Central Banks – First hawks breaching the line.
The first central banks are becoming hawkish, while others are lagging behind. It is the oil countries’ central banks who are leading the move: Canada started tapering, Russia hiked rates and economists expect Norway to follow suit later this year. The ECB stayed on hold last week, speaking optimistically on the economy without sounding hawkish. For the Fed, sell side analysts expect tapering to begin after H2 2022, while swap markets are currently assigning a 70% probability for a rate hike by the end of 2022. For Wednesdays FOMC meeting we don’t expect any policy changes.
US Tax Raises – Capital gains tax against inequality.
As part of the tax proposals to fund the infrastructure spending bill, Biden now proposed to almost double capital gains taxes for American investors – facing substantial backlash from America’s wealthiest. In an attempt to reduce inequality, higher tax rates, combined with a normalisation of monetary policy, dampen the outlook for US equities materially, also as investors facing higher capital gains taxes may decide to take profits after the strong rally in US equities since last March. Following the $1.9tn stimulus plan and the future infrastructure bill, this latest move from Biden confirms his determination to follow-up on his campaign pledges, this time demanding higher taxes from the best-off. Over the long-run we believe these measures are an important step towards reducing inequality, improving productivity and rising inflation.
ECB Bank Lending Survey – Mixed signals.
Last week’s Bank Lending Survey (BLS) showed that euro area credit conditions tightened in 1Q21, albeit less than in 2020 and less than expectations, reflecting elevated uncertainty risks and concerns over borrowers’ creditworthiness. However, in Q2 less banks expect credit standards tightening and, more importantly, loan demand from both corporates and households is expected to pick-up considerably. The BLS is one of the few concrete parameters the ECB uses to explain its “holistic” and “multi-faceted” definition of financial conditions – hence this survey stays a key focus for us to gauge policy decisions by the ECB.
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