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%.

RBA Monetary Policy Decision

Above: GBP/EUR breakout.

Source: Poundsterlinglive

USD: Reflationary policies are a mild dollar negative

The top news this European morning is a package of monetary easing measures delivered by Chinese authorities overnight. Our Chief Economist for Greater China, Lynn Song, details the measures in this article. It is tempting to describe these measures as a monetary 'bazooka', but as Lynn highlights there is much work to be done to get Chinese demand back on its feet. However, these measures have delivered decent 3-4% gains in local equity markets and a similar jump in iron ore, seen as a key benchmark for the Chinese property sector. Whilst in theory monetary easing should be negative for a currency, USD/CNH has in fact broken down to a new low. We suspect this reflects both Chinese exporters belatedly hedging dollar receivables, but also a re-rating of the China investment thesis and investors being forced to pare back underweight positions in China.

What does this all mean for the dollar? Chinese measures add to the reflationary sentiment we were discussing in yesterday's FX Daily. This environment is characterised by steeper yield curves, higher equities and as we pointed out yesterday normally sees the benchmark reflationary FX pair, EUR/AUD, come lower. Indeed, EUR/AUD has dropped 1.3% over the last 24 hours. For the dollar itself, a reflationary environment is mildly negative as investors rotate into more pro-cyclical and EM currencies. However, in today's environment, investors need to be very selective as to which currencies they choose to hold against the dollar. For example, European FX looks very mixed at the moment and the euro will be struggling with fiscal consolidation over coming years – and potentially sending it on a collision course with the US over trade policy given Europe's export growth model.

For today the only US data of note is September Conference Board consumer confidence. With equities doing well, this is expected to tick a little higher and keep the soft landing in play. Given more manufacturing malasie expected out of Germany today and the euro's large weight in the DXY, this probably means DXY continues to trade a tight 100.50-101.00 range. However, if a recovery in Chinese domestic demand is the flavour of the day, expect currencies like the South African rand, the Brazilian real and the Australian dollar to do well.

EUR: Bracing for some more soft data

After another drop in the eurozone manufacturing PMI yesterday and the composite index dropping into contractionary territory, investors will be bracing for a soft German Ifo number today. Indeed, yesterday's swathe of PMI data took its toll on the rates markets (two-year EUR swap rates off 7bp) and the euro. Were it not for the global inflationary environment EUR/USD would look more vulnerable under 1.1100. For the time being, however, we slightly favour this 1.1100-1.1150 range to hold, with the best news for EUR/USD potentially coming with US price data on Friday.

As above, we continue to see the possibility of EUR/AUD trading lower and expect that the trend could extend to 1.60. Helping the move is the consistently hawkish Reserve Bank of Australia. The RBA remains definitely on inflation-watch and looks unlikely to cut rates this year.

GBP: Sterling soars

Sterling continues to perform well. The majority of yesterday's drop in EUR/GBP was down to the miserable eurozone PMI data for September. In addition, the market is looking at some headlines coming out of the Labour Party conference in Liverpool. The focus here has been comments from Chancellor Rachel Reeves hinting at a loosening of fiscal rules which will allow for greater investment. Speculation is growing that there could be a change in the accounting treatment for some of Labour's new institutions – such as the National Wealth and GB Energy – which could potentially unlock an extra £15bn of borrowing. So far the UK sovereign CDS has not widened on this and the concept of these plans seems credible so far.

But sterling has enough support at the moment without these potential investment plans. We do not see GBP/USD positioning as particularly stretched and given perhaps a softer dollar environment, the direction of travel continues to be towards 1.35. EUR/GBP has impressed by taking out support at 0.8340/45. Next stop, 0.8300.

HUF: NBH continues in cutting cycle

The National Bank of Hungary is scheduled to meet today and we expect a 25bp rate cut to 6.50% in line with market expectations. Even before the Fed's latest decision, we were leaning towards a 25bp cut at the September NBH meeting. Post-Fed, we see a non-negligible chance of a slight dovish shift in forward guidance, with the 6.00-6.25% range cited as a realistic target for the 2024 terminal rate.

The NBH will publish its latest set of macroeconomic projections for the main measures (GDP and inflation) alongside the interest rate decision, while the detailed September Inflation Report is due on 26 September. Given the downside surprise in second quarter GDP growth and the weaker-than-expected start to the third quarter, we expect a significant downward revision to the GDP forecast. After a 1.0ppt cut, we see the central bank's forecast range for economic activity this year at 1.0-2.0%. The lack of domestic demand is worrying enough to prompt a 0.5ppt downgrade in 2025 GDP growth to a range of 3.0-4.0%.

On the inflation front, actual headline data since the June forecast release has been more or less in line with the projected path. However, as we approach the end of the year, we expect the NBH to narrow its forecast range from 3.0-4.5% to 3.5-4.5%, as the lower end of the previous forecast has become statistically unlikely to be reached. While we see average inflation next year above but close to 4%, we don't think the central bank is ready to pull the trigger on a forecast change just yet. In turn, the NBH's inflation forecast for 2025-2026 will remain at 2.5-3.5%, in our view.

We expected to go into the meeting with a range of 392-393 EUR/HUF. While the rate differential still points to these levels, weaker German numbers and a weaker EUR seemed to pull down most CEE currencies yesterday. As we pointed out earlier, the risk is a dovish move in NBH communication, and market pricing seems rather neutral to us given the macro numbers in recent weeks. The indication of more rate cuts in our view would translate into further rate receiving in the HUF market, and so we could see a continuation of the reversal in EUR/HUF that may have already started yesterday.

Almost since the beginning of this year we have been using the 390-400 trading range framework for EUR/HUF, which has worked very well. In recent months the space has probably narrowed to 392-400. While we see a move to the upper bound of the range, we think it is too early to go above 400. One of the reasons is a higher EUR/USD. which will dampen the pressure on HUF, but also a potentially hawkish NBH reversal if HUF comes under pressure.