Market News Commentary - From The Desk of David Loesch 03.18.2021
Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on March 18th, 2021
- The FED comments were exactly what everyone thought they would be. They continue to hold the course while maintaining a glide path for both rates and asset purchases which it established last year. The FED also does not appear to be close to altering any monetary policy anytime soon, which means that rates should drift back down naturally once these large T auctions are placed. The lack of material changes to the post-meeting interviews indicates that the FED does not view its critical support role through the pandemic as drawing toward a conclusion. Powell said it is not the time to discuss an exit, and it won't be for quite some time.
- Policymakers did indicate they see much faster growth this year in response to the fiscal stimulus but overall, very little change over the next two years as an average. The FED indicated that this will drive unemployment lower but will only have a minimal impact on inflation. This stance seems to be a talking point for many - demand outstripping supply. With the 10T trading at 1.74% today, I feel like this market is soon pushing towards a 2.00%. As rates move this quickly, the equity markets will start to show cracking signs due to higher borrowing costs across the board.
- We have discussed the $300- $350B of funds going to state and local municipalities from the latest stimulus bill. Many states are "balking" at this capital injection due to a restriction on the "loan." The provision allows the Federal Government to claw back money if it finds that the state used the capital to reduce its "state income taxes" instead of using the funds for other items, such as infrastructure. Many states are pushing back on this mandate because they do not need the capital. OH, and OK are the first two states that have asked for a re-write on the mandate; they view the capital injections as a substantial danger to their fiscal budgets.
- Moody's lifted the outlook on US airport debt to stable from negative on the expectation that more travelers will fly amid the declining COVID case counts. S&P is also reviewing this same issue. I suspect that all the "COVID” type trades will be reviewed and upgraded over the next few months.
- President Biden's tax increase package, being called "build back better," will have to rely solely on Democratic votes. Many, including Mitch McConnell, indicate that they do not see the enthusiasm for moving taxes up currently. For a significant portion of Biden's plan, the Democrats would have to employ the same budgetary maneuver, known as reconciliation. They used this technique to pass the $1.9T stimulus package with a simple majority vote. To pass this legislation, Biden will need every House and Senate Democrats on board.
- The President’s plan is the first significant federal tax hike since 1993. This conversation should come as no surprise; it is increasingly evident that tax hikes will be a component of our overall 2021 tax season and, most likely, for another four years. The following are among the proposals currently planned or under consideration: raising the corporate tax to 28% from 21%, paring back tax preferences for so-called pass-through business such as LLC or partnerships, raising the income tax rate on individuals, expanding the estate's tax's reach, and higher cap gains taxes.
David Loesch
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