May and Carney have been addressing the Bank of England’s conference celebrating 20-years of its independence this morning, but the market impact has been minimal. Carney made the most pound sensitive comment, saying that the BoE will support the UK economy through the Brexit process, and since Brexit is still so uncertain one can assume this means limited rate hikes from the BoE, even if the Bank has shifted to a less dovish stance and could hike rates at its next meeting in November.
These comments from Carney neutralised some of the hawkish comments from the BoE chief economist Andy Haldane, who said that the UK economy is “nearing the point” where a reduction in stimulus would be warranted, aka a rate hike is coming. Theresa May did not address the topic of BoE policy, but she did say that the UK government would mitigate any side effects of BoE actions.
May’s robust defence of capitalism tamed
May’s comments were supposed to be a robust defence of capitalism after Labour leader Jeremy Corbyn’s speech yesterday. However, May, rightly, trod carefully, after all, Corbyn made a good point that the left is gaining momentum. She did say that there is much work to do to restore the UK’s finances to health, and that ideologically extreme economic policies are bound to fail. May’s was a fairly mild defence compared to Corbyn’s anti-capitalist rant of 1 hr 15 mins that closed the Labour Party conference on Wednesday.
US – UK trade deal at threat?
Perhaps more interesting was May’s comments about the punitive tariffs on Bombardier (TO:BBDb) from the US. She mentioned the growing wave of protectionism across the world, she also lambasted Boeing (NYSE:BA) saying this is not the behaviour the UK expects from a partner. Expect this tit-for-tat spat to go on with the US for some time, which could make a trade deal with the US post Brexit tough to achieve.
Trump tax deal benefits the dollar for now
Overall, the pound barely moved on the back of the Carney and May speeches, far more important to sterling is the renewed pressure from a strong dollar as the market reacts to the unveiling of Trump’s tax plan. Although the tax plan has many hoops to jump through, the proposal to scrap the corporate repatriation tax is having a large impact on markets. This would allow US corporates to bring back money they have stored off shore for a one-off fee, and would scrap the double taxation of foreign corporate profits going forward.
Since US corporates have been some of the biggest purchasers of US Treasuries in recent years (they have ploughed foreign profits into the US Treasury market), the prospect of corporate demand for Treasuries drying up has already pushed up Treasury yields by 10 basis points in 24 hours, which is a substantial move. This shift higher in yields has also underpinned the dollar rally, and the dollar index is up some 0.7% since the tax announcement.
While there are still many hoops to jump through to get Trump’s tax plan into play, the upside for the dollar and yields could be limited, however GBP/USD could dip back to the 1.3200 mark in the coming days without disrupting the technical uptrend in cable.
Interestingly enough, there are some Republicans who are against Trump’s tax plans already. Congressman Corker, a fiscal hawk, has spoken out against the idea due to the pressure this could put on the deficit. Thus, there is no guarantee that Trump’s tax plan, as it currently stands, will see the light of day, which could limit the upside in the dollar, rising Treasury yields and also the boost to stocks, which hit a fresh record high on Wednesday.
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