With the market certain the Fed will hike at 2pm today, there is little room for surprise. Furthermore, as Deutsche Bank previewed yesterday, no matter the Yellen spin, whether it is a "hawkish", "neutral", or "dovish" hike the market reaction is expected to be bullish...
... and as a result the market is already turning its attention to what the Fed will way about 2017, furthermore, with bond traders near record short positions, there is potential for a squeeze in rates after the announcement should Yellen err on the dovish side.
In a slightly more informative preview, JPM writes in its early morning update that big event today (and pretty much the last big one of the year) is the Fed announcement and while some are worried about a “hawkish hike” (whereby Yellen uses the press conf. to warn of the potential for a more rapid normalization pace in ’17 and beyond) it is unlikely this afternoon’s decision will prove particularly disruptive.
However, it is more interesting what JPM is focusing its attention on next. As JPM notes, the "next very big catalyst for this market will be the Trump/Ryan tax reform plan and how it makes its way through Congress (which is why the FT article “Republicans face corporate tax rebellion” is one of the most incremental of the morning). Elevated political expectations are the single biggest risk for the tape and once the year-end chase rally euphoria wears off this will likely weigh on sentiment."
To be sure, this is has been a recurring concern on this website, most recently noted in "The Narrative Changes: Republicans "Pour Cold Water" On Trump's Massive Stimulus, Will Block Tax Cuts" and while readers can skim the reference FT note here, a better preview of what is shaping up as the main event of 2017 was presented by the WSJ this morning, in "How Sen. Mitch McConnell May Test Donald Trump."
Here are the highlights:
At the end of a tumultuous year, the on-again, off-again relationship between President-elect Donald Trump and House Speaker Paul Ryan (R., Wis.) seems mostly to be back on. Instead, the GOP leader Mr. Trump may need to worry about more next year is Senate Majority Leader Mitch McConnell.
If Mr. Trump hopes to cut deals on Capitol Hill in 2017, no lawmaker may be more important than the Kentucky Republican in charge of the Senate, where 60 votes are still needed to pass most bills.
Mr. McConnell has recently diverged from Mr. Trump on policy issues more emphatically than Mr. Ryan, who has been taking pains of late to emphasize that he is now on the same page as the president-elect. The dynamic is a quiet reversal from much of the last year, when Mr. Ryan's breaks with Mr. Trump seized the spotlight.
Unlike Mr. Ryan, Mr. McConnell didn't publicly hesitate over endorsing Mr. Trump once he became the GOP nominee. Mr. McConnell criticized Mr. Trump's crude comments about women in early October but indicated no shift in stance, while Mr. Ryan said he would not campaign with Mr. Trump. But this week Mr. McConnell took a sharper tone than Mr. Ryan on allegations of Russian interference in the U.S. elections last month.
* * *
On domestic policy, Mr. McConnell is also sending early signals about what he would like to see from Mr. Trump next year -- and what he might oppose.
During his campaign, Mr. Trump called for $1 trillion worth of new infrastructure construction, a proposal that Republicans may balk at if its cost adds to the federal budget deficit. Mr. Trump's campaign proposal relied on private financing, offering a tax break to lure capital to projects. The presidential transition website said Mr. Trump planned to invest $550 billion in infrastructure.
"What I hope we will clearly avoid, and I'm confident we will, is a trillion-dollar stimulus," Mr. McConnell told reporters Monday. "We need to do this carefully and correctly and the issue of how to pay for it needs to be dealt with responsibly."
Mr. McConnell could have outsize influence on this policy issue in particular: his wife, Elaine Chao, is Mr. Trump's pick to be transportation secretary. Still, Mr. McConnell has indicated support for all of Mr. Trump's cabinet nominees, including Exxon Mobil Corp. CEO Rex Tillerson, whose ties to Russia have alarmed other GOP senators. Mr. McConnell said in a statement Tuesday that he was confident Mr. Tillerson "will face each problem head on with American interests and security as his top priority."
As for the FT, the paper writes that more stormy clouds may be gathering as "Republicans are facing their first corporate tax rebellion since Donald Trump’s election victory as opponents ranging from apparel makers and big retailers to the billionaire Koch brothers unite against a plan to penalise US importers. The revolt comes as Republicans seek to spark economic growth with the biggest overhaul of the tax code in 30 years and signals Mr Trump could have to choose between promoting US-made products or crippling import-dependent businesses.
The cause of the uproar is a proposal to tax imports that is sending shockwaves through global supply chains, as Republicans in the House of Representatives champion it as part of a plan to encourage US companies to buy more American goods.
Senior lobbyists who sometimes struggle to get the attention of company leaders told the Financial Times they were receiving calls from chief executives with orders to fight the tax plan, which some importers say threatens to wipe out their profits.
“This is something that has really gone all the way up to the boardroom, which doesn’t often happen in Washington,” said Stephen Lamar, executive vice-president of the American Apparel and Footwear Association, who called the import tax an “existential” threat to his industry.
So far the market has ignored all potential hurdles to the one biggest bullish catalyst since the Trump election: the still largely unknown "massive" fiscal stimulus that Trump hopes to unveil. Judging by the rising reactions to the Trump plan, from both the private and the public sector, ignoring the potential hurdles that are springing up every single day may be foolhardy.