The contours of the investment climate are unlikely to change based on next week’s economic data from the US, Japan, or Europe. The state of the major economies continues to be well understood by investors. 

Growth in the US, EU, and Japan remains solid, and if anything above trend, as the year winds down. The incremental data will likely show that the eurozone economic momentum is intact with the November flash PMI. Japan’s October trade balance is expected to be little changed, but strong imports and exports are consistent with a revival of trade activity seen this year. The US durable goods orders, stripped of aircraft and defense orders, to get the underlying signal, are expected to have risen around 0.6% in October, which would be just below this year’s average (0.8%), but follows three consecutive months of more than 1.2% increases. 

Instead of focusing on latest iterations of high frequency data, investors will likely focus on policy developments. Here, US tax reform and the minutes/record from the latest FOMC and ECB meetings standout. In the UK, Brexit and the budget are the focus. 

US tax reform made important progress last week. The House of Representative approved its version. The Senate Finance Committee approved its version. The next step is a vote on the Senate floor. This could come after the return from the Thanksgiving break, after which there are a dozen legislative sessions before next month’s holiday break. However, we are skeptical that the bill can pass in its current form. The regressive nature of the proposals and the divisive inclusion of the repeal of the individual mandate for the Affordable Care Act will produce at least three defections from the Republican Party. 

Indeed, nearly 2/3 of the economists polled by Reuters (November 13-17) were not confident that tax reform would pass this year. Many who think it might be passed next year seem to expect a scaled-down version that may rely on temporary cuts more than reform per se. 

If the tax bill falters on the floor of the Senate, as we think likely, the stock market may be vulnerable to disappointment and volatility would likely increase. Bond yields may ease, and with the short-end anchored by the expected path of Fed policy, the yield curve may flatten further.