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How the Economy and Markets Could React to Tax Reforms

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Underlying economic performance could be key driver

The US Fed has gradually increased interest rates without spooking the fixed income markets and continues to project future hikes, provided the economy remains on track for its 2% inflation target (WIP) and the longer-run unemployment range stays at 4.5%–5.0%. Economic indicators from the US continued to outperform expectations. The consumer confidence index for March 2016 hit a 16-year high of 125.6 as compared to 116.1 in February.

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Jobs figures for March will be reported this month and are expected to remain upbeat after an impressive addition of 235,000 jobs in February. The consensus survey reports point towards a minor drop in the manufacturing (XLI) and services (IYC) indexes, but this likely won’t be a major problem, as no one expects another rate hike before May this year.

What to expect once tax reforms are announced

Once Trump announces proposed tax cuts and infrastructure spending plans, we can expect that the US Fed could be forced to act sooner than expected, forcing US yields to surge higher as rate normalization takes its toll on bond markets (BND). We don’t know when these announcements will be made, but they could come soon. In the next part of this series, we’ll explore how these developments may affect global equities (VEU), US equities (USMV), and currency markets.

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