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Thursday, April 01, 2021
American Jobs Plan Beckons More Uncertainties
ANBOUND

On the 31st of March, U.S. President Joe Biden unveiled a new USD 2.25 trillion American Jobs Plan. As a follow-up to the USD 1.9 trillion stimulus plan implemented recently, Biden's American Jobs Plan aims to invest USD 1.2 trillion in infrastructure, new energy, and digital networks over 8 years, as well as about a trillion in the welfare of the elderly, employment and training. At the same time, the U.S. government will increase the statutory tax rate for domestic companies from 21% to 28% and take measures to prevent profit outflows in order to fund infrastructure expenditures within 15 years. In general, this new plan aims at improving the structure of long-term economic growth in the United States and alleviating the deteriorating problem of unequal distribution of social wealth. The proposal of this plan is undoubtedly targeted towards the recovery of the U.S. economy in the post-pandemic era. For the capital market, it means stronger inflation expectations, which brings about new uncertainties as to the direction of the U.S. economy and capital market.

Although the USD 2.25 trillion plan seems huge, it will be implemented over the course of eight years, which means there will be no observable impact in the near future. According to Goldman Sachs' estimates, the new infrastructure plan will spend an average of about USD 275 billion a year in additional expenditures for the next eight years, accounting for about 1.25% of the U.S. GDP. This scale is not significant compared with the U.S. government's cumulative fiscal expenditure of approximately USD 6 trillion since last year in supporting economic recovery fromthe COVID-19 pandemic. Hence, there will not be any major impact on the liquidity of the dollar in the short-term. Instead, this new plan focuses more on the continuous improvement of the long-term economic structure. According to an analysis by the China International Capital Corporation (CICC), Biden's goal is not only to help infrastructure financing, but more importantly, it aims to resolve the deep-seated contradiction between the rich and the poor in the United States. In Biden's view, the polarization between the rich and the poor, racial conflicts, and social divisions are root problems that the United States most urgently needs to address. Of course, there are still a lot of uncertainties on whether this plan will be able to achieve its goals. Many doubt if this welfare plan is likely to bring about an increase in domestic employment and wages in the United States. While promoting the development of the high-tech industry in the United States, it will further accelerate the outflow of American manufacturing and aggravate the United States' social differentiation. This is an uncertain factor in the long-term changes in the U.S. economy.

This plan of expanding expenditure will undoubtedly further complicate the expansion of the U.S. fiscal deficit and bring about more uncertainties to the future U.S. government debt problem. Regarding the source of funding for the new infrastructure plan, Biden hopes to fund the American Jobs Plan by increasing corporate taxes. He also announced a corporate tax reform plan, proposing to increase the federal corporate income tax rate from the current 21% to 28%, and raise the minimum tax rate for U.S. companies' overseas profits from 10.5% to 21% in order to restrict U.S. companies' from using overseas tax avoidance methods and to encourage them to expand investments in the United States. The Biden administration stated that this tax increase plan will add approximately USD 2 trillion in revenue to the U.S. treasury within 15 years to make up for the expansion of expenditures. However, some analysts believe that this plan will actually still bring about a USD 500 billion fiscal deficit. At the same time, many market institutions estimate that under the opposition of the Republican Party and the corporate world, this tax increase plan may have to make compromise and will be greatly discounted in the future. Therefore, once this plan is really implemented, it would mean that the debt burden of the U.S. government will be further aggravated, which will also have a realistic and long-term impact on the U.S. Treasury bond market, further impeding the independence of the Federal Reserve's monetary policy.

Of course, under the Biden-Harris administration's continuous fiscal stimulus plan, there is very little disagreement regarding the short-term optimistic prospects of economic recovery. Federal Reserve officials have recently repeatedly emphasized that they will push inflation levels back to how it was before the pandemic as soon as possible, so as to reach the policy target of 2%. In such a case, with the enhancement of the fiscal stimulus, the recovery of the U.S. economy will be faster when the pandemic is brought under control. Currently, the yield of U.S. long-term Treasury bonds has risen significantly in the first quarter, which means that the market has gradually adapted to the expectation of rising inflation in the short and medium term. The market's divergence lies in whether the rate of inflation rises moderately in the case of rapid demand growth. Many institutions worry that the rapid rise in demand will cause inflation to far exceed the Fed's policy goals and cause changes in the Fed's policy. The Fed's chair Jerome Powell's previous talk about reducing the scale of QE has exacerbated the concern.

In regards to the global market, due to implementations of fiscal and monetary stimulus, the United States and other major market are on a continuous upward trend since the COVID-19 pandemic struck last year. That being said, this trend has now reached a turning point. Not only has the market's disagreement on the future not been eliminated, but it has instead further intensified. After the announcement of the American Jobs Plan, the U.S. stock market and bond market did not experience any major fluctuations, with only technology stocks recovering significantly due to policy factors. Some market participants believe that stock prices have risen rapidly to digest the potential U.S. infrastructure package, and any signs of difficulty in passing legislation may trigger a sell-off. The uncertain outlook is also becoming more and more obvious in the U.S. Treasury bond market. J.P. Morgan Asset Management said that after the recent bond market volatility, the "proper place" for the U.S. 10-year bond yield should be around 2%. HSBC believes that the U.S. 10-year yield will fall to 1% before the end of the year, and the economic recovery brought about by stimulus measures will be insufficient to bring about a lasting rebound in price pressure. However, judging from the continued rise in the yield of long-term U.S. Treasury bonds, the zero-interest-rate market environment is changing. This scenario may cause the capital market to change from quantitative to qualitative, and the new American Jobs Plan is undoubtedly accelerating this. From this point of view, changes in inflation are currently the biggest risk that the U.S. economy and its capital markets are facing.

Final analysis conclusion:

The American Jobs Plan focuses not only on short-term economic recovery, but also on the improvement of long-term U.S. economic structures. However, this plan brings about more uncertainties. Under the policy stimulus, whether the recovery and growth of the U.S. economy can overcome the side effects brought about by inflation is even more uncertain.

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