February 26 – Stock futures moved cautiously higher overnight, following passage of President Trump’s tax cut and growth plan by the House of Representatives late yesterday, and as traders continue to monitor earnings reports. There will be particular focus on Nvidia’s earnings report after the close today. The VIX is trading near 19 this morning, as it slips lower from yesterday’s spike to near 21.5, while the dollar index firms to trade near 106.6. Yields on 10-year Treasuries are trading near 4.30%, which is just above their 10-week low, while yields on 2-year Treasuries are trading near 4.11%. Crude oil prices are consolidating near yesterday’s nine-week lows near $69 per barrel, while the grain and oilseed sector was mixed to weaker overnight.
The House of Representatives passed a massive blueprint for extending the Trump tax cuts, adding some additional cuts, cutting fiscal spending by $2 trillion, cutting regulations on business, securing the border, and raising the debt limit by $4 trillion dollars. The House vote was 217 – 215 after President Trump called up three reluctant House members and convinced them to support the bill. The Senate passed its version of the bill last week. The two bills will now go into a conference committee to negotiate a bill that can pass both houses of government, probably in May or June. President Trump still has considerable work in front of him to get a conference bill that will pass both houses when Republicans hold just a very narrow lead in both, but most political observers are impressed that he was able to get so much in one bill through each of the houses so quickly with that narrow margin; an environment that gives individuals considerable power in the vote. The primary headline focus in recent weeks has been on tariffs and the threats that they present to global trade, the global economy, and the risk of inflation. That has corporations modifying their outlooks in earnings reports, leading to cautious investment on Wall Street, while the headline environment has also seriously eroded consumer confidence. Those confidence erosion factors can drag an economy down when that economy is based on consumer spending.
The question then is what can President Trump do to restore confidence going forward? I mentioned yesterday that one option is the “refund” check being discussed to possibly send a check – perhaps $5,000 – to taxpayers representing a portion of the savings recovered by the work that DOGE is doing, but I also stated that such a plan would likely face some challenges in Congress and take time to implement, leaving the economy vulnerable in the meantime. However, another option is to move forward with the above bill that would give businesses confidence that their tax rates won’t increase at the end of this year, while also providing some regulatory relief. As for the consumer, I’ll approach it another way. The inability of Congress to pass a budget bill would suggest more gridlock in Washington that is unable to solve the problems that impact everyday Americans. However, the ability to quickly pass a massive bill gives a sense of confidence that Washington really can take action to address some of our nation’s fiscal concerns, restoring some confidence. That doesn’t address whether you think the actions are positive or negative, but it does address the confidence factor of Congress being able to function.
Finally, it should be noted that the above budget blueprint is just that – a blueprint. The hard work will come when committees face the challenge of translating the goals for spending cuts into specific departmental budgets and related policies. I’ve previously stated that tax cuts and deregulation in the absence of cutting fiscal stimulus results in inflation pressures, and also on higher interest rates, particularly for the longer-end of the yield curve as we’ve seen play out over the past six months when the Federal Reserve was cutting short-term rates. The budget blueprint passed by Congress once a conference committee is able to blend the two bills will dictate significant cuts. That will impact policy to implement the cuts. We’ll see that play out as Congress writes its next Farm Bill this year. The scope of cuts required will likely necessitate some significant changes in policy relative to farm programs. How will that impact the support of one of Trump’s strongest voter bases – rural America – particularly at a time when the Ag economy is struggling. The House blueprint suggests that the Farm Bill will have $230 billion less to work with, which means some very difficult cuts will need to be made to both farm support and possibly nutrition programs.
The grain and oilseed markets came under heavy selling pressure to start the week, while showing some signs of emerging stability late yesterday into the overnight session. Much of the strength in recent weeks has been about money flow tied to expectations of returning inflation. That strength needs to eventually have fundamental support. The uncertainty of Washington combined with questions over whether the fundamentals supported prices are current levels contributed to this week’s selloff. That leaves the sector vulnerable in the short-term. USDA’s annual Agricultural Outlook Conference will provide fresh fundamental fodder for the markets on Thursday and Friday. But we should also see a rapid increase in the flow of fundamental factors as the spring planting season takes shape.
