Two Macro Threads Causing Some Jitters

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US Economy

US Senate tax bill weighing on Equities while RBA touched upon lower inflation forecasts

With what can be called a potential clash anticipated between President Donald Trump’s administration and US Senate Republicans, the global equities have started losing some ground at the back of the US tax plan proposal which is now speculated to delay corporate cuts until 2019.

On Thursday, US Senate Republicans had proposed a tax overhaul dealing with the deductions for all state income and property taxes; and the proposed plan might delay the new lower 20 per cent corporate rate from 35 per cent, only from 2019, in order to avoid piling over the already high deficit over the next decade. The Senate plan also proposes for little lower individual tax rate than the House version. Particularly, the Senate plan seems to lower the top individual rate to 38.5 per cent for individuals earning $500,000 or more and couples earning $1 million or more. The Senate plans entail a bulkier array of individual tax brackets that are 7 in number against four as proposed by the House. Amidst the developments, the equity markets were seen to witness fluctuations in the volatility index with various uncertainties now casted in the minds of the investors.

At home, the Reserve Bank of Australia (RBA) touched upon some forecasts relating to inflation and interest rates, which came as a surprise to many and were significant in terms of economic growth. The bank signalled to maintain the historically low interest rate while a slow return to an improved level of inflation is reached.

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Inflation Trend (Source: RBA)

Given the low wage growth, challenges in retail and labour market scenario, inflation forecasts are said to now undershoot the bottom of the target band in 2018 and at the bottom of the band in 2019. Particularly, underlying inflation is expected to remain steady at around 1.75 per cent until early 2019, before increasing to 2 per cent. RBA’s recent statement of monetary policy thus indicated for sluggish inflation and interest rates to stay at a record-low 1.5 per cent at the moment. This has also impacted the dollar price a bit and brought a blow to the market expectations of rising of rates as foretold by the bank for 2018 and rather contemplates for further cuts in the coming year.

In its statement, RBA mentioned that household spending is still entrenched in a high level of uncertainty as highly indebted households struggle with low wage growth; while labour market conditions are strengthening with above-average employment growth expected to continue.

In contrast to the inflation scenario, RBA is confident that GDP growth, which otherwise dipped in the September quarter, will bounce back in support from continued investment. There has been a 10 per cent rise in non-mining investment since 2016 and is expected to follow the trend. Further, public investments will also grow stronger.


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