ON DECK FOR TUESDAY, SEPTEMBER 22
KEY POINTS:
- Equity sentiment mildly improves
- Constructive US macro releases
- Powell’s testimony is unlikely to yield surprises
- BoE’s Bailey pushes back timing on negative rates
- EGBs impacted by seemingly baseless Brexit rumour
- Would Biden really be better for Canada?
INTERNATIONAL
Broad market tone is a little more positive today than yesterday but catalysts for this stability are few and far between. There was nothing by way of material releases out overnight. BoE Governor Bailey jawboned negative rates and said that supporting technical work will take some time which implies no sense of immediacy. That caused the gilts curve to flatten. RBA Deputy Governor Debelle also jawboned options for further action and emphasized additional bond buying across longer maturities, currency intervention but not given where the A$ sits at present, lower rates but without going negative and negative rates despite his assessment that the evidence on their effects is mixed. The A$ broadly shook that off. US macro releases were not first tier market movers, but were generally favourable as Fed Chair Powell and Treasury Secretary Mnuchin begin their testimony. I’ve also addressed some opinions on whether Canada would unambiguously fare better under a Biden presidency; in short, nope, but that’s by no means to be misconstrued as a Canadian endorsement of Trump’s policies toward Canada and other allies!
- Stocks are gently higher across North America and Europe. US exchanges are up by approximately ¼% to ½% and the TSX is up by ½%. European exchanges are trading ¼% to almost 1% higher with Germany leading. Overnight Asian exchanges slipped in lagging fashion to the quickened North American sell-off into yesterday’s close.
- Sovereign bonds are generally little changed in North America. Gilts are cheaper by 3–6bps in a bear flattener move as the front-end sells off on reduced negative rate expectations. Italian and peripheral spreads over bunds are materially narrower in part on unconfirmed if not flat out empty media headlines that Brexit negotiations are running a little smoother. I’ll believe that when I see it.
- Oil prices are up by about 1% across Brent and WTI with gold flat.
- The USD is a touch firmer on a DXY basis this morning. It is gaining on most crosses except for CAD that is flat.
UNITED STATES
US macro releases were constructive this morning. Existing home sales landed bang on the consensus guess at +2.4% m/m in August (+24.7% prior) and in keeping with the momentum shown in pending home sales. The Richmond Fed’s manufacturing index increased a bit to 21 (18 prior, 12 thin consensus) and the gain was driven by a jump in new orders (27 from 15) with a faster pace of hiring (23, 17 prior).
Richmond’s gain combines with the strong beat in the Empire gauge (17, 3.7 prior) and the little changed Philly Fed metric (15, 17.2 prior).
Fed Chair Powell and US Treasury Secretary Mnuchin are commencing their quarterly CARES Act testimony before the House financial services panel as this publication is being distributed. The written testimony that was released after markets closed yesterday yielded no surprises (here).
CANADA
There are no releases out of Canada today. BoC SDG Wilkins’ media interview is still pending publication and it isn’t known if it is policy- or career-related but there is probably low market risk around it.
Here are a few more contributions to the debate on what the throne speech should strive toward from individuals who are well known to Canadian observers (here, here and here).
As an aside, would Joe Biden be better for Canada? One might be tempted to assume as much after years of damaging insults and protectionist salvos launched by US President Trump. Nevertheless, while actual policy can morph into something dissimilar from an election platform, it’s not the least bit clear to me that Biden – albeit more polished – would be a better friend to Canada.
- Tax competitiveness: The Biden and Harris campaign pledge to raise taxes on corporations and upper income earners. On first round effects, this could make Canada relatively more tax competitive, or at least less uncompetitive. Canada’s statutory corporate tax rate is higher than the US, but the marginal effective tax rate on capital which focuses upon taxation on new investment is lower in Canada than the US, the G7 average and OECD average. Biden has pledged to raise the statutory corporate tax rate to 28% from 21% and to raise the top marginal income tax rate to 39.6% from 37% (analysis here). On second round effects, however, Canada’s government may see such changes as an opportunity to crowd-in tax room without necessarily harming relative competitiveness. The current Canadian federal government repeatedly emphasizes ‘fairness’ and in an effort to rein in very large deficits may capitalize on tax policy changes in the US by raising taxes in Canada. The other second round effect is how equities would take higher rates of taxation on capital gains. You could, however, argue that mammoth deficits could require a Trump administration to ultimately contemplate tightened fiscal policy one day and that higher taxes could be on docket regardless of who wins in November.
- Keystone: Biden has said he would rescind the permit for the Keystone XL pipeline. This may just be election hype that could change, given that the horse has already left the barn with parts of the full length already operational and the rest already under construction, given that modern pipeline technology is safer than alternative modes of transporting oil and given that it’s hard to see how the world would be made a better place if more oil was produced by Putin, MBS and Maduro instead of Canada. Nevertheless, the 830,000 barrels per day that would be transported from Hardisty, Alberta straight to the US Gulf coast would help to alleviate discounts driven by bottlenecks at existing distribution points and give a boost to Canadian exports and particularly Alberta’s struggling economy. Thwart its progress and more trains and trucks may be rumbling through Canada’s and America’s backyards.
- NAFTA: Thank heavens the NAFTA 2.0/CUSMA/USMCA deal did not include sunset clauses that would not have served any of the three countries well and was generally little changed from NAFTA 1.0 in terms of broad substantive matters. But that doesn’t mean trade disputes between the countries would go away in a Biden presidency. Sector-specific disputes that have already dragged on over the years under both Republican and Democratic Presidents (e.g. softwood) could be very likely to continue to do so under a Biden administration.
- Global trade policy: I still find this piece to be a useful breakdown of where Biden would be better than Trump on global trade policy, the same, worse, and what we don’t know. Further, Biden (and previously Obama) have subscribed to their own versions of made in America policies. On net, the tactics and delivery may be very different, but it’s not the least bit clear that Biden is a globalist.
- Carbon taxes: This could be a key one for Canada both directly and indirectly. Biden has pledged to introduce a carbon tariff against countries the US deems to be failing to pursue policies that are favourable to the environment. Most trading partners would likely view this as one part hypocritical, one part arbitrary and one part just another tariff by any other name and could therefore retaliate with their own tariffs. If used as a protectionist tool—or not—then it could further inflame global trade tensions while creating multiple adverse incentives and distortions to world trade. The direct effects on Canada—if directly targeted—and the indirect effects on world trade, growth and commodity prices could be damaging in part depending upon how they may be implemented and how America’s trade partners take it. On the latter count, it’s likely exceptionally naïve to assume that trade partners will oblige the claimed quest for a cleaner planet and submissively roll over.
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