Tax cuts in China and the US

Posted by: Paul Donovan

06 Feb 2020
  • China will cut taxes on Valentine's Day, for Chinese buyers of goods partially made in the United States. The US should match with tax cuts of its own. This is viewed as positive for two reasons. Obviously this is a fiscal stimulus. The commitment to the Phase One trade deal is reassuring after problems in Sino-US relations over the coronavirus.
  • German factory orders are due. German production has suffered in the trade dispute. US trade taxes caused uncertainty. Uncertainty cut investment in global supply chains. Lower investment cut demand for German-made investment goods. Uncertainty has not disappeared – stabilization rather than improvement in the data is expected.
  • The US trade deficit increased again. European and Mexican surpluses with the US hit record highs. We know that Mexico benefitted from supply chain shifts as trade taxes rose. The EU surplus may be a source of tension – EU Trade Commissioner Hogan visits Washington again today.
  • The data calendar is light. Markets await tomorrow's US employment report. Lagarde of the ECB and Kaplan of the Fed are speaking. US unit labor costs and productivity numbers are due. Productivity data is a useful concept, but depends on the accuracy of GDP. Few economists trust real-time GDP.

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