All market chatter is about Biden’s taxes & their impact on shares and cryptos. But let’s discuss that ECB decision first– The economic outlook is improving in Europe, yet you wouldn’t know it from Lagarde’s Thursday comments after the ECB decision. The yen was the top performer while the kiwi lagged. Biden’s tax proposal is discussed below. The Markit surveys are up next. Below are the messages on upcoming EURUSD descent issued to the WhatsApp Broadcast Group 30 mins ahead of the ECB announcement. The volatility & subsequent selloff followed as foretold.
Expectations were for the ECB to leave PEPP purchases unchanged and that’s exactly what they did. However there were some who thought the could pre-announce a return to a slower pace in June but that didn’t happen and leaks from deliberations showed it wasn’t even discussed.
What was more of a surprise was how somber Lagarde remained. Eurozone economic data has improved considerably since the start of the year and consistently beaten estimates. That was seen again Thursday with consumer confidence rising to -8.1 from -10.8.
Lagarde forecast that growth would ‘firm’ later in the year and said business investment had been good but there was nothing like the show of confidence we saw from the BOC. In offering a hint at why, Lagarde pointed to a lower level of fiscal support.
The euro sagged after the press conference and briefly broke below 1.20. Much of the decline was on risk aversion in large part due to risk aversion on a pending Biden proposal to raise capital gains taxes. That was something he campaigned on but it evidently took the market by surprise Thursday.
Biden’s Tax Proposal
The preliminary tax announcement consists of raising the top income tax rate from 37% to 39.6% and levying income and capital gains tax rates for earners of more than $1mn. Combining these hikes with the those from Obama’s health care reform, the cumulative capital gains tax rates on the wealthisest bracket would surpass 43%. Markets sold off on the announcement, but it is not unconceivable for markets to push back up to new highs, before a fresh wave of selling hits ahead of the new legislation.
The day ahead features most of the global manufacturing and services PMIs from Markit. The increases in these metrics in the past 2-3 months have been swift but what’s particularly stark is the jump in pricing. Every comment in the KC Fed on Thursday was a nod to supply chain disruptions, soaring commodity costs and labour shortages. “It is very difficult to handle the increased business with supply chain issues across all materials and finding anyone who wants to work,” was one. “Entry level pay will need to be increased. This will create pressure on all other positions,” was another.
