President Donald Trump has helped boost the stock market with his promises of pro-growth policies, but now the market is looking for him to deliver.
Trump speaks to a joint session of Congress Tuesday night, and he's expected to discuss his bigger plans for defense and stimulus spending. He's also expected to address repeal and replacement of the Affordable Care Act, but markets are most interested in what he has to say about tax reform.
"I think the market is set up for disappointment. I don't think we're going to get details. It doesn't mean we won't get them in a few weeks," said Peter Boockvar, chief market analyst with The Lindsey Group. "We've had this extraordinarily high bar for tax cuts that the market wants to hear about. The only reason we rallied 10 percent is hopes on tax cuts, and we'll get them. It's just a matter of … what degree. You reach a point where it's 'let's see the details.'"
Until late last week, there were even higher expectations that Trump would provide an outline for his tax reform plan, since on Feb. 9 he had said he would have a plan in two to three weeks. But Treasury Secretary Steven Mnuchin damped those expectations in an interview with CNBC Thursday, saying the administration had not made up its mind on a key aspect of the House tax proposal — the controversial border-adjustment tax. Mnuchin also said the White House is working on a combined plan with Congress and would get something done by August, after it deals with the Affordable Care Act.
Marc Chandler, head of fixed income strategy at Brown Brothers Harriman, said Trump's speech could definitely move the dollar. For instance, if he sounds protectionist, that could boost the dollar even though real protectionist policies could be a negative in the longer term.
"There are a lot of things people are watching for. ... If he talks about protectionism and how he might have a reciprocal tax, it could go the other way [higher]. Initially the dollar moves higher on protectionism. It partly means stronger growth."
Trump has not taken sides on the border-adjustment tax, though he has said he likes aspects of it.
The proposed tax is the biggest revenue generator in the House tax reform proposal, expected to raise $1 trillion over 10 years. It would tax all imports coming into the country at a rate of 20 percent but not tax exports. The dollar is expected to rise sharply if that tax is adopted, and some say the 25 percent or so move would mitigate any inflationary pressures from the higher cost of foreign goods.
If Trump embraces the plan, the House tax reform plan is expected to have a better chance for success. It is already being opposed by some senators.
"The dollar could sell off if he doesn't address the border-adjustment tax or says it's too complicated," said Chandler.
The markets will also be honing in on what Trump says about the Affordable Care Act, which Congress has been hoping to repeal and replace in the next month. If it seems there is progress on that front, it may be affirm that tax reform could be completed in a 2017 time frame. But if that remains sketchy, it may be a negative.
"A key part to funding tax reform is the plan on the Affordable Care Act. … They have to get it done in this budget cycle," said Dan Clifton, head of policy research at Strategas. "They have to get it done by Sept. 30. They probably will talk about March, April for repeal and replace."
The replacement plan has yet to be seen. "The market's worried that the Affordable Care Act is going to push tax reform down. getting some clarity around affordable care act could help," he said. Clifton said a 2018 tax cut is more likely at this point, and Trump will probably speak about it in a sweeping way, as he will do with other issues.
"He's going to say, I'm going to invest in infrastructure. He's going to talk about getting those tax rates as low as possible, that he's going to deliver a tax cut for individuals and businesses. But he's not going to go into the specifics of capital expensing or how the substitute of Affordable Care Act is going to be," Clifton said.
Some strategists believe the markets could move if Trump's tone is more suggestive of one path or other.
"I don't think you should have a lot of expectation that we'll get a lot…He [Trump] even said the March budget outlook is not going to have anything about taxes," said John Briggs, head of strategy at NatWest Markets.
Trump on Monday revealed he's going to ask for $54 billion more for defense spending, and that it would be paid for by cuts at other agencies. The market is awaiting more details on expected infrastructure spending.
While no real details are expected, if the president indicates he'll have a plan that looks too much like it would raise debt but not raise revenues, the bond market may take it as a negative and sell off, meaning yields would go higher.
"I think that would pressure yields. If there's any sense that there's big issuance needs coming in the future, you probably could steepen out the curve," said Briggs, meaning yields on the longer duration 10-year note and 30-year bond could rise. "I just don't know if you're going to get enough information to make a determination either way."
Trump last week stirred up speculation about his position on the border-adjustment tax when he said he likes some aspects of a "border tax." But he was not specific, and Mnuchin has said the White House sees both positives and negatives.
The House tax plan calls for a reduction in the corporate tax rate to 20 percent from 35 percent. The border-adjustment tax is also getting mixed reviews from corporate America. Retailers and companies that import say it is potential tax on consumers and could be inflationary. Proponents say the strong rise in the dollar could offset the impact of the tax, which would encourage more manufacturing in America.
George Goncalves, head of rate strategy at Nomura, said even if the details are sketchy, the market is looking for some guidance on the sequence and timing for tax reform and stimulus. "If you know what comes next, the timing of it and how big is it going to be, that might be enough to get people satiated," he said. If a plan is proposed that looks unattainable or that the timing is even later, the bond market would rally, and yields would fall.
"The market is positioning for details," said Goncalves. The 10-year yield Monday was at 2.36 percent, boosted in part by an increase in expectations for a Fed rate hike in March.
"If it goes swimmingly, we're back at 2.45, 2.50. If it doesn't we'll be back at 2.10," he said. "I think it's got to be beyond the soft stuff. It's got to be tangible. It's got to be real," said Goncalves.
Goncalves said a robust sounding plan, but one short on details, may trigger a rise in yields. "It's going to be a skeptical drag higher," in yields, he said.
Another revenue generating proposal in the House plan is to limit the deductability of interest. Instead companies would be able to expense capital expenditures.
Clifton said the tax writers could get to a 23 percent tax rate without the border adjusted tax, if the interest deductabily is limited and there is 100 percent expensing of capital expenditures. The average tax rate for the S&P 500 is about 25 percent so the cut in the tax rate loses punch, the more it gets to be above 20 percent.
Clifton said he does not expect a big infrastructure program in 2017, with perhaps $15 billion earmarked. "I would think about whatever he's doing to do on infrastructure for '17 is a down payment for a bigger proposal that comes for '18. Our themes have been focus on the energy infrastructure and less on the highway infrastructure." The Trump administration has already waved on new infrastructure spending in the energy sector by clearing the way for pipeline construction, which is funded by the private sector.
Ahead of Trump, markets Tuesday will get plenty of economic data early in the day, including a second reading on fourth quarter GDP and advance economic indicators at 8:30 a.m. ET. There is S&P/Case-Shiller home price data at 9 a.m. and Chicago PMI at 9:45 a.m. At 10 a.m., consumer confidence is released.
Dallas Fed President Rob Kaplan will be on "Squawk Box" at 7:30 a.m. ET. There are three other Fed Speakers during the day. Philadelphia Fed President Patrick Harker speaks at 3 p.m. on the economic outlook, while San Francisco President John Williams speaks at 3:30 p.m. on the outlook. St. Louis Fed President James Bullard in Washington speaks on the economy and policy at 6:40 p.m.
Earnings are expected Tuesday from Target, AutoZone, SeaWorld, Steve Madden, Bank of Nova Scotia, Valeant Pharmaceutical, and Sempra Energy. Salesforce.com, Etsy, Blue Buffalo and Weight Watchers report after the market close.