This Friday morning Paul Sedgwick featured on Bloomberg radio offering his views on a broad range of subjects, we plan to distribute the podcast later in the day. Amongst the topics that the interviewer looked for our views on are the US economy ahead of the proposed tax reforms, any thoughts ahead of Draghi’s speech later Friday and Brexit. Along with the recent selloff in equity markets.
The need for the US to reform its tax system, seems to be a common goal. Amongst the proposals are to simplify the current number of tax bands, along with lowering corporation tax from the current 35% to 20%. The latter would allow the repatriation of capital back to the US which corporates executives argue will be used to boost the economy. At present, the proposed tax reforms are forecast to increase the national debt, which is currently 20 trillion dollars, by another 1.5 trillion dollars. Others hope the boost the tax reforms would give to the economy means ultimately the impact may not be so great.
As we commented on earlier in the week, one of the main concerns amongst investors is either a Fed policy mistake or a major shakeout in the bond market. Will the Federal Reserve’s plan to reduce its balance sheet, push yields higher and will the Fed increase rates at a pace that will impact economic growth? Macro Research house Capital Economics addresses both these points and concludes that either is unlikely. The Fed would be wary of raising rates too quickly fully aware of the possible negative impact on growth. Their rhetoric has constantly been more hawkish than their actions. Although the combined size developed central bank’s balance sheets have tripled since the start of the crisis, there are structural reasons why they can remain inflated. Capital Economics forecast that the Federal Reserve will take at least 3 years to reduce its balance sheet from the current 4tn dollars to 3tn, well above the 800bn dollars ahead of the crisis.
Later on Friday, Bundesbank President Weidmann, and ECB president Mario Draghi are expected to speak. There have been tensions between Germany and the ECB over monetary policy. Recently Weidmann commented that he felt the ECB should have set a defined date to end its asset purchase program. German’s feel that the current monetary policy is too loose, and the ECB continue to want to make sure that the economy continues to need central bank stimulus. On Friday we may get another indication of the level of tension.
Brexit, the negotiations go on, sterling has managed to remain quite resilient despite the political uncertainty. One feels speculators are bearish of sterling and UK assets, so any incremental good news could see sterling rise again. We also have the budget next week, one imagines this may well be another tax and spend budget. One possibility is lowering the threshold for VAT. Mr Hammond may be hampered by the small majority the Conservatives hold and will be keen not to fall into any traps as he did with National Insurance contributions last year.