What markets want to hear from Mnuchin

Steven Mnuchin, U.S. President-elect Donald Trump's reported choice for U.S. Treasury secretary, speaks to members of the news media upon his arrival at Trump Tower in New York, November 30, 2016.
Mike Segar | Reuters
Steven Mnuchin, U.S. President-elect Donald Trump's reported choice for U.S. Treasury secretary, speaks to members of the news media upon his arrival at Trump Tower in New York, November 30, 2016.

Traders are hoping Treasury Secretary Steve Mnuchin will reveal what the Trump administration's tax reform plan will look like — and when they might see it.

Mnuchin appears on CNBC's "Squawk Box" at 7 a.m. ET Thursday, and taxes are the topic traders want to hear about most. But they are also looking for details on a wide range of topics, from trade to the debt ceiling, banking regulation and whether the government would issue a 50-year bond.

"I think certainly tax reform is going to be the top question for him. I would want to know what the timeline looks like. How's the White House working with Congress? How's Congress working with itself in terms of progress? It seems the sticking point is how tax reform will be paid for, so I want to know what is the current thought on the border-adjustment tax," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.

Markets are hopeful Trump will lay out his hand on tax reform Tuesday when he speaks to Congress, since on Feb. 9, he said he would have a "phenomenal" tax plan in the next two or three weeks. Traders did the math and figured he was talking about his state of the union address, but the administration has not confirmed it.

Companies and Congress have been lining up on both sides of the border adjustment tax, which would tax imports coming into the country but not exports going out. GE, Boeing and other big industrial companies favor it, but Wal-Mart, Target and other retailers and companies subject to imports oppose it as inflationary and a tax on consumers.

Proponents say it will add U.S. jobs and make American manufacturing more competitive, but it also relies on an expected 25 percent increase in the dollar to make it work. Trump has called it confusing but has not officially weighed in on it yet, so it's been unclear whether he will back it when he releases his plan. Since some senators already oppose the tax, which is part of a House tax reform plan, it is seen as being very unlikely passing unless Trump throws his support behind it.

House Republicans, meanwhile, say the president will back their plan. The House plan would reduce the corporate tax rate to 20 percent from 35 percent, relying on the border adjustment tax for $1 trillion in revenues over 10 years.

Chris Rupkey, chief financial economist at MUFG Union Bank, said Mnuchin may discuss China and Mexico but what still could be most important to the market is information on tax reform. "I think the the one big story for us is the cross-border [adjusted] tax, which just makes a lot of Republicans cross, and is that dead on arrival or not? Is it going to be part of tax reform?" he said.

If the president does not support the destination tax, other revenue sources would have to be explored. But his support for the House plan could expedite the process. Another proposal aimed at raising revenue would limit the deductability of interest. Analysts say without the border adjustment, the corporate taxes might only be cut to just under 25 percent, a rate many of the biggest companies are already paying.

Robert Sinche, chief global strategist at Amherst Pierpont, said he does not expect Mnuchin to share much Thursday when it comes to taxes, and he does not expect Trump to address tax reform right away either. "Tax reform is great big picture, pie in the sky stuff. Budgets and debt ceilings are nuts and bolts, putting one foot in front of the other and taking care of business. The reality is he has 28 days to put some kind of budget in place, to make some kind of rational decisions on whether to extend the debt ceiling or not," said Sinche. Congress has to extend the debt ceiling by March 15.

If there's no plan or promise from Trump on taxes next week, that could be a negative for markets. "It's a pretty big one. I think you'd see equities sell off, yields decline, dollar potentially weakens. The market would certainly welcome him [Mnuchin] front-running it. The market's looking for any kind of clarity. It seems Trump, Mnuchin, Gary Cohn or Paul Ryan are the ones the market is looking to, to get some clarity," said Cabana.

Strategists also want to hear about Mexico and NAFTA, the North American Free Trade Agreement that Trump plans to renegotiate. They also want to hear Mnuchin's comments on China and Japan, both of which Trump has said manipulate currencies.

Sinche said the market Wednesday was speculating about another topic Mnuchin might discuss — whether he would shift the mix of Treasury issuance. Sinche said there's speculation there could be a shift away from shorter duration securities to longer duration because of current low rates. That resulted in a roughly four basis point move in the 30-year yield Wednesday morning.

Strategists said Mnuchin could discuss a 50-year or 100-year Treasury bond.

"He has discussed that in the past so certainly any guidance he can give on debt management issues and what changes, if any will be forthcoming. Even if Treasury keeps their funding mix unchanged, the average maturity is going to extend. It's not too terribly controversial to see if he was going to extend the average maturity. What would be more controversial to the bond market would be if he is going to discuss reallocation going from the front end to the long end," said Cabana. "He basically suggested that he would like to consider increasing the average maturity of the debt back in November."

There are a few pieces of data Thursday. They include initial claims at 8:30 a.m. ET, FHFA home prices information at 9 a.m., Services PMI at 9:45 a.m. There's also a 7-year note auction at 1 p.m.

Earnings are expected Thursday morning from Axa, Kohl's, Hormel Foods AMC Networks, NovoCure, Cinemark, Chesapeake Energy, Seadrill, Apache, Cinemark, Novocure and Wayfair.

Baidu reports after the bell, as do Intuit, Hewlett-Packard Entertainment, Nordstrom, Gap, Imax and Splunk.