The flip side
As recovery takes hold in the US, fiscal stimulus is becoming a more contentious issue. This is not all together surprising. When disaster looms, politicians have a strong incentive to work collaboratively to hasten aid but when the immediacy of the danger passes, they seem to revert back to true form. While Senate and House of Representatives have passed the $1.9tn aid package into law, part of the funding mechanism of that spending—including a rise in corporate income tax from 21% to 28%—is under attack. The detractors of further US fiscal spending highlight the improvement in economic readings, which might lead to a spike in inflation and the uncompetitive nature of a materially higher corporate tax rate.
As always, these objections come down to how you interpret the underlying data, or indeed if you bother with data at all. On the inflation front, most central bankers have argued the preponderance of data argues against a meaningful persistent shift in inflation due to stimulus, because of underemployment and timing of spending. The US Labor Force Participation Rate has shifted downward by nearly two percent since the onset of coronavirus, which suggests between 6-7 million Americans have left the work force in the past year. This suggests a good deal of slack left in the labour market and a check to upward wage price pressures. The second part of the inflation question is about when people spend their stimulus cheques, since that explains the size of a given impact on prices. Given the underemployment in a large portion of the US population, those stimulus funds should predominately bolster savings until the employment rate ticks higher, spreading out the increased spending over time.
Corporate tax hikes are meant to address increased public spending after events such as the Global Financial Crisis and coronavirus pandemic, but equally they respond to a four-decade downward trend in worldwide corporate tax rates, which has shifted burden of government funding from shareholders to individuals. In the past several years, the issue of wealth inequality has naturally come to the forefront of public debate. It was only a matter of time before the Regan-era trickle-down policies–that reduced corporate tax burden–were brought back under the microscope once more.
Bottom line: Republican Representative of Pennsylvania Pat Toomey claims that Janet Yellen’s plea to fix a worldwide corporate tax regime is cover for shifting costs to shareholders. The irony is that is he both correct and incorrect because it depends on one’s vantage point. A higher corporate tax rate would indeed allocate more cost to shareholders, but swims against a generational shift of higher burden for individuals. His point on relative rates has merits but the tax rate race to the bottom must become untenable at some stage. The global financial crisis and now coronavirus stimulus have raised the stakes of global finance and make the question of proportional distribution both relevant and timely.
The week ahead
The UK is on track to begin its second phase of re-opening on 12th April, as retail and hospitality try to recover from the turbulent economic conditions of the last year. Pilot tests for large scale events look set to begin as the government attempts to re-introduce crowds at sporting venues and re-open nightclubs in June. Vaccination rates have fallen as expected at the start of this month, however with news that the Moderna vaccine will be rolled out in the third week of April, the slower rate of vaccination may not last as long as expected. This lift in optimism has helped markets, with the FTSE 100 up 1% in early trading today.
- The final Services PMI for March will be released on Wednesday with no change forecast at 56.8.
- The Construction PMI is projected to read 55.0 vs 53.3 last month.
- Halifax House Price Index m/m is scheduled for this Friday and will read 0.3% for March vs -0.1% in February.
- The Bank of England Quarterly Bulletin will take place on Friday at 12:00pm.
As coronavirus cases continue to rise in Europe, the vaccination programme has remained rather sluggish with only around 10% of the European population having received a single dose of the vaccine. This comes as countries such as France and Italy imposed Easter lockdowns to contain a spike in infections, with France locking down for another four weeks. Still, the consensus of a recovery later in the year remains strong, as economists forecast 4.2% GDP growth for the bloc. European stocks have also finally managed to erase pandemic losses as the Stoxx 600 rose to its highest level since February 2020. The index has gained around 9% this year after cratering 40% at the start of the pandemic.
- German final Services PMI is to be released on Wednesday and is set to read 50.8. The French final Services PMI is also due out on the same day forecast at 47.8.
- Eurozone PPI m/m looks likely to fall to 0.6% for February vs 1.4% in January.
- German Industrial Production m/m is forecast at 1.6% for February vs -2.5% in January.
- French Industrial Production also looks set to fall for the month of February to 0.6% vs 3.3% in January.
The US economy has improved yet again as a reported 916,000 jobs were added in March, almost doubling the additions in February. This comes as optimism continues to grow due to the rapid rise in coronavirus vaccination rates. The country is currently vaccinating at a rate of 45 per 100 and has roughly 40% of adults at least partially inoculated. This boost in optimism has weighed on government bonds with the US 10-Year Treasury yield still trading at elevated levels around 1.72%. Markets have begun pricing in a tightening in monetary stimulus later this year as pressure on the Federal Reserve begins to heat up.
- The FOMC Meeting Minutes will take place on Wednesday with Charles Evans and Thomas Barkin due to speak.
- Unemployment claims look forecast to fall to 690K vs 719K the previous week.
- Federal Reserve Chairman Jerome Powell is due to speak on Thursday.
- PPI and Core PPI m/m look likely to read 0.5% and 0.2% respectively for the month of March, unchanged from February.
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