This will be a busy week. America first. We will get another taste of what that might mean, when Donald Trump announces his tax plans on Wednesday. He said on Friday that there would be an announcement then and tweeted on Saturday: “Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday”.
There are two problems here. One is that this seems to be totally unplanned in the sense that the US Treasury had not expected it and is not ready with specific plans. The other is that, as always, the President proposes and Congress disposes. It is not at all clear what he can get through Congress, despite the Republicans controlling both houses. A little clarification came over the weekend from an unnamed Administration official, who said: “We are moving forward on comprehensive tax reform that cuts tax rates for individuals, simplifies our overly complicated system and creates jobs by making American businesses competitive.” The announcement itself would be of “broad principles and priorities”.
The key thing to look for will not be what happens to headline top rates of tax for individuals, because we know that will come down. What will matter will be what the plan is for corporation tax (will the idea of some sort of tax on imports be retained?) and what are the plans to close loopholes for both personal income and company taxation. As always, look for the market reaction. What will happen to the shares of Walmart, potentially a big loser from any additional taxation on imports, and Boeing, potentially a big gainer because it exports so much? Also look for the reaction from the Republican leadership in Congress. The plan that will be sketched won’t be the final one by any means, but if Congress does not buy into those principles and priorities then stalemate would result.
The big financial story in the US will be company results. This is a huge week here, for more than 190 members of the S&P 500 index are reporting. These account for some 40 per cent of the index’s value, and include Google’s parent Alphabet, Amazon, Microsoft, and Exxon. If corporate America remains solid, this will bolster political support for the new Administration. Wall Street has so far given a cautious vote of support for Donald Trump. Will it continue?
The great European political event of the week of course is the first round of the French elections and the reaction to them. Writing ahead of even a sniff of an outcome I think the thing to acknowledge is that France will be on edge right through the summer. If you want a single indicator of that tension, look at the gap between the interest rate on French 10-year bonds and the equivalent German ones. That has widened in the past week for obvious reasons. The other thing to be aware of is that the French economic outlook has improved quite a bit in recent months: French business is more optimistic about growth than German business, a rare reversal. French voters will, whatever they do, be making a political statement rather than an economic one.
The stronger the performance of the eurozone economy, the earlier the European Central Bank will start to tighten policy. There is an ECB meeting and press conference on Thursday, and while there will be no immediate change in policy, look for hints about the ending of QE and the retreat from negative interest rates.
This is also the week when we will get the preliminary estimates of first quarter GDP growth for a number of countries, including the US, UK, France, and Spain. Expect the UK rate of growth out on Friday to slow a bit from the final quarter is last year, perhaps down to 0.4 per cent. Anything lower than that would be a shock, but do remember that the GDP figures are subject to huge revisions, and while the number may generate political resonance it won’t be that significant in economic terms. More generally, decent growth from the major developed countries will support the gradual rising optimism about the world economy later this year. Politics may be tricky but growth looks solid.