G7 – Fighting global tax elusion.
Over the weekend, the G7 nations agreed to impose a minimum corporate tax rate of at least 15% on foreign earnings of large multinationals. The new rules aim to help nations collect tax-revenue in countries where money is earned, instead of just the in the headquarter-locations. Amongst others, this affects large firms with online sales, like U.S. tech giants Amazon and Facebook. We believe the agreement is an important signal towards ending global tax evasion as it penalizes tax havens, and thereby reduces global inequality. Further, it should lift corporate tax rates globally, as it brings an end to countries undercutting each other to attract global firms. However, key details like the scope – which companies exactly are affected – and the tax base are yet to be determined. In our view, the agreement is a first sign of renewed international cooperation with the US.
US Labour Market – Tepid growth.
US job growth accelerated in May, but the pace remained below market expectations. Payrolls increased by 559k last month after a revised 278k gain in April. The unemployment rate fell to 5.8% from 6.1%, while the labour participation rate was little changed. Albeit slightly underwhelming, the NFP number doesn’t account for those staying at home due to the supplemental unemployment benefits. Consistent with this labour supply shortage, we also saw a rise in average hourly earnings of 0.5% month-on-month, given the difficulty in hiring. Enhanced unemployment benefits nationally end in September, though 25 states have already said they’ll stop them earlier. With labour supply expected to increase in the coming months, we also expect wage inflation to be ‘transitory’. Interestingly, employers appear to be prioritizing non-seasonal hiring, consistent with the hiring in leisure &hospitality which has been strong and leading the increases in NFPs. The seasonally adjusted May NFP number for leisure&hospitality came in at 14,377 versus the non-seasonally adjusted print of c. 14,600. Overall, we think the employment data from last week is not enough for the Fed to change their policy reaction function. We expect the Fed remains on track to discuss tapering in the fall, with late-2021/early-2022 start.
ECB Preview – Growth up, inflation muted.
We believe Thursday’s ECB meeting will deliver substantial upgrades to growth projections, while changes to inflation forecasts will likely be muted. Tapering won’t be discussed at this meeting: If the pledge to purchase at a “significantly higher” pace was toned down, this would be a hawkish shift, that we don’t expect yet. Nonetheless, Q3 purchases may be reduced amid weaker seasonal issuance – without hawkish implications. As Europe’ vaccine rollout catches up with the US and the economy continues to stabilize, we think the ECB will discuss tapering PEPP over the next months and eventually may do so in parallel with the Fed. However, forward guidance will highlight that monetary policy will stay accommodative for long, as the ECB cannot afford peripherical government yields to rise substantially amid high sovereign debt levels.
Positioning – Mind the downside.
Over the past week we added to credit protection, reducing the funds downside further as spreads remain near their tights. Our cash credit book currently yields around 2%, albeit only 50% invested, exceeding the yield earned on European IG credit or BTPs. We continue to see upside in the reflation and reopening sectors, and express this through convertible debt and equity index options. Convertible bonds offer better convexity than other debt, while offering protection against rising inflation, as stocks rise. The below chart illustrates our funds estimated profit and loss, compared to that of a $ HY credit ETF in rising and falling markets:
To read more on our latest views, please see our Silver Bullet | Dog Money or visit our Insights section.
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