Macro Insights - US tax reform while Germany makes progress towards a coalition

Macro Insights - US tax reform while Germany makes progress towards a coalition

13 November 2017

Focus on US tax reform will continue amid a steady stream of economic releases. The House of Representatives adjusted its tax reform bill with the expectation of a successful, broader House vote later this week. The Senate’s bill is still in outline and has key differences from the House bill, including the timing of corporate tax change, household income tax rates and estate tax repeal. With power more finely balanced in the Senate and more restrictive rules, the Senate’s vote is likely to be tighter and its bill is likely closer to eventual legislation, which makes developments here arguably more important than in the House. CPI, retail sales and November’s Fed survey releases this week will be followed to confirm the ongoing solid pace of US expansion suggested by current GDP “nowtrackers”. This could see 2017 GDP growth reach 2.3%.

UK government fragility continues to generate political uncertainty. Last week’s update from EU negotiators suggested the UK will need to improve its Brexit separation offer over the next two weeks if it hopes to secure “sufficient progress” to move onto transition and trade talks in December. However, PM Theresa May’s Cabinet faces additional problems. Claims of sexual impropriety have embroiled two Ministers, a third resigned over separate conduct issues and the Foreign Secretary is under pressure regarding comments made about a UK national in Iran. Sterling appeared under added pressure at times last week and will continue to be sensitive to political developments. This week inflation data for October could deliver the peak in the current inflation cycle; retail sales appear to be more subdued in October; and the labour report will be closely watched by central bank trackers.        

First agreement on German coalition this week? Reports from Germany suggest that the so-called Jamaica coalition could reach a pre-deal on major policy issues by Thursday. Recently, the Free Democrats (FDP) leader dropped his hard stance on the Euro area and especially his request of phasing out the European Stability Mechanism (ESM). The FDP also agreed to more modest income tax cuts while the Greens made concessions by no longer insisting on fixed dates to ban diesel cars and to shut down coal energy production. One final hurdle will come from the Greens, who will need to get any deal passed by a party congress.

China pledges to strengthen trade and investment ties with the US and further opens up its financial system. Trump’s visit to China last week produced two major deals. First, the US and China signed a large number of trade and investment agreements, worth a record $253bn. Not all of them will have immediate impacts, as many projects will be carried out over time, but higher Chinese imports of US energy, agricultural goods and high-tech products should eventually help to narrow the US-China bilateral deficit. The second announcement came from the Finance Ministry that China would open up its financial industry, by allowing foreign investors to own up to 51% stakes in securities ventures and insurance companies, and these caps will be gradually removed over a 3-5 year period. This demonstrates China’s strong commitment to further financial liberalisation, which, we think, can exert external pressure on the domestic system for change. For foreign investors, the ability to own a majority stake in joint ventures will give them greater decision-making power and encourage them to build and expand businesses in the world’s second largest market.


Upcoming events
Euro area:
Q3 GDP for Germany and Italy (Tuesday), EMU industrial production (Tuesday), EMU final October inflation (Friday)
UK: October inflation (Tuesday)
US: October inflation and retail sales (Wednesday), House vote on tax reform
Japan: Q3 GDP (Wednesday)

Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML.

The Research & Investment Strategy (R&IS) team at AXA Investment Managers present their views on recent developments and the factors shaping markets over the week ahead. For more information on the R&IS team or any of the above comments, please contact us or follow us on social media for updates throughout the week.

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