The Fed, before tax hikes

Posted by: Paul Donovan

23 May 2019
  • Fixed income markets live in a parallel universe where every time a bond trader's lower lip starts to wobble with an impending temper tantrum, the Federal Reserve is supposed to cut rates. The Fed minutes signaled this is not likely. Stability was the key message. However, this message was B.T. (before tax hikes). Trade taxes slow the economy, increasing uncertainty and recession risks.
  • Vietnam is benefitting from the US tax increases; exports to the US surged. Anecdotal evidence suggests Chinese companies are shifting part of their production to Vietnam, Indonesia and Thailand. The shift may be small, but if it is the final stage of production the boxes are labelled "made in Vietnam" and trade taxes are evaded.
  • The UK mercifully has a media political blackout for the European elections. Prime Minister May's position seems rather difficult. Sterling has fallen 4% against the dollar in three weeks (true, Bitcoin can manage such a move in moments, but sterling is a currency and is used by people). Investor focus is on whether the prime minister will resign on Friday.
  • German GDP data and the minutes of the ECB April meeting will offer some useful insights into the economy. Sentiment opinion polls will not.