US: Markets to take cues from labour market report and tax plan developments - BBH

Analysts at BBH suggest that weakness in the key US labor market report will be quickly shrugged off as adversely skewed by the record storms.  

Key Quotes

“There is great uncertainty in estimating the magnitude of the distortion.  The median from the Bloomberg survey is for an 85k increase in non-farm payrolls compared with an average this year of 176k.”  

“The December Fed Funds futures contract was unchanged before the weekend despite the new decline in the core PCE deflator to 1.3%, the lowest level since October 2015.  The two-year note yield closed at its highest level since late '08 before the weekend and is now only at the upper end of what the new Fed funds target range is expected to be at the end of the year.  It is also the level that the Federal Reserve pays on all reserves (not just excess reserves).  For the record, the ECB charges 40 bp to use its deposit facility, and the BOJ takes 10 bp.”  

“Investors have gotten some measure of the US President and his unorthodox negotiating style.  The first talk of the unwinding of the Trump trade can be found near the start of the year.  Lest we forget, the dollar peaked against the Mexican peso, which was seen as the ultimate Trump trade, a few days before the inauguration.  He repeated health care reform fiascoes and serial dramas have served to lower expectations.”  

“Yet US yields did rise after a few more details were offered on a tax plan that the White House supports, which had been broadly negotiated by six officials.  However, the 10-year yield had already recovered from 2.01%, the low for the year to nearly 2.30% before the surge in the second half of last week to almost 2.36%.  The trend was already in place.  And where did the yield move?  Simply to the upper end of the range that has been in place since the end of Q1.  In fact, last week's high-yield print marked the third point on a trend line connecting the May and July highs as well.”  

“Also, the betting website PredictIt attributes a 31% chance of a tax cut this year at the end of last week.  On the other hand, the relative outperformance of stocks of high and low taxed companies suggests some pricing in of corporate tax cuts.”