Take 5 and come back tomorrow (16/7/24) Markets RegulationTaxes Macro Real Estate

None of what follows is investment advice.

Market environment: Playing the Trump card - (Asia-Pacific markets fell, with futures for Europe moderately down and those for the US mildly up) – Asia-Pacific markets declined partly due to fears of a Trump victory in the US elections leading to worsened relations with China. US futures also benefit from expectation of a softer Fed policy. Futures for Europe are moderately down and those for the US mildly up.

Response to the crisis: Don’t mess around with tradition - (The Minister for the Economy says that there is time to come up with an agreement with the opposition regarding the new Bank of Spain Governor (Expansion p12) – In theory the appointment of a new Bank of Spain Governor should not pose a problem, as  the role is meant to be independent of the Government and integrated in the wider ECB network. However, the Government’s track record in terms of filling other allegedly independent jobs (General Prosecutor, President of the official RTVE broadcaster, head of the CIS government polling body etc.) does not suggest that independence will be clear feature of the choice, either in character or in behaviour. I think it would be a very bad idea for the Government to try to muffle the potential criticism of Bank of Spain’s economic research unit with respect to government policies. Especially as the Government ignoring such criticism is now a long-established tradition.

Taxes: The lesser of two evils - (The Treasury Minister rejects a similar financing system for Catalonia to that of the Basque Country (“cupo”) but is open to a Catalan Tax Office under the regional constitution (“Estatut”) (Expansion p20)/The Government and the PP accuse each other of not negotiating the reform of regional financing (Cinco Dias p22)/The Treasury will exempt the regional governments from the requirement of a budget surplus and will allow a deficit of 0.1% of GDP through 2027 (El Economista p24) – Being able to grant something to the pro-independence Catalan parties, whose support is required by the Socialists at the regional and national parliament levels, that is acceptable but falls short of independence is currently very important for the Government.  The problem is that, as the pro-independence parties have not renounced, but rather reaffirmed their goal, those concessions will end up being stepping stones towards the separation of Catalonia from Spain. One of the main reasons the last attempt at independence failed was, in my opinion, that an independent Catalonia was not viable without a separately functioning tax/financial system. Accepting the creation of a Catalan “cupo” would represent discrimination against the rest of regions that would not be granted the privilege, as well as increasing the risk of viable independence. So, even if not accepting a “cupo” may be seen as the lesser of two evils, the proposed solution is still an evil.

Macro: Keep the ball in play - (The Government raises its estimate of potential GDP and provides more margin for the public sector accounts, planning to present a fiscal plan a higher medium term growth than projected by the EC (Cinco Dias p23) – We commented yesterday that fiscal rules mean little if they apply to “optimistic” forecasts. Playing around with estimated “potential GDP growth” is a good example. But then again, the entire global financial system is increasingly reliant on the hope that a “productivity miracle” will lift GDP growth, allowing a relatively painless deleveraging.

Real Estate: Building more will not help costs - (Construction costs take prices of new homes to a record level (Expansion p21)/Housing transactions fall 21.5% YoY in May (National Statistics Institute) – According to a report from the Sociedad de Tasación valuers, construction costs have risen 30% over the last four years. And that is without taking into account land prices. Boosting supply should be part of the solution, but not really from the construction cost point of view, as the increased activity would likely lead to upward pressure on inputs, especially sector wages.