Wall Street is betting on the Fed and just wants to stay the course with US stocks. Percolating risks that include tax fears and a hot economy that triggers a sooner-than-expected scaling back of the Fed’s massive bond-buying program are unlikely to derail the current risk appetite for equities. Yesterday, the Fed’s minutes signaled optimism is justified for a stronger economic recovery, but the doves are not anywhere close to budging on their firm stance that rates will remain near zero through 2023 and that now is not the time to reduce their monthly asset purchases. Today, Fed Chair Powell’s comments overwhelmingly affirmed the belief that the policy is on dovish cruise control for the foreseeable future.
The Biden administration’s wish list for taxes might seem aggressive but traders need to remember it is most importantly only a starting point. The corporate tax rate during the Obama administration was 35% and fell to 21% following the Trump tax cuts. The proposed corporate tax rate increase to 28% has strong opposition from conservative Democratic Senator Manchin, but he has noted that he believes it should have never fallen below 25%. Taxes are coming and for the most part that doesn’t seem really reflected in the stock market.
I must admit that I first laughed at the idea of a global minimum tax. I did not find the idea funny, but the implementation of such a task unfair and unrealistic. It is almost as if the US is playing No-Limit Texas Hold’em and just won a very large pot (race for the COVID vaccine) and decided to drastically raise the blinds for every country. With a very unbalanced global economic recovery, the Biden Administration should be more skeptical that developed nations will agree to set a minimum tax worldwide. Initial comments from other nations might seem constructive, but this has a long way to go before getting finalized.
The US economy is about to run hot, but the situation across the EU and emerging markets is still uncertain. Only the US and UK have announced tax increases and they coincidentally happen to be the two countries who have had a very strong COVID vaccine rollout. A minimum global tax agreement could be targeted at some point in the summer, but it just seems unlikely that a majority of countries who are well below the OECD average will be supportive.
Jobless Claims Rise
US stocks were unfazed after jobless claims unexpectedly rose, pouring some cold water over a steady wave of optimism over recent labor-market momentum. Initial claims for unemployment rose 16,000 to 744,00 last week, worse than the consensus estimate of 680,000, and upwardly revised prior reading of 728,000. Jobless claims seem to get less market reaction every week, but this one further cements the Fed’s dovish stance of near-zero interest rates till 2024 and no reason to even think about talking over when to reduce their monthly asset purchases. The Fed wants to see over 8-million jobs come back but the consistent extraordinarily high jobless claims suggests the recent hiring spree will need to go on for years, before policymakers will be content.
Dollar weakness is back, and that trade could see an exceptional amount of fresh longer-term bets. It seems it was just yesterday when Goldman Sachs abandoned their short call on the dollar. Goldman was counting on US growth and rising bond yields to keep the greenback supported over the short-term. The path higher for yields is higher, but Wall Street might see a consolidation over the next month or so with Treasuries and that could open the door for dollar weakness.
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