As duly predicted US equity prices are continuing their rise into the Thanksgiving break, all three major indexes hit record highs. Most of the headlines over the past couple of days, aside from the usual Brexit ones, is the failure of Angela Merkel to form a coalition government. The impact on the euro, the European stock and bond markets has been limited, as there seems to be no serious alternative to her. However, her authority will probably have been damaged by this failure and may have to cede some ground to form a new coalition.
Later today Philip Hammond releases his budget statement, housing seems to be the main topic of debate, followed by increased measures against those who are deemed to be trying to avoid tax. There is some speculation that the Chancellor will lower the threshold VAT, which could raise circa 1bn pounds. There will probably be the usual hit to drinks and tobacco manufacturers. If he does announce some new infrastructure spending initiatives this may also boost the construction sector.
Housebuilding and tobacco stocks may react to the budget, also possibly any companies whose interest lies in the North Sea, however, unless there are any unexpected changes to corporation tax, stamp duty or capital gains taxes the impact to the stock market from the Budget could well be minimal. On Tuesday we received the latest Industrial trends survey, and in line with other surveys, it is a bit of a curate’s egg, good in parts. Along with any changes to taxation, Phillip Hammond will announce any changes to GDP and forecasts for public borrowing.
As we approach December when the Federal Reserve is expected to raise interest rates again this year by another 25 basis points. We have highlighted the tightening between the two and ten-year spread. Strategas research also points out that the gap between the two and five-year spread is 30bp, we last saw this in 2015 which led to a surge in the US dollar and a correction in US stock prices. The bond market is considered the best predictor of economic recessions. In each of the last seven occasions over the last 50 years when the US yield curve has inverted it has been a prelude to a US recession.