US President Biden will give his first press conference of his Presidency, on Thursday March 25th, at 17:15GMT/13:15EDT. Biden will likely be asked a range of questions covering the border crisis, infrastructure plan, minimum wage and geopolitical tensions (Europe, Russia, China, North Korea). The key focus for traders will be the infrastructure plan, and specifically, what the final cost is likely to be, over what time frame, the strategy the administration will pursue to enact the legislation, and the mix of tax hikes/new debt issuance to fund the plans – many of these questions may be unresolved this week; Biden is due to give more details on his economic agenda next Wednesday.
“BUILD BACK BETTER”:
Biden advisers are putting together measures of up to USD 3trln in new spending over ten years, to be financed via tax hikes for corporations and the wealthy, the NYT reported. Other Reports indicate that the administration will pursue the plan in two phases: the first will be an infrastructure package, which would involve USD 1trln of spending on ‘traditional’ infrastructure, like roads, bridges, rail, ports, EV charging, improving the electric grid and other parts of the power sector. This part of the plan would be funded by lifting the corporate tax rate from the current 21%; Treasury Secretary Yellen in testimony to lawmakers this week said it could be boosted to 28%, although on the campaign trail, Biden had suggested 25%. The second tranche of the plan would focus on ‘human infrastructure,’ and would reportedly be financed by raising individual tax rates. The White House leaned back on the report, however, and suggested that some parts of the article were not a reflection of its thinking. Elsewhere, a minimum wage hike from USD 7.25 to USD 15 was not included in the coronavirus relief package, although Commerce Secretary Raimondo has this week reiterated support for a boost. There was some suggestion that a figure around USD 11/hour may have been more palatable for some moderate Democrats, and as such, there will be focus to see whether Biden would also be willing to compromise.
THE KEY QUESTIONS:
How the administration’s proposals will be financed, over what timeframe, and by what legislative strategy are the key questions for traders; this will help determine the impact of tax hikes and the amount of new issuance required to fund the plan. Initial reports indicate that the infrastructure plan will be financed by corporation tax hikes (from 21% to 25%? Or to 28%?), while the second tranche is expected to be funded via increased individual tax hikes; the White House has said that the President remains committed to his campaign pledge that nobody making under USD 400k per annum will have their taxes increased, but the press secretary intimated that the USD 400k figure was for families, not individuals, meaning that the tax hike could hit those earning USD 200k per annum . Republicans (and some moderate Democrats) are likely to offer stiff resistance to many of the measures being mulled. It is therefore likely that some parts of the proposal may have to be implemented via ‘reconciliation’, which means that a majority in Senate will be sufficient to carry the legislation (with VP Harris casting a tie breaking vote in the event Senators are split 50/50) rather than 60 votes, although certain items are not permitted to pass under this strategy. NOTE: There are risks that Biden’s press conference will not delve too deeply into the details we seek, and as such, many of these questions may remain unresolved this week; indeed, some reports suggest that Biden will give further details on Build Back Better on March 31st.
IMPACT:
With the number of questions around the details of the plans, it is difficult to estimate how much will be financed by new debt issuance, particularly given that the horizon for the spending is over a decade. One risk is that the infrastructure plan might bring forward any corporation tax hike (the key is how these increased tax rates will be phased in). Goldman Sachs has estimated that Biden's tax plans could cut 2022 S&P 500 EPS by about 9%. The bank projects 2022 EPS of USD 197 for the index, based on a tax hike to 25%, which would represent a 3% drag on earnings. "A hike to a rate above 25% or the passage of other proposals like the GILTI tax hike [Global intangible low-taxed income] would represent downside risk to our estimate," the bank said, "alternatively, hikes implemented with a phase-in period could spread the earnings hit across multiple years, but investors would likely price the full impact as soon as it becomes clear."
THE INFRASTRUCTURE TRADE:
The impact that the new spending will have on broader asset classes is also difficult to estimate. JPMorgan has recently been advocating a five-fold strategy to clients while they await more details: (1) Holding reasonable underweights in markets where risk premia are too low for a higher-inflation environment (DM Bonds because curves are too flat if inflation will be +2%, and HG Credit given embedded duration); (2) Holding overweights of those markets that should prove less sensitive to rising rates due to other offsets (Global Equities due to double-digit earnings growth); (3) Favour Equity styles and sectors that are direct beneficiaries of higher rates (Value vs Growth and Cyclicals vs Defensives); (4) Trade tactically the asset class that behaves the least consistently when rates rise (FX); (5) Take exposure to a baseline low-vol increase in inflation and a tail risk of a high-vol increase (overweights in inflation breakevens and Commodities ex-Gold).
OTHER AREAS OF INTEREST:
Given that this is Biden’s first press conference as President, the focus will likely be broad, and will cover themes such as the border crisis, geopolitics, and even gun control. Of these, the latter two have the potential to be relevant. Later Thursday, Biden will participate in a conference call with European leaders (19:45GMT/15:45edt) on US/EU relations, where any commentary relating to possible sanctions on the Nord Stream 2 pipeline in Europe will be in focus. Meanwhile, this call will likely draw some punchy rhetoric regarding China, if the Secretary of State’s remarks at the NATO summit this week are to be used as a proxy; North Korea may also get a mention after reports that the pariah state fired non-ballistic cruise missiles this weekend (which are not a violation of UN Security Council resolutions), which Biden did not consider a provocation, while the run of recent shootings is likely to see the administration take measures on gun control; VP Harris this week made an impassioned plea to lawmakers, urging action before any executive orders, which are not as long-lasting as Congressional legislation.