Democratic social spending bill slowly comes together with generally good news for the stock market
Durable goods orders expected to show some weakness
5-year T-note auctionDemocratic social spending bill slowly comes together with generally good news for the stock market — Democrats continue to struggle to come up with a final agreement on a reconciliation bill. However, the good news for the stock market is already known, i.e., there won’t be a hike in the corporate tax rate. President Biden favored a hike in the corporate tax rate to 28% from the current 21% level. House Democrats lowered that to 26.5%. However, Democratic Arizona Senator Sinema single-handedly forced Democrats to forego a hike in the corporate tax rate altogether.
The U.S. corporate tax rate of 21% will remain relatively low compared with the median of 24% for the G-20 countries. However, the U.S. still has a higher tax rate than countries such as Ireland, Germany, and Canada at 15%, and the UK at 17%. Lower corporate tax rates make countries more competitive in attracting global businesses to their shores, thus boosting their economies.
The stock market has rallied sharply in the past two weeks, with most of that rally attributable to the lack of a corporate tax hike. It previously looked like a corporate tax hike was a done deal, until Senator Sinema expressed her opposition at the 11th hour. Higher corporate tax rates reduced after-tax corporate earnings and, by definition, undercut stock prices, which essentially represent the present value of future earnings.
However, Democrats are now looking for more than $1 trillion of revenue to plug the gap caused by Senator Sinema’s refusal to allow a hike in the corporate tax rate or in the income and capital gains taxes of high-income taxpayers.
In bad news for a handful of targeted companies, Senate Finance Committee Chairman Ron Wyden, along with Senators Warren and King, yesterday released their proposal to require U.S. companies with more than $1 billion in profits to pay a minimum tax of 15%. That proposal is expected to bring in an extra $300-$400 billion over 10 years. The proposal has wide support in the Democratic caucus, and most importantly, the support of Senator Sinema.
The proposal is designed to dovetail with Treasury Secretary Yellen’s global plan for a 15% minimum tax.
Meanwhile, Democrats continue to work on their idea of taxing unrealized capital gains for billionaires. The idea has support among some Democrats but may prove too unwieldy to implement, particularly for private assets that don’t have a well-defined value, like publicly-traded stocks do.
Democrats are trying to present some kind of framework deal before President Biden leaves on Thursday for his trip to Europe for the G20 conference and the UN Climate Summit. However, there are still some major sticking points and a final deal may spill over into next week.
Democratic leaders may be forced to present a stand-alone bill to renew highway funding that expires this Sunday on October 31.
Durable goods orders expected to show some weakness — The consensus for today’s Sep durable goods orders report is -1.0% m/m and +0.4% m/m ex-transportation, which would follow August’s report of +1.8% m/m and +0.3% m/m ex-transportation. Meanwhile, Sep capital goods new orders nondefense ex-aircraft (a proxy for capital spending) is expected to show a moderate increase of +0.4% m/m, down from August’s increase of +0.6% m/m.
Durable goods orders have been very strong this year as the global economy reopens from last year’s shutdowns. Durable goods orders in dollar terms have reached a new record high and are up by +14% from the pre-pandemic level seen in February 2020. On a year-on-year basis, durable goods orders in August were up +18.2% y/y and durable goods orders ex-transportation were up +15.7% y/y.
5-year T-note auction — The Treasury today will sell $61 billion of 5-year T-notes and $28 billion of 2-year floating-rate notes. The Treasury will then conclude this week’s $211 billion T-note package by selling $62 billion of 7-year T-notes on Thursday.
The 5-year T-note yield yesterday closed at 1.17%, which was just modestly below last Friday’s 1-3/4 year high of 1.25%. The 5-year yield has risen sharply by about 35 bp in just the past 1-1/2 months due to accelerated expectations for Fed tightening. The market is now expecting about an 80% chance of two rate hikes by the end of 2022, versus expectations this summer that the Fed would not start raising rates until early 2023.