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Daily update

  • The global signals from the UK’s mini-budget matter. Modern monetary theory has been taken into a corner by the bond markets and beaten up. Advanced economy bond yields are not supposed to soar the way UK gilt yields rose. This also reminds investors that modern politics produces parties that are more extreme than either the voter or the investor consensus. Investors seem inclined to regard the UK Conservative Party as a doomsday cult.
  • Tax cuts are unlikely to give the UK a meaningful medium-term boost (the supply constraints in the UK economy are more about health and education). A short-term “sugar high”  is likely but may be limited. A high-income earner’s rational response would be to increase savings in anticipation of future tax increases.
  • Exit polls suggest the Italian right has won the general election, without being able to change the constitution. The Brothers of Italy party seems likely to lead the government, and has publicly pledged a relatively conservative fiscal stance.
  • Several ECB speakers (including President Lagarde) are scheduled. Currency levels are a focus, but this is not 1985. Coordinated currency control was easier in a world of capital controls, less global trade, and simpler supply chains. German and US business sentiment polls are also due.

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