Senate Passes Budget In Big Win That Sets Stage For Next Big Failure

By Heisenberg

Ok, well yields and the dollar are on the move late Thursday evening, reversing course after falling just before the closing bell on Wall Street following news that Jerome Powell is now the favorite for the Fed Chair.

The Senate has approved a FY18 budget, a step towards advancing the GOP’s tax agenda. Long story short, they’re going to be able to sidestep a filibuster via a procedural maneuver that obviates the need for Democratic support.

This whole thing has been laughably fraught but ultimately, they’ve managed to clear the first – and lowest – hurdle by amending the Senate budget and clearing the way for the House to vote on the version that just passed the Senate. The current plan is to hold that vote next week, according to a House aide.

“The GOP budget compromise took shape Thursday evening and allows for more defense spending in the first year, in line with the House budget,” Bloomberg writes, adding that “it eliminates House language to expedite $203 billion in entitlement savings, while leaving in place Senate language that would allow drilling in the Arctic National Wildlife Refuge,” something Senate Democrats tried to strip out.

The Senate language that allows tax cuts to increase the deficit by $1.5 trillion stays in, although the original House plan had called for no loss of revenue. That bit is key. Here’s WaPo:

At the same time, by agreeing to the massive tax cut, Senate Republicans have officially moved the party far away from its promised goal of ensuring that the tax plan would not add to the deficit. The White House and House Republicans had vowed that the tax cuts would be offset with new revenue from the elimination of certain deductions, but that is no longer the GOP’s goal. Instead, they have abandoned longstanding party orthodoxy of deficit reduction and are seeking a political win after months of frustration on Capitol Hill.

Right. Anything to get something done at this point. Fiscal discipline be damned – they’ve got midterms to worry about and Steve Bannon’s “got his hands on his guns.”

Anyway, Mitch McConnell is excited. “Tonight, we completed the first step toward replacing our broken tax code,” he proclaimed, mustering as much enthusiasm as you can expect from a wheezing, bespectacled old tortoise. “We have a once-in-a-lifetime opportunity to replace a failing tax code that holds Americans back with one that actually works for them,” he went on to lie say.

“I applaud the Senate for passing a budget,” Paul Ryan said in a statement, which also contained the following complete fabrication: “This action keeps us on track to enacting historic tax reform that will mean more jobs, fairer taxes, and bigger paychecks for American families.”

Bob Corker reminds you that this was really just a ruse so you know, curb your enthusiasm. “This is the biggest hoax cast upon the American people ever that this budget process even exists. The only thing about this that matters is in preparation for tax reform,” Corker said.

I’m sure McConnell is praying that this goes some ways towards placating an increasingly unhinged and irritated Trump. So far, the President hasn’t tweeted anything about it although about 10 minutes ago, he did come up with a new nickname for his latest enemy, who will henceforth be known as “wacky Wilson.” The White House took up the slack and released this statement:

FY18 budget resolution adopted by Senate creates a pathway to unleash the potential of the American economy through tax reform and tax cuts, simplifying the overcomplicated tax code, providing financial relief for families across the country, and making American businesses globally competitive.

As The Hill reminds you, “the final discretionary spending levels that will fund the government in 2018 will have to be negotiated between Congressional Republicans, Democrats and the White House ahead of a December 8 deadline [and] failure to reach an agreement or pass a stopgap measure by then would lead to a government shutdown.” And that, just ahead of the December Fed meeting.

Speaking of the Fed, John Taylor is apparently not out of the running just yet and that’s adding to the selloff in Treasurys and helping to push the dollar up as well (remember, people are still convinced that Taylor would be hawkish and I guess compared to Powell, that would be an accurate characterization).  Here’s Bloomberg with a summary of what happened with the dollar and Treasurys just after the budget news hit:

  • Dollar buying surges across platforms led by leveraged accounts on news the U.S. Senate adopts budget resolution in step toward tax overhaul, according to Asia-based FX traders.
  • Leveraged accounts bought dollars ahead of further buying executed over the Tokyo fixing
  • Large bids layered under USDJPY 112.30 for real money accounts
  • Exporter selling of spot above 113.00 not as heavy as previous
  • Treasuries under pressure, initially dipping after Taylor also seen in running for Fed Chair with Powell, before sliding sharply after U.S. Senate adopts budget resolution, smoothing the path for future tax cuts. Large buying of downside seen in 5-year options.

Here are the charts:

DollarYields

And here’s USDJPY and S&P futs:

ESUSDJPY

So there you go. “Bigly.” Only not really.

Actually it’s basically nothing, but given that the default state of affairs on Capitol Hill these days is “gridlock,” “nothing” is actually better than “something.”

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