Reflecting on Phillip Hammond's first and last autumn statement, a great deal appears to have been written by a great many, about very little. A significant part of yesterday’s speech, for example the commitment to lower corporation tax, were measures already proposed by the previous incumbent in the job. The Office for Budget Responsibility economic forecasts, although required to give some measure to base the statement on, are predicted on an outcome that no-one can be certain of, and therefore being taken with a pinch of salt.
The so called “project fear” campaign, aimed earlier in the year to encourage voters to remain, appears to continue to be in full swing. Growth expectations for next year have been slashed to 1.4%, coincidentally the same as the German economy is forecast to grow next year, and our borrowing is expected to climb to 90% of GDP. On the positive side, on a day when American’s give thanks, perhaps we should be grateful that the OBR have not forecast an economic recession. No-one can be certain what could happen next year, except for the fact that the probability is the forecasters will be wide of the mark.
As US treasury yields continue to climb apparently so does the belief that the 20-year bond bull market is coming to an end. Perhaps the ECB now wish they had their own Donald Trump waiting in the wings.
So far equity prices in the US have not been rattled by either the strengthening currency or the rising bond yields. The continued strength of the US dollar and rising bond yields both have the propensity to rattle equity investors, particularly at a time when many analysts believe valuations are already stretched.
As much as there is much written about the impact of the weaker pound on the UK economy, a strengthening US dollar impacts not only the cost of US exported goods, but it also can have a negative impact on the sentiment towards emerging economies. Part of the valuation story for equities has been the attractive dividend yields relative to bonds. As bond yields rise there will be the temptation for investors to switch back to the supposed saver haven of bonds at the expense of equities. Equity valuations are boosted by low bond yields, so far equity investors continue to appear to buy into the belief that bond prices are falling in response to better growth expectations.