Source: EuroNews

Donald Trump’s ever-growing litany of tax proposals includes something for almost every American family: tipped workers, hourly employees, senior citizens — and now even the higher-income residents of Democratic-led states whose tax breaks he took away while president.

The former president has thrown out such a wide range of tax proposals that even his own advisers are unsure about which ones he intends to enact if elected. Some of the pronouncements have come as surprises and caused angst among allies.

Within Trump’s orbit, the former president’s menu of tax ideas is seen as a way to appeal to voters in an extremely tight election — particularly, low-and-middle-income Americans frustrated by high prices looking for financial relief.

“I see it as a way of Trump trying to figure out how he can win over more working-class Americans,” said Stephen Moore, a senior fellow at the Heritage Foundation and informal economic adviser, who briefs Trump every few months on the state of the economy. “Some of the ideas are good. Some of the ideas are not so good. On balance, most of the ideas are good.”

Not since President George HW Bush asked voters to read his lips has a president made such big promises on taxes in an election campaign. For Trump, as with Bush, the question is whether he can keep them. (Bush, despite his “no new taxes” pledge, increased levies.)

“Principles of sound tax policy, economics — that’s no longer in the driver’s seat. Politics is in the driver’s seat. That’s why we’re seeing carve-outs and things that sound good on the campaign trail,” said Erica York of the Tax Foundation, a right-of-centre think tank.

If elected, Trump would go into negotiations with Congress regarding a wish list totalling US$11 trillion (RM45.91 trillion) and counting, according to the Tax Foundation. That includes the extension of the 2017 tax cuts, which will expire unless Congress acts. He has also pledged as much as US$2.8 trillion in additional revenue from tariffs to offset a portion of that cost. The former president and his allies have said his tax-cut proposals would bolster economic growth, helping to offset some of the cost, though his campaign hasn’t provided any details.

The Trump campaign said he isn’t making empty promises.

“President Trump delivered on his promise to cut taxes in his first term and he will deliver again in his second term,” said spokeswoman Karoline Leavitt.

Vice President Kamala Harris has also made tax policy a central part of her campaign, pledging to increase the child tax credit, create incentives to first-time home-buyers and expand deductions for startup businesses. She even co-opted one of Trump’s signature ideas — no taxes on tips, giving the proposal bipartisan momentum. Harris is planning her own economic-focused address this week.

The Tax Foundation found that Harris’ tax plan would decrease the deficit because the reductions are more than offset by higher levies on corporations and wealthy households.

Pinch of SALT

Trump has targeted his proposals at key election constituencies. When in Nevada, a state with the highest percentage of service and hospitality workers, he made a surprise proposal to end taxes on tips. He’s offered to eliminate taxes on Social Security, a boon to retirees. To woo blue-collar workers, he proposed ending taxes on overtime.

And in his latest proposal, he reversed himself on one of the more controversial provisions of the Tax Cuts and Jobs Act, his signature tax rewrite of 2017.

By capping the deduction of state and local taxes at US$10,000, Trump helped to offset a higher standard deduction and lower overall rates in the 2017 bill. The SALT cap also had a political dimension: The taxpayers most affected are in districts with higher home values and higher tax rates — and are predominately run and represented by Democrats.

But the 2022 midterm elections helped sweep a number of Republicans into some of those districts, especially in New York State, where lawmakers have lobbied Trump to change course.  

“It disproportionately hurts states like New York,” said Representative Michael Lawler, a Republican representing the Hudson Valley who said he raised the issue with Trump last month. “So, I’m heartened, obviously, to hear the former president say he will work with us to fix it.”

As for how the restored SALT deduction would be paid for, Lawler said: “Nobody knows.”

Moore said some of Trump’s economic advisers have discussed reviving SALT in a scaled-back fashion, allowing homeowners to deduct up to US$15,000 or US$20,000 annually, instead of the US$10,000 permitted now.

One idea which Trump genuinely is wedded to, advisers say, is his proposal of no longer taxing tips. That idea has been under consideration since the primaries, his advisers say, but they held off on announcing it until the more competitive general election.

Tax base

How far Trump can go will depend on which party controls Congress next year, but Trump’s tax plan could face obstacles in both parties over concerns about costs and fairness.

Many of his proposed carve-outs go against the grain of four decades of tax policy, prompted by President Ronald Reagan who vowed to “broaden the base” by eliminating targeted tax breaks and lower rates for everyone.

Any move to exclude a certain type or source of income from taxes will undoubtedly change how people work. A no-tax-on-tips policy, for example, could prompt more workers to agree to lower wage in exchange for the promise of more tips. An hourly worker could rearrange his or her schedule to maximise overtime — and might even agree to a lower hourly rate to do so.

“Could some employers get creative? I suppose so. At the end of the day, to be honest, I’m more concerned about the incentives the other way,” Representative Russ Fulcher, an Idaho Republican who has a bill to eliminate taxes on overtime pay. “As exacerbated by Covid, we have these programs in place that encourage not working, and that’s a problem in itself.”

Source: The edge markets

In focus today

In Germany, we receive the Ifo growth indicator for September. In August, the assessment of the business situation declined to the lowest level since Covid. We expect another benign print as the German economy continues to struggle with weak activity in the manufacturing sector.

In the afternoon, we expect the Central Bank of Hungary to cut the policy rate by 25bp to 6.50%.

Economic and market news

In China, PBOC and financial regulators this morning unveiled a batch of new stimulus to lift the economy keeping aim at the 5% growth target for this year. At a rare economic briefing today, they announced reductions in both the policy rates as well as the Reserve Requirement Ratios, the first time these have been lowered on the same day. They also took new steps to support the housing market by lowering the requirement for down payment for second time buyers from 25% to 15%. And they announced that funds and brokers can tap PBOC to buy stocks. The measures were bigger than expected and gave a big lift to Chinese stocks, which are up close to 4% in the offshore market. Metal prices also saw a decent lift. This is, in our view, still not the big bazooka needed to finally turn things around. But it may be supplemented with fiscal policy measures and should at least give a short-term lift to Chinese growth. It is probably coming too late, though, for the government to reach its’ 5% target. We expect 4.8% growth this year.

Euro area PMIs disappointed markets as both manufacturing and services declined more than expected, resulting in a composite figure that now suggests a contraction at 48.9 (cons: 50.5). The data suggested a softening labour market, likely driven by layoffs in a (very weak) German manufacturing, but also declining price pressure across all subcomponents. Note that French services had a large negative contribution which we attribute to a one-time post-Olympics’ effect. Market reaction was for a weaker EUR while markets raised the probability of an October cut from the ECB to about 40%.

US PMIs were more in line with consensus as the composite PMI continued to signal solid growth, especially in services, though there were solid upticks in input prices. Manufacturing appeared much gloomier with firms reporting shrinking order books and growing inventories. On balance, the market reaction was to push up yields slightly with the 10Y treasury up some 5bps during the day.

Equities: Global equities were higher yesterday despite what could be described as less impressive macroeconomic numbers. This was accompanied by a slight cyclical outperformance and another day of higher yields at the long end. Please note the US 10-year yield has increased every single day since the Federal Reserve meeting last week. Yesterday, we observed a modest value outperformance, but more notably, small caps underperformed as yields continued to rise. In the US yesterday, the Dow was up +0.2%, the S&P 500 increased by +0.3%, the Nasdaq rose by +0.1%, and the Russell 2000 decreased by -0.3%. This morning, China unveiled significant fiscal and monetary loosening measures, somewhat akin to launching a little bazooka. These measures are primarily aimed at the property market but are also directly boosting equity markets. It is no surprise to see Chinese stocks reacting positively to the coordinated stimulus, with most neighbouring stock markets also showing gains this morning. European futures are up, while US futures are lower this morning.

FI: European yields tumbled yesterday on weaker than expected PMIs from France and Germany. While the French services PMI was below 50 (as expected, due to the construction of PMIs), a general weakness was observed in the PMIs, not least the employment section. Curves steepened from the front end, with 2s10s German yield spread dis-inverted now standing at 2bp. It is the first positive slope since 2022.

FX: This morning, Chinese authorities announced stimulus measures to try to prop up the economy. Asian stock markets reacted positively, notably Hang Seng rose more than 3%. The announcement sent USD/CNY toward 7.03. The EUR came under pressure vs its G10 peers after soft euro area PMI data. EUR/USD is just above 1.11 and EUR/GBP prints multi-year lows as it approaches 0.83. EUR/SEK moves toward the lower end of the 11.30-11.40 range while the recent positive NOK trend has brought EUR/NOK closer to 11.60. Muted reaction in the AUD immediately after RBA leaves rates unchanged at 4.35%.

EUR/USD struggles to hold the key support of 1.1100 in Tuesday’s European session after a sharp decline move on Monday. The major currency pair remains under pressure as Monday’s flash HCOB Purchasing Managers Index (PMI) data for September has stoked market expectations for the European Central Bank (ECB) to opt for a second straight interest rate cut in the October meeting. 

The PMI report showed that the business activity unexpectedly sank into contraction, which was estimated to fall slightly but remained above the 50.0 threshold that separates expansion from contraction. 

A decline in the HCOB Composite PMI dominantly came from the manufacturing sector, where contraction in activities accelerated at a faster-than-expected pace. The service sector remained on a growth trajectory but at a slower pace than what economists forecasted.

Weakening Eurozone activity prospects would add to obstacles for ECB policymakers in pursuit of stable market conditions who are already worried about price pressures remaining persistent. Last week, ECB Governing Council Member Isabel Schnabel said that sticky services inflation is keeping headline inflation at an elevated level.

In today’s session, President of Deutsche Bundesbank Joachim Nagel is scheduled to give a speech at 16:00 GMT. Nagel is expected to provide fresh cues on the ECB’s likely interest rate action for the remaining year.

Daily digest market movers: EUR/USD edges lower as US Dollar holds recovery

EUR/USD stays under pressure as the US Dollar (USD) gains ground after the release of the mixed preliminary United States (US) S&P Global PMI data for September. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, strives to trade confidently above 101.00.

The US S&P Global Composite PMI came in a little lower at 54.4 from the final reading of 54.6 in August as activities in the manufacturing sector unexpectedly declined further. The US S&P Global Services PMI expanded at a faster-than-expected pace of 55.4 but edged lower from the former reading of 55.7. The agency noted that “Business sentiment, demand, hiring, and investment are being subdued by uncertainty surrounding the Presidential Election, casting a shadow over the outlook for the year ahead at many firms.”

Going forward, the outlook of the US Dollar could remain uncertain as traders hold bets supporting more big rate cuts from the Federal Reserve (Fed) in the November meeting. Financial market participants expect that the Fed will opt for a 50 basis point (bps) interest rate cut for the second straight time in the November meeting amid growing concerns over deteriorating job growth.

“The Federal Reserve to cut rates by another 50 basis points in November, a decision that will largely depend on incoming data, especially the next monthly jobs report,” according to strategists from Citi.

On the economic data front, investors will focus on the Personal Consumption Expenditures Price Index (PCE) for August, which will be published on Friday. Signs of price pressures remaining persistent would weigh on market expectations for a Fed 50 bps interest rate cut. On the contrary, soft figures would prompt the same.

Technical Analysis: EUR/USD trades close to 20-day EMA

EUR/USD hovers near 1.1100 in European trading hours on Tuesday. The major currency pair finds support near the 20-day Exponential Moving Average (EMA) near 1.1090.

The outlook of the major currency pair would remain firm till it holds the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological level of 1.1000. 

The 14-day Relative Strength Index (RSI) moves lower to 55, suggesting momentum is weakening.

Looking up, the round-level resistance of 1.1200 will act as a major barricade for the Euro bulls. A decisive break above the same would drive the pair toward the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.

Source: FXSTREET

RBA Monetary Policy Decision

Above: GBP/EUR breakout.

Source: Poundsterlinglive