Quarter-End Adjustments Blunt Trend Moves


The ADP private-sector job estimate (~550k vs. 117k in February) will draw early attention, but the real interest lies with President Biden's speech in Pittsburgh in which the infrastructure program will be announced. What the administration has in mind is so large that, as we have suggested, it will be broken into two parts. According to the latest leaks, the price tag of the first part is about $2.25 trillion. It is focused on the material infrastructure, including the electrical grid, nationwide broadband internet, modernize the water system, bridges, and roads, and bolster housing and manufacturing. The second part will focus on people, like health care, and making permanent the expansion of the earned income tax credit, the child tax credit, and paid family leave/medical leave. The combined cost is estimated at around $4 trillion.  

While the spending part makes some feel uncomfortable, others are more concerned about the revenue enhancers tax increases. In essence, Biden appears likely to propose the repealing of large parts of the 2017 tax cuts. This would include returning the corporate tax rate to 28% from 21%. There would be a minimum corporate tax. The new proposals would also close or at least narrow loopholes that provide tax incentives to invest offshore. Federal subsidies for fossil fuel companies would end. Households with income over $400k would see an increase in the marginal rate. Unlike the $1.9 trillion stimulus bill, which saw votes strictly along party lines, the Democrats are divided over elements of these infrastructure measures, the role of taxes, and how much emphasis on environmentally-friendly initiatives. 

Biden has tried to make a case for these proposals because they are necessary to compete with China. While it may be true to some extent, the competitive element does not only apply to China. But aren't there other reasons why one of the richest countries should have a first-rate power grid and better bridges and roads with rural communities have broadband access. One of the lessons of the pandemic was that poverty and poor health are comorbidities, especially in societies that distribute health care primarily via the pricing mechanism. Subsuming the issues under national security strategy is not necessary and seems to be a dangerous precedent. As we have seen previously, there is practically no limit to what can be justified on national security grounds. 

Canada reports January GDP figures today. They are too historical to have much market impact, but barring a downside surprise to the 0.5% gain projected by the median forecast in Bloomberg's survey, the takeaway will reinforce the shift in sentiment. Previously, the consensus view was the Canadian economy would contract in Q1 by 1% (annualized), but that has switched, and the latest survey shows the expectation is for a nearly 3% expansion. The economy is forecast to have expanded by 0.5% in January. Separately, but not unrelated, the IMF will update its forecasts next week, and an upward revision to its US and Chinese forecasts will lift the anticipated global growth from the 5.5% pace seen previously. Canada benefits from the spillover from the US stimulus.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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