FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Without much noteworthy economic data this week, market sentiment soured on a leaked Biden administration proposal to raise the maximum tax rate on capital gains of high-income taxpayers.
  • First quarter GDP data and a rate announcement from the Federal Reserve are also on the docket next week. Growth in the first half of this year is coming in faster than we expected, raising the risk of earlier Fed hikes.

Financial News

 

 

Big Events Next Week Drive Markets

Financial News- Biden Proposes Tax Hike on Capital Gains for Millionaires

Without much noteworthy economic data this week, market sentiment took its cue from policy announcements that are expected next week from the Biden administration. Sentiment seemingly soured on the news that the spending under the American Families Plan will be funded by tax hikes on higher income taxpayers. President Biden had outlined his intention to raise taxes on higher incomes in his campaign platform (see details). Particularly relevant for investors is the proposal to tax capital gains at 39.6% (up from 20%) for people with incomes above $1 million, which would be the same rate as the top marginal rate on income under Biden’s proposals (Chart 1). That would match the late 1970s, the highest rate historically, however, Bloomberg estimates this would only affect about 0.3% of the population.

These changes need to be passed by Congress, and so will either require Republican support or budget reconciliation. The latter is more likely, and therefore the support of moderate Dems, like Joe Manchin and Kyrsten Sinema, may mean tax hikes could be watered down before they are passed. The White House is still finalizing the details of its plan. The key spending items will likely include funding for platform promises like: paid family leave, child care, universal pre-K and free community college.
Financial News Consumers to Drive Faster Growth in Q1

There is also some big economic news coming next week: first quarter GDP and a Federal Reserve interest rate announcement. We expect economic growth to accelerate to a 6% annualized pace in Q1, up from 4.3% in Q4 (Chart 2). This acceleration will be largely due to jump up in consumer spending – from 2.3% in Q4 to 10% in Q1. The second wave of Covid-19 infections and associated restrictions had held back spending at the end of 2020, but fiscal stimulus that has come in two waves over the course of Q1 has boosted spending. Recall eligible Americans received $600 payments back in January, and a further $1400 in late March. We have seen in retail sales and high-frequency data that consumers haven’t hesitated to spend these windfalls.

Personal income and spending details for March will also be released on Friday, which will tell us a lot about momentum heading into Q2. We expect it to be healthy. Overall, growth in the first half of the year is tracking better than we expected in March, and on its own is enough to raise 2021 real GDP growth forecast from 5.7% to 6.2%.

This upgrade to economic growth raises the risk the Fed will hike rates sooner than we expected in March. So we will be listening very closely to how Chair Powell talks about the outlook on Wednesday. This is not a meeting with a summary of economic projections but shifts in messaging will be closely parsed. We will be publishing Dollars and Sense next week – so stay tuned for our updated view on the Federal Reserve.

Leslie Preston, Senior Economist | 416-983-7053

 

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