US tax reform is “more likely” to be enacted in the first three months of 2018 as opposed to the final quarter of 2017, Goldman Sachs said on Wednesday, marking the latest headwind to the “reflation trade”.

The downbeat view from the investment bank represents a setback from late March, when Washington economist Alec Phillips noted that despite the Trump administration’s failure to push through measures to repeal and replace Obamacare, ” enactment of tax legislation this year still looks likely”.

Mr Phillips said on Wednesday that tax reform legislation is “not much further along than where it was a few months ago”, adding that “the timing does appear to be slipping once again”.

Part of the issue stems from lawmakers remaining somewhat focused on healthcare, which was one of the pillars of Donald Trump’s campaign but has split the Republican party, with various groups offering starkly different opinions on how to proceed.

“(I)f the legislative focus remains on health legislation through May, a vote on tax reform at the committee level might not occur in the House until July, which could make final enactment of tax legislation before year-end challenging,” Mr Phillips said.

“At this point, we expect that enactment is more likely in [first quarter] 2018 than [fourth quarter] 2017″.

The drearier view for tax reform has played a part in the recent break-down of the “Trump trade” that carried equities sharply higher and pressured bond prices following the November election. Analysts began to expect lower taxes on businesses would provide a boon to corporate America’s earnings growth and bolster the overall economy — a thesis that now looks murkier, at least in the short run.

Bank of America analysts noted on Wednesday that parts of the bond market are now “pricing in the death of tax reform and not merely a delay”. Note the shift to the left in the curve below, which points to lower expectations of higher rates by the end of 2018.

Source: BofA Merrill Lynch

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