The buzz around tax reform only looks set to get louder with the markets likely to feel the effects. Banks meanwhile hold only their best loans, the consumer gets stronger and resi rents rise and fall. Contributions from Barclays, CoreLogic, GS, JPM, MS.
Markets/Economy: Tax reform and market volatility
Plans for tax reform now working its way through Congress would push US corporate taxes closer to a value added tax instead of a tax on profits. Both the House and Senate include provisions to stop taxing exports, stop deducting the cost of imports, allow immediate expensing of capital investments and end deduction of interest expenses. The individual and collective effects the proposed changes all matter. Potential advantages: simplification and an end of incentives to distort company capital structures and tax strategies. Potential disadvantages: distortions to trade if foreign exchange rates fail to fully adjust. Result: a big source of potential market volatility in 2017 since FX, rates, debt supply and corporate profits could swing with policy. See an American Action Forum discussion of border tax adjustments here. Also see Barclay’s US Economic Research: Border adjustments: a tariff by any other name…, 12 Jan 2017. And see Goldman Sachs, US Economics Analysts: The Economics of Corporate Tax Reform, 14 Jan 2017 (Barclays, GS, Milepost).
Markets: FX and import/export risk rises
Businesses and investments sensitive to foreign exchange could have a wild ride this year since so many policies could push the balance in different directions. Tax policy – especially a decision to border-adjust taxes – and fiscal stimulus could push the dollar higher while tariffs or other limits on trade could push it lower. Prospects for a rising dollar should drive foreign demand for US debt up, capping US interest rates or driving them down. Prospects for a weaker dollar would weaken demand and drive rates up. The lack of detail in the president-elect’s press conference last week has left the market guessing. Agriculture, aircraft and chemicals are among the most exposed to the risk. See Deutsche Bank’s US Fixed Income Weekly: US Credit Strategy, 14 Dec 2017 (DB, Milepost).
Markets/Banking: JPM, BAC hold onto Fannie- and Freddie-eligible loans
Both JPMorgan and Bank of America have been keeping a rising share of loans that might otherwise go into Fannie Mae and Freddie Mac MBS. “We generally balance sheet all of the jumbos,” BAC said on its earnings call last week, “So then the question is for conforming how much do we do? The credit quality in mortgages is so strong that, frankly, it's not worth getting the guarantees.” JPM echoed that sentiment, saying “a little more than half of our originations are jumbo, we retain all of those. And then when you look at the conforming space, it's really honestly consistently a better execution.” JPM said it intended to keep growing its portfolio of jumbo and conforming mortgages. See Goldman Sach’s The Mortgage Trader: US banks keeping more conforming loans on their balance sheet, 15 Jan 2017. (GS, Milepost).
Markets: The US consumer gets stronger
“The US consumer ended 2016 on solid footing,” Morgan Stanley writes, “with delinquencies among most consumer sectors printing near post-crisis lows. From a balance sheet perspective, excluding auto and student loans, other types of consumer debt remain more than 10% below their previous peaks. Relative to consumers' disposable income, the current debt-to-income ratio of 10% is something we haven't seen in the 35+ years extending back to 1980.” See Morgan Stanley’s ABS Market Strategy, 10 Jan 2017. (MS, Milepost).
Markets/Economy: Low rents keep rising, high rents lag
Rents in the lower tier of the single-family rental market have been rising at a much faster pace than rents in the top tier of the market, according to CoreLogic. Rents on lower-priced homes rose 5.4% YoY through October while rents on high-priced homes rose 2.5%. Housing supply from new construction competes more often with higher-tier rents, suppressing growth. CoreLogic also finds big differences across housing markets, with rents in markets with limited supply and a strong economy rising the fastest. Rents in Seattle, for instance, rose 7% YoY while Houston, hurt by volatility in energy prices, saw a 2% decline. The CoreLogic post is here. (CoreLogic, Milepost).