Big Picture
Canada unveiled its budget
The headline for Canada this week was the federal budget proposal.
The government is projecting the deficit to come in at $354 billion this year, 16.1 per cent of GDP, and it is projecting the deficit to fall to $30 billion or 1.1 per cent of GDP, by 2025-2026.
A significant driver of this projection is an optimistic path for nominal GDP growth, adding downside risks to the projections. The spending measures announced for the near-term were consistent with that outlined in last year’s Fall Fiscal Update and should approximate the top end of the $70-$100 billion guidance range provided.
On the economic front, Canadian inflation rose to its highest level in more than a year in March, with year-over-year price gains accelerating to 2.2 per cent last month, up from 1.1 per cent in February and roughly in-line with the consensus forecast of 2.3 per cent. Lastly, the BoC announced that it will continue to hold it policy rate unchanged, as widely expected. The BoC also updated its Monetary Policy Report that made significant revisions to the outlook for growth and inflation. The most important announcement of the day was that the BoC will indeed reduce the pace of its weekly asset purchase by $1 billion to $3 billion, effective April 26th on the back of the economic recovery in Canada.
South of the border, U.S. weekly jobless claims unexpectedly fell last week, reaching a new pandemic low as lockdown restrictions eased, with the increasing uptake of the vaccine. Initial applications in regular state programs fell by 39,000 to 547,000 in the week ending April 17, after last week’s figure was upwardly revised to 586,000. The labour market needs to add approximately 8.4 million jobs to recover fully, while nearly 13 million Americans are claiming benefits in the pandemic-era programs.
Looking to Congress, it is preparing to proceed with a bipartisan legislation to increase competitiveness with China by strengthening the domestic manufacturing industry and investing in technology. Senate Majority Leader Chuck Schumer and Republican Senator Todd Young announced the Endless Frontier Act, which would authorize US$100 billion to invest in research and development in technology, computing, artificial intelligence and other areas. The Senate is looking to combine this initiative with the legislation from other committees dealing with U.S. and China competitiveness and vote on it next month.
The top international headline was that the European Central Bank (ECB) left its crisis-fighting tools unchanged, asserting that its current stimulus settings are powerful enough to put the economy on track for a rebound later this year. The Governing Council kept the size of its pandemic-bond buying program at €1.85 trillion, confirming that purchases will run at an elevated pace in the current quarter.
U.S. and Canadian markets lose ground this week
For the four days covered in this report, the Dow lost 385 pts. to close at 33,816, the S&P 500 declined 50 pts. to end at 4,135 and the Nasdaq fell 234 pts. to finish at 143,818. In Canada, the TSX ended the period down 319 pts. to close Thursday’s session at 19,032.
Strategy
President Biden proposes equalizing the tax rates for wage and capital gains income for high earners
U.S. President Joe Biden announced yesterday that he intends to end the preferential U.S. tax treatment of investment income that has benefited the nation’s wealthy as he seeks to fund a sweeping new social-spending program.
For those earning US$1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4 per cent. The new marginal 39.6 per cent rate would be an increase from the current base rate of 20 per cent. Firm details of the plan are not yet known, but the President is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming American Families Plan.
The announcement came during mid-afternoon trading resulting in the market selling off into the close. The S&P 500 Index closed down 0.9 per cent on the day, having been in the green prior to the announcement and the yield on the ten-year Treasury note fell to 1.54 per cent from an intraday high of 1.59 per cent. The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labour.
Indeed, Mr. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it is unfair that many of them pay lower rates than middle-class workers. Other measures that the administration has discussed in recent weeks include enhancing the estate tax for the wealthy. The President has already warned that those earning over US$400,000 can expect to pay more in taxes, and rolled out plans for corporate tax hikes, which would go to fund the US$2.25 trillion infrastructure-focused American Jobs Plan.
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