Enzac Research: Market Crosscurrents - Dissecting the Post-Tax Bill Landscape & Hidden Stress Points

Leo Wong Chin Wai
May 23
3 min read

The passage of Trump's tax bill through the House has unleashed a wave of market recalibration, with equities and bonds exhibiting uncharacteristic choppiness as investors weigh the implications of expanded fiscal stimulus against tightening monetary conditions. While initial reactions suggested a "sell the rumor, buy the fact" dynamic, deeper analysis reveals structural vulnerabilities beneath the surface—particularly in Treasury liquidity, corporate earnings sustainability, and the Fed's dwindling policy flexibility.

Core Themes & Original Insights

1. The Tax Bill Paradox: Fiscal Expansion Meets Monetary Constraint

House Passage ≠ Senate Certainty: Markets initially sold off on the bill's advancement but rebounded as procedural hurdles became apparent. The OMB's July 4th target for enactment suggests contentious negotiations ahead, particularly around deficit projections.
Waller's Dilemma: The Fed Governor's conditional openness to H2 rate cuts (contingent on tariffs easing to 10% by July) clashes with his warning about fiscal discipline. This creates a policy Catch-22: Can the Fed realistically cut if the tax bill exacerbates debt issuance?
Enzac's Liquidity Stress Indicator shows Treasury market fragility persisting post-20Y auction, with dealer balance sheets nearing capacity. The 10Y TIPS auction's "on-the-screws" pricing (+0bps tail) masks concerning trends:
- Indirect bid dominance (71.4%) reflects hedging demand, not organic appetite.
- Direct bid collapse (16.7%) signals domestic investor retreat.

2. PMI Mirage: Tariff-Driven Inventory Buildup Distorts Growth Signals

The S&P Global Flash PMI beat (Composite 52.1 vs. prev. 50.6) hides troubling subtext:

Service Sector Exports plunged at the fastest non-pandemic pace since 2014, revealing weakening global demand for US dollar-denominated services.
Input Inventories surged to 18-year highs as firms hoard materials ahead of potential July tariff escalations—a temporary boost that may reverse violently in Q3.
Labor Market Erosion: Employment sub-indices declined despite output growth, suggesting productivity gains are peaking.

3. Energy & Geopolitics: OPEC+ Gamesmanship Meets Escalation Risks

OPEC's 411k BPD Output Trial Balloon: The group's deliberate leak about a July hike (later walked back) achieved its goal—crushing speculative long positions without committing to action.
Iran-Israel Nuclear Brinkmanship: With Iran threatening to treat any attack as US-collusion and Israel preparing contingency strikes, crude's geopolitical risk premium remains underpriced. Our Energy Crisis Probability Matrix assigns a 38% chance of $80+ Brent by August.

4. Hidden Credit Stress: Corporate Debt Markets Flash Amber

Lumen's Fire Sale: AT&T's $5.75B fiber acquisition signals desperation in telecom capex amid rising funding costs.
Humana/CVS/UnitedHealth Slide: CMS's expanded Medicare audits threaten $12B in annual sector profits.
Snowflake's Guidance Raise: Cloud providers' resilience may be the last bastion of tech earnings stability as AI capex plateaus.

Proprietary Metrics & Forward Scenarios

Indicator	Current Reading	Threshold Alert
Treasury Liquidity Score	64/100	<50 = Crisis
PMI-Inventory Divergence	+2.1σ	>+1.5σ = Q3 Drag
OPEC Output Commitment Gap	-1.2M BPD	<-0.5M = Bullish
Fed Cut Probability (Sept)	20bps priced	>30bps = Risk-On

Base Case (60% Probability):

Senate dilutes tax bill, reducing deficit impact by 30%
July tariffs stabilize at 15%, delaying Fed cuts until November
10Y yield rangebound between 4.40-4.75%

Bear Case (25%):

Full tax bill passage + August tariff hike → 10Y tests 5.0%
OPEC output hike coincides with Iran conflict → $70 WTI
S&P 500 corrects 12% on earnings compression

Actionable Trade Ideas

Relative Value: Long 2Y Treasuries vs. Short 20Y (Steepener unwind)
Sector Rotation: Overweight Healthcare Services (UNH), Underweight Utilities (XLU)
FX Hedge: USD/MXN puts ahead of US-Mexico tariff talks