Tax Reform Effort Captures Market’s Attention

In recent weeks, the two themes capturing the most attention from financial markets have been 1) the tax reform effort, and 2) the White House nominee for Fed Chair. In addition to fiscal policy (tax reform) and monetary policy (fed leadership), the narrative could be expanded to include inflation and real growth. These factors have generally provided a boost to financial markets over the last several weeks, but the tailwinds subsided somewhat in late October. The inflation component is really dependent on the other three factors, and while there have been flashes of reflationary pressures in the U.S. and abroad in recent weeks, the consumer price landscape remains mixed (e.g., tepid U.S. PCE report and disappointing Eurozone CPI for September). Domestic real growth has improved, including a better-than-expected initial estimate of Q3 GDP, and it is generally supportive of reflationary expectations. However, the boost from fiscal and monetary policy expectations has waned.