Daily Commentary

MarketMinder’s View: We are a little more than two weeks removed from the UK announcing its Budget, but the analyses and coverage remain robust—and most of it slants negatively. (As a reminder, MarketMinder is nonpartisan and doesn’t prefer any politician or political party over another—our interest is in policies’ market and economic implications only). This article shares some Bank of England research that found, “… Ms Reeves’s decision to launch £26bn National Insurance tax raid alongside an increase in the minimum wage had forced bosses to scrap roles to keep costs under control. According to the Bank of England’s analysis, Ms [Catherine] Mann said that half of firms were having to reduce headcount because of higher costs imposed by the Government.” Sounds bad! Except there is one critical detail to consider: “This information was drawn from a recent survey regarding hiring intentions, Ms Mann added.” (Boldface emphasis ours) Look, it may very well be that some respondents will end up having to let workers go—perhaps because of taxes, though in our experience, other reasons (e.g., industry-specific headwinds and macroeconomic conditions) often play a bigger role. But surveys tend to reflect how people feel in a given moment. They aren’t predictive of future action. It is also pretty standard for businesses to pin discouraging decisions on whatever external event is hogging headlines, lest they signal any internal weakness. This year it is higher payroll taxes; in years past it would be weather, currency swings, or, or, or. We don’t dismiss the headwinds and extra burdens from higher taxes on UK businesses, but we suggest giving this some time to play out. After all, despite the aforementioned payroll tax and minimum wage hikes, which took effect in April—and UK business activity didn’t cease. For more, see our UK Budget coverage, “Few Surprises: Leaks and Trial Balloons Mute the Market Effects of Britain’s Tax Shifts.”

MarketMinder’s View: The European Central Bank (ECB) is considering several possible measures aimed at easing the burden of banking supervision, including simplifying capital rules for larger lenders, decreasing scrutiny of smaller lenders and perhaps scrapping the titular Additional Tier 1 (AT1) bonds (a type of debt with equity-like qualities, some of which grabbed headlines during early 2023’s banking volatility). As detailed here, “One of the defining features of AT1s is that interest payments are not guaranteed but can be suspended in a crisis while a company has to conserve funds to avoid default. The ECB did not go into detail on how it proposed reforming AT1s, but its report suggested that the bonds should either be improved to bolster ‘their loss-absorption capacity’ or abolished completely.” In other words, despite mandating banks issue these bonds as part of their capital base so that creditors could be “bailed in” when a bank is at risk of failing, regulators aren’t wholly convinced they hit the target. Which brings us to a key point: The ECB’s aim to “simplify” regulations may actually make capital requirements stricter. “According to an estimate from the German Banking Industry Committee, banks in the EU could be forced to raise as much as €418bn of additional CET1 if all AT1 and related bonds were required to be replaced.” Policymakers are still firming up details, but for now, regulatory uncertainty is creeping back up in eurozone Financials, which could discourage risk taking to some extent until banks know the lay of the land. Yes, this is all aimed at “deregulating” and improving EU banks’ competitiveness globally, but even well-intended, pro-growth measures can carry unintended effects.

MarketMinder’s View: Two questions lead this longish article: “Who will be the next Fed chair, and will the Fed continue to be independent?” On the first question, we don’t know—President Donald Trump said he will designate a nominee next month to replace current Fed head Jerome Powell (himself a Trump appointee), and while observers have their “front-runner” lists, trying to predict a nomination is, at best, guesswork. We will answer the second question with another question: When was the Fed ever truly politically independent? And that, conveniently, is the point the article spends the bulk of its pixels showing, with detailed history that helps put today’s fears in context. Yes, in theory, politicians’ meddling in monetary policy isn’t a positive. But America isn’t Turkey, whose executive essentially strongarms the central bank governor into doing his will—a contrast to the US, which has a 12-member committee vote on policy. Also, not to get hung up on semantics, but America’s central bankers are inherently political: Politicians appoint them (and choose to reappoint or not). By nature, someone who vying to keep their role will typically act in a way to win favor with the job appointer—that is human nature, however subconscious it may be. The history discussed in this article shows other examples of how “political” the Fed can get, with former Fed governor Marriner Eccles going so far as to leak memos to major publications to highlight the heated interactions between the Fed and the White House and Treasury back in the 1950s. Is that not a political act? Point being, even fighting to maintain “independence” is itself political. Don’t get caught up in the noise. Focus on policymakers’ actions instead.