. President Trump: Tax reform won’t benefit wealthy. Believe me.
  • Trump: Corporate tax rate to be lowered to 20%, up from previous 15% proposal

Major Events/Reports

Trump talks tax reform

If there’s one thing that usually brings good tidings and cheer to Wall Street, it’s the magic words “tax cuts.” After all, corporate America does revel in the prospect of higher profitability and the Donald promised that he would get it all done by the end of the year.

Apart from that, Trump clarified that the framework for tax reform won’t benefit the wealthy (a.k.a. himself) but that it would be historic for the administration’s legacy (a.k.a. himself). He emphasized:

“This is a once-in-a-generation opportunity, and I guess it’s probably something I could say that I’m very good at. I’ve been waiting for this for a long time. We’re going to cut taxes for the middle class, make the tax code simpler and more fair for everyday Americans. And we are going to bring back the jobs and wealth that have left our country and most people thought left our country for good.”

Not exactly something we haven’t heard before, but he did include a few more numbers in his speech and this was chomped up quickly by financial sector shares. In particular, the proposal would would reduce the tax brackets from seven to just three (12%, 25% and 35%) and the standard deduction would be doubled to $24,000 for married couples and $12,000 for single filers. It would also increase the child tax credit from $1,000 to an unspecified but “substantially higher” amount.

However, it’s also worth noting that Trump conceded to cutting corporate taxes from 35% to 20%, higher than his earlier call to 15%. He explained that he floated 15% as a bargaining tactic, the “brilliant negotiator” that he is.

U.S. equity indices turned green on this stronger push for tax reform as it also took the focus away from brewing tensions with North Korea.

  • Dow 30 index is up 56.39 points to 22,340.71 (+0.25%)
  • S&P 500 index is up 10.20 points to 2,507.04 (+0.41%)
  • Nasdaq is up 73.10 points to 6,453.26 (+1.15%)

Not-so-hawkish remarks from Poloz

Loonie bulls seem to have been expecting too much from BOC Governor Poloz as they were clearly disappointed by his relatively neutral tone during his testimony.

While the head honcho reaffirmed their hiking bias, he also explained that future policy action will be data-dependent and that there is no pre-determined path for interest rates. He mentioned that there could still be surprises in either direction and that:

“We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.”

Poloz also noted that inflation has been undershooting their target for years and that there could be risks stemming from the economy’s reaction to macroprudential measures addressing housing market imbalances.

During the Q&A, he went on to say that household debt is the number one risk and that this could still leave the Canadian economy vulnerable to a shock, likening it to a tree with a crack that could possibly mend itself but could also be blown over by a storm.

As for the Loonie’s appreciation, Poloz refrained from saying whether it’s a boon or a bane, but he did say that it’s something that needs to be considered. On a more optimistic note, he noted that the temporary factors dragging inflation down would likely dissipate in the next 12 months and that the labor market has more room to grow.

RBNZ kept rates steady

As expected, RBNZ Acting Governor Grant Spencer and his fellow policymakers agreed to keep interest rates on hold at 1.75%. Apart from sitting on their hands in terms of policy changes, they also refrained from making any major changes to their official statement.

The central bank did acknowledge that the trade-weighted exchange rate has eased slightly since August but reiterated just the same that a lower value of the Kiwi would be positive for tradeables inflation and growth.

Policymakers acknowledged that growth has continued to improve, with Q2 GDP coming in line with expectations after weakness in the previous periods. They also mentioned that inflation has picked up during Q2 but warned that it could decline in the coming quarters. As always, the RBNZ concluded:

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Major Market Mover(s):

USD

The Greenback was in a pretty good mood after U.S. President Trump unveiled more details on his proposed tax cuts and shared how progress is being made.

GBP/USD fell from a high of 1.3462 to 1.3393 (-0.50%), AUD/USD dropped to .7855 (-0.38%), USD/JPY bounced 52 pips up to 112.76 (+0.46%), and USD/CHF is up to .9719 (+0.33%)

CAD

Loonie bulls took another step back when BOC head honcho Poloz sounded a bit more cautious than expected in his latest testimony.

USD/CAD is up 120 pips to 1.2470 (+0.97%), CAD/CHF fell from .7845 to .7794 (-0.65%), CAD/JPY is down to 90.42 (-0.51%), and EUR/CAD is up to the 1.4650 minor psychological mark (+0.62%)

NZD

The Kiwi was able to breathe easy after the RBNZ kept interest rates on hold as expected and the central bank refrained from stepping on the gas with its jawboning.

NZD/USD is steady around .7208, EUR/NZD fell from 1.6362 to 1.6306 (-0.36%), GBP/NZD is down to 1.8577 (-0.50%), and NZD/JPY recovered to 81.25 (+0.51%).