Markets rally as U.S. takes step toward tax reform

On today’s edition of Market Week in Review, Rob Cittadini, director, Americas institutional, and Paul Eitelman, senior investment strategist, discussed the latest developments around tax reform in the U.S., including the impact on financial markets.

Approval of 2018 budget plan boosts U.S. tax reform efforts

Thursday night, the U.S. Senate passed a budget resolution for 2018, Eitelman said, clearing a major hurdle in the Republican party’s plans to move forward on tax reform. In addition, the Senate included an amendment that will allow the House of Representatives to also approve the blueprint in its current form—meaning that an agreed-upon budget by both chambers in Congress could happen as early as next week, Eitelman noted. “This means Congress can probably move forward pretty quickly on tax reform—which is encouraging news for markets,” he said. To wit, the S&P 500 Index® was up about three-tenths of a percent as of Friday morning, and a little more than half a percent on the week.

However, Eitelman stressed, things are likely to become more contentious with tax reform efforts going forward, as the exact rates and thresholds are hammered out. “The hardest yards are still ahead,” he warned—“but yesterday’s news was a positive step toward getting tax cuts.”

Retail sales slump in UK—What could this mean for a November rate hike?

Shifting to Europe, Eitelman noted that the September numbers on UK retail sales were a bit of a disappointment. The amount of goods purchased by consumers fell by 0.8% last month, he said—"a pretty big downside surprise.” In his view, this creates a dilemma for the Bank of England, which has been mulling an interest rate hike in November due to a recent sharp uptick in inflation. On the other hand, said Eitelman, the bank has to consider the state of the UK economy, which has been gradually slowing down. September’s softness in consumer spending only adds more uncertainty to the economic outlook going forward, he noted.

Because of this, Eitelman and the team of strategists at Russell Investments are not totally convinced that the Bank of England will raise interest rates next month. “We think it’s going to be a very, very close call, given what we’re seeing in terms of domestic fundamentals in the UK,” he stated.

National Congress meeting kicks off in China

Meanwhile, in China, the country’s 19th Party Congress is underway, Eitelman said. So far, the biggest takeaway from the meeting is that China plans to balance its growth with economic reform, he said—an important issue for financial markets. “Essentially, China is saying that they’re not going to do things too quickly, to prevent disruption to their economy—but ultimately, they do want to continue forward on a path of reform,” he explained.

The country’s gross domestic product (GDP) growth rate for the third quarter was 6.8%, Eitelman said—a healthy number that matched consensus expectations. Looking under the surface more, he sees a lot of monthly economic indicators that look good, including strong retail sales and industrial production. “Broadly speaking, what’ve we’re seeing in China is a pretty good improvement,” he added, “with healthy, stable growth—a big positive for financial markets this year.”

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