[Good Morning Market] U.S. Tax Cut Bill Spurs Fiscal Concerns... "Short-Term Response Strategy Needed"

On May 22 (local time), the New York stock market ended mixed as it digested the passage of the "Trump tax cut bill" in the U.S. House of Representatives. The domestic stock market is expected to open with a slight rebound on May 23, as concerns over the tax bill have already been priced in.

On this day, the Dow Jones Industrial Average closed at 41,859.09, down 1.35 points (less than 0.1%) from the previous trading day, while the S&P 500 index finished at 5,842.01, down 2.6 points (0.04%). In contrast, the Nasdaq index rose 53.09 points (0.28%) to 18,925.74. All three major indices showed gains in early trading, but later gave up those gains due to concerns over a widening fiscal deficit and the burden of high interest rates. As a result, the Dow and S&P 500 ended the session slightly lower.

On this day, the U.S. House of Representatives passed the Trump administration's key tax cut bill by a vote of 215 in favor and 214 against. This bill includes provisions to make permanent the individual tax cuts set to expire in 2025, exempt taxes on tips and overtime pay, cut Medicare funding, increase budgets for defense and border security, and eliminate subsidies and tax credits related to renewable energy. If the bill is ultimately passed by the Senate, it is expected to further worsen the U.S. fiscal deficit in the medium to long term. The Congressional Budget Office (CBO) projects that the bill will increase the federal government's fiscal deficit by $3.8 trillion over the next 10 years.

Concerns over increased fiscal burdens were also reflected in the Treasury market. The yield on the 10-year U.S. Treasury note rose to 4.63% during the session, but then reversed course and settled at 4.54%. Analysts attributed this to the prevalence of short positions in the bond market prior to the tax bill announcement, as well as the view that the tax cuts are limited to wealth effects for high-income earners, which may restrict their impact on boosting consumption. The 30-year yield also declined to 5.05%, but remains in high territory.

Following news of the tax bill's passage, the market saw selective moves centered on specific themes. Quantum computing-related stocks surged, while solar and electric vehicle stocks underperformed due to concerns over reduced tax benefits. There was also evidence of funds moving into cryptocurrencies. The U.S. dollar strengthened in early trading, but its gains narrowed by the close.

As for key economic indicators, the U.S. manufacturing Purchasing Managers' Index (PMI) for May improved to 52.3 from the previous month, while the services PMI also rose to 52.3, both exceeding expectations. The number of new unemployment claims fell by 2,000 from the previous week to 227,000.

Kim Jiwon, a researcher at KB Securities, said, "The domestic stock market is expected to open higher today, as concerns were already reflected in yesterday's decline." However, Kim added, "With a lack of additional momentum, a wait-and-see stance is likely to prevail." Kim also advised, "It is necessary to monitor exchange rate and interest rate trends for the time being."