Daily Commentary

MarketMinder’s View: On the heels of last weekend’s public spending plans, Japan’s cabinet has finalized some tax tweaks aimed at boosting business investment. Like the supplemental budget, these will need parliamentary approval, so they could be watered down or abandoned. That is one reason we suggest tempered expectations. Here is another: The proposed reforms are temporary, sunsetting after five years. Under the proposed system, companies will be able to “deduct 8% of the value of their capital investments from their corporate tax liability” (15% for companies affected by US tariffs) or “depreciate the entire cost of their capital investments in the first fiscal year. This is intended to facilitate consideration of subsequent investments for businesses, particularly those in the growth stage that are facing immediate cash flow challenges.” Don’t get us wrong, measures like this can encourage investment. But when they are only temporary, they tend to pull forward investments that would have happened anyway rather than create new ones out of whole cloth. The article notes the late Prime Minister Shinzo Abe adopted something similar in 2014, with a three-year shelf life, and it credits this for higher business investment. But the boost was short-lived, with investment growth slowing afterward and contracting in 2019, before COVID lockdowns. It is hard to envision any temporary changes creating a virtuous cycle. Nice as the short-term benefits may be, an ever-changing tax code increases uncertainty. So we don’t think this is likely to be some massive positive for Japanese stocks. Other tailwinds probably matter more.

MarketMinder’s View: Lots of politics here, so we remind you we prefer no politician nor any party and assess developments for their potential economic and market implications only. But strip the politics out, and we think this makes some salient points about tomorrow’s UK Budget, which is widely expected to have a spate of incremental tax hikes. Headlines have speculated about the specifics for months, while the Treasury has seemingly floated legions of trial balloons to gauge markets’ and the public’s reaction. This has raised uncertainty and hit sentiment, making this observation on point: “It is not meant to be like this: aside from the agenda-setting first budget that follows a general election victory, and outside economic crises (though goodness knows we have had plenty), budgets should be reassuringly dull.” Yep. The status quo of scattershot tweaks that hinge on the Office of Budget Responsibility’s (OBR’s) forecasts keeps policy in flux, which extends uncertainty. A tougher Budget might rankle in the short term as everyone digests the winners and losers, but ending this annual dance would likely be beneficial in the long run. Businesses would know the lay of the land, which would enable more risk-taking and investment. Curbing the influence of the OBR’s March forecast, which is reportedly a work in progress, is a solid first step. That takes the Budget dance down to once a year. But the more boring that one dance is, the better off things would likely be in the long run. Which reminds us of the other key point here: Neither party has a monopoly on beneficial policies. Budgets from both have wrought unintended consequences. Keep all this in mind as investors digest tomorrow’s Budget.

MarketMinder’s View: Yes, US retail sales growth slowed from 0.6% m/m to 0.2% … in September. That is ancient news, considering we are a week from December and stocks generally look about 3 – 30 months ahead. ADP’s weekly private sector payroll data, which showed employers cutting 13,500 jobs on average weekly in the four weeks through November 8, are a little timelier but also backward-looking, considering growth creates jobs—not the other way around. Payrolls are a late-lagging indicator. And consumer confidence, which The Conference Board reports weakened again this month, captures people’s feelings at a given moment, which doesn’t predict behavior. So what we have in this article is a smorgasbord of reports that show what happened in the recent past, which doesn’t predict what will happen. Stocks’ bread and butter is weighing that future. Knowing what just happened can shed light on expectations, but stocks depend on how reality ultimately squares with those expectations. What matters here, therefore, is that expectations seem to remain pretty low as analysts connect the dots between these reports and project weakness.