Tax and tapering dominate the headlines

26 April 2021

Chief Investment Officer Bernard Swords talks us through strong Q1 economic data that is feeding into the earnings season with US earnings coming in more than 20% better than expected. Bernard also outlines the newsflow from the US on tax funding and tapering by Bank of Canada as it announces the scaling down of their bond purchases.

  • Policy risks featured last week with the dreaded words of taxation and tapering both hitting the headlines. In the US we got further details on Biden’s infrastructure plan which will entail some taxation funding. There is still a long process to get these proposals approved so the end result could be quite different. In the meantime earnings are moving far faster in this cycle so that any higher level of corporate taxation could be more than compensated for.
  • Last week saw the first of the major central banks move to tapering. The Bank of Canada will be reducing its level of bond buying going forward. This caused some broader concern, but there are some features unique to Canada that suggest read-through to other economies and central banks is limited.
  • The economic data for the next couple of months will probably continue to run hot. PMI’s from the euro area were better than expected. The strong recovery is still driving earnings upwards. Less than 20% of companies have reported in the US but earnings are coming in more than 20% better than expected. It is heavily influenced by the volatile financial sector, but it is still a very large figure especially given that forecasts have already been raised and we are several quarters into the recovery. With reopening only starting profits will get another boost. So just like the economies, profit progression is going to look early recovery as well over the next couple of months.
  • Overall, the data coming out over the last week confirms that we are still experiencing a strong recovery and that looks like it will hold into the middle of the year at least. Stability has also returned to the bond market. We believed that yields would rise in 2021 but that it would be orderly, and it would be driven by better growth prospects. This has turned out much better than we expected. 
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