Daily Commentary

MarketMinder’s View: This piece dives into politics to cover the latest in the never-ending stream of tax hike and austerity talk emerging from the UK, so we remind you MarketMinder favors no politician nor any political party, assessing matters solely for their potential market and/or economic effects. In her latest potential Budget policy trial balloon, Chancellor of the Exchequer Rachel Reeves delivered a speech today that hinted strongly that she and the Labour government would forego their campaign promise not to raise taxes on ordinary UK folks, citing her competing promises to cut deficits and debt while reinforcing public services. Now, the UK doesn’t need austerity in the sense the debt is becoming hard to service, a point her speech unwittingly made: “She said the aim was to free up money for key public services and ultimately tax cuts. Reeves noted that one pound in every 10 of taxpayers’ money was spent on servicing the UK’s debt.” (Boldface ours.) That translates to a 10% estimated interest payment to tax revenue rate, which is lower than America has been since 2022, during the 1980s and 1990s—and is some seven percentage points lower now (per St. Louis Fed data). Yet there wasn’t and isn’t a crisis in America. UK interest payments accounted for more than 10% of total tax receipts for all of the 1980s, which wasn’t a bad stretch for Britain, either. So there isn’t a need to hike income taxes from a purely economic standpoint. The politics are more complex and that is the issue here. For markets, though, all this chatter over the past few months helps mitigate the surprise, should Reeves pull an about-face and raise taxes. It would likely take a far bigger measure than those mooted here (one percentage point hikes) to deliver a negative shock.

MarketMinder’s View: With the US Supreme Court set to begin hearing the government’s appeal of lower-court rulings that President Donald Trump exceeded his executive authority in basing far-ranging “reciprocal” and fentanyl-trade related tariffs on emergency powers, it is worth remembering that even if the court rules against the administration, this doesn’t end tariff uncertainty. As Treasury Secretary Scott Bessent said in an interview this morning, “‘There are lots of other authorities that can be used, but [the International Emergency Economic Powers Act, IEEPA] is by far the cleanest, and it gives the U.S. and the president the most negotiating authority,’ he said. ‘The others are more cumbersome, but they can be effective.’ Specifically, Bessent cited Section 232 of the Trade Expansion Act of 1962, which provides a justification on grounds of national security, as well as Section 301 of the Trade Act of 1974, which regulates unfair trading practices.” These don’t grant quite the sweeping authority to tax American consumers that IEEPA does. But it is worth remembering that however the court rules, there is likely to be some uncertainty surrounding it. How the administration reacts on tariff policy is one source.

MarketMinder’s View: Headline aside, this is an overall rather sensible look at a long-running false fear—that China and others will ditch the dollar and end its centrality to the global financial system, which some people falsely believe keeps America’s debt affordable. This takes it from the other side, assessing the internationalization of the yuan. The headline says China’s yuan tops the dollar in “trade” but there is a key word missing: It tops the dollar in Chinese trade. “If you count all cross-border payments — including bond purchases and foreign investment — the yuan’s share leaps to 53%, overtaking China's dollar trade for the first time in 2023.” But: “In a further milestone, the yuan briefly overtook the euro last year as the second-most used currency in global trade finance, albeit with 5.8% of the market versus the dollar’s 82%, according to SWIFT, the global messaging network banks use to settle international payments. The yuan’s share of global currency reserves also reached its highest-ever level in the second quarter of the year at 2.4%, the International Monetary Fund (IMF) said in October.” But more important than the numbers, to us, are some of the logical points raised herein. As this notes, if China wanted the yuan to effectively replace the dollar, it would have to allow free capital flows, which would, “… reduce the Chinese Communist Party’s control over its domestic credit system. … China's domestic credit system is still largely directed by state-owned banks under political supervision. Beijing is wary that allowing unrestricted flows of money in and out of the country could expose the Chinese currency to speculative attacks and other foreign influence. So full convertibility remains off the table.”