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Futures Soar On Stimulus Hopes, Fed Bond Buying, Ignore Geopolitical Clashes

Futures Soar On Stimulus Hopes, Fed Bond Buying, Ignore Geopolitical Clashes

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Futures Soar On Stimulus Hopes, Fed Bond Buying, Ignore Geopolitical Clashes Tyler Durden Tue, 06/16/2020 - 08:11

After Monday's dramatic intraday reversal which saw the S&P500 surge more than 100 points from session lows and closing above its 200-day moving average, ES futures continued their levitation overnight and were trading at 3,110 last, propelled both by Monday's Fed announcement it would start to buy corporate bonds on Tuesday, and a late Bloomberg report that Trump was seeking a $1 trillion infrastructure proposal to stimulate the economy which would focus on 5G and rural broadband, although reports added it would still under discussion and would need the backing of Congress.

As Bloomberg notes, government stimulus has been a key feature of the global equities rally, despite soaring unemployment and signs that a second wave of the virus has started to emerge. Now there are signals that more economic support is on the way. "The size and the pace of Fed balance sheet expansion is something that will put a floor under global equity markets,” Stephen Gallo, BMO Capital Markets head of European FX strategy, said on Bloomberg TV.

At the same time, investors mostly ignored news of a sharp escalation in Korean tensions, as well as a deadly clash between Indian and Chinese border troops, while expecting a record rebound in May retail sales. Investors will be keeping a close watch on a live telecast of Fed Chair Jerome Powell’s two-day testimony before the Congress which is expected to begin at 10 a.m. ET. Powell’s remarks follow the grim outlook from the U.S. central bank last week that brought back volatility into stock markets after bets of a swift economic rebound helped the Nasdaq confirm a bull market.

As a result of more stimulus hopes, S&P futures rose 1.2% overnight, lifting the S&P 500 index to 9% below its record high hit four months earlier after coming within 5% of that level early last week. U.S. stocks ended a volatile session higher on Monday with the S&P 500 closing above its 200-day moving average, a key technical indicator of long-term momentum.

Travel-related stocks, also known as the "Robinhood darlings", jumped with Delta Air Lines, United Airlines, Carnival Corp, Norwegian Cruise Lines and Royal Caribbean jumping between 8% and 10% in premarket trading.

In Europe, the Stoxx 600 Index rallied the most in a month lef by construction stocks following a Bloomberg report that the Trump administration is weighing a $1t infrastructure program as part of plans to boost the economy. Stoxx 600 Construction & Materials index gains as much as 4.2%, the most since May 18, led by gains for CRH, HeidelbergCement and LafargeHolcim
Ashtead jumps as much as 19%, touching a record high, boosted by the U.S. plans and 4Q results that Jefferies said were slightly ahead of guidance. Ground engineering specialist Keller up as much as 15% after update.

Asian stocks gained, led by materials and industrials, after falling in the last session. All markets in the region were up, with South Korea's Kospi Index gaining 5.3% and Japan's Topix Index rising 4.1%. The Topix gained 4.1%, with TEMONA and Furukawa Battery rising the most. The Shanghai Composite Index rose 1.4%, with Nanjing Iron & Steel and Shanghai Yimin Commerce Group posting the biggest advances.

In geopolitical news, there was a sharp escalation out of North Korea which said it was mulling plan to enter demilitarized zones and its army is preparing to implement government orders. Subsequently, North Korea demolished the inter-Korean joint liaison office. South Korea's Blue House said Seoul will "strongly respond" if North Korea further worsens the situation, with traders now looking at a US response.

Separately, an Indian Army Colonel and 2 Army soldiers were killed in action during a clash with Chinese troops at one of the standoff points in the Galwan Valley, Ladakh, India Today Senior Editor Aroor; after reports of fresh tensions at standoff points in Easter Ladakh at Pangong Tso/Galwan, according to The Hindu's Peri. Some reports note that Indian soldiers attacked Chinese soldiers at the border. Thereafter, the Global Times reported that the Chinese Foreign Ministry said that China and India have agreed to resolve bilateral issues through dialogue to ease the border situation and maintain peace and tranquillity in border areas. More recently, the Chinese Global Times editor tweeted “China also suffered casualties in the Galwan Valley in the physical clashes with Indian soldiers, China doesn’t want to have a clash with India, but we don’t fear it”.

In rates, ttreasuries were off the lowest levels of the day although yields remain cheaper by up to 5bp at long end of the curve in a bear-steepening move. Plans for more U.S. stimulus via a $1 trillion infrastructure proposal lifted stocks, weighed on Treasuries as it implied far more issuance to come. Yields cheaper by 0.5bp to 5bp across the curve with front-end out to 7-year sector outperforming, steepening 2s10s by 1.7bp, 5s30s by ~5bp; 30-year yields topped at 1.542%, highest since June 10

In FX, the dollar fell versus most of its Group-of-10 peers following the U.S. infrastructure proposal to revive the virus-hit economy. "Dollar de-basement risks are mounting again and Treasury yields going much higher because of the expected infrastructure spending,” said Mizuho head of strategy Vishnu Varathan. "Markets are anticipating a lot more money flooding into the market with this spending and that the U.S. will have to sell a lot more bonds." The pound led G-10 gains after talks between U.K. Prime Minister Boris Johnson and the EU’s top officials. Bunds slipped while Italian bonds led outperformance by euro peripheral debt.

Elsewhere, WTI climbed toward $38 a barrel in New York, with Brent trading at $40.58 last amid signs of improving demand and declining production.

Looking at the day ahead, there are a number of data highlights from the US, including May’s retail sales, industrial production and capacity utilization, and finally June’s NAHB housing market index. Elsewhere, Fed Chair Powell will be speaking before the Senate Banking Committee, while we’ll also hear from Fed Vice Chair Clarida, the ECB’s Visco and Bank of Canada Governor Macklem. Oracle is reporting earnings.

Market Snapshot

  • S&P 500 futures up 1.2% to 3,102.50
  • STOXX Europe 600 up 2% to 360.21
  • MXAP up 3.2% to 158.26
  • MXAPJ up 2.6% to 507.74
  • Nikkei up 4.9% to 22,582.21
  • Topix up 4.1% to 1,593.45
  • Hang Seng Index up 2.4% to 24,344.09
  • Shanghai Composite up 1.4% to 2,931.75
  • Sensex up 0.6% to 33,412.76
  • Australia S&P/ASX 200 up 3.9% to 5,942.30
  • Kospi up 5.3% to 2,138.05
  • German 10Y yield rose 1.7 bps to -0.429%
  • Euro up 0.09% to $1.1333
  • Brent Futures up 1.6% to $40.36/bbl
  • Italian 10Y yield rose 1.2 bps to 1.33%
  • Spanish 10Y yield fell 3.2 bps to 0.529%
  • Brent futures up 2% to $40.50/bbl
  • Gold spot up 0.2% to $1,729.35
  • U.S. Dollar Index down 0.1% to 96.60

Top Overnight News

  • The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds
  • Stocks rose globally alongside U.S. equity futures after news about American monetary and fiscal stimulus plans bucked up investor sentiment in face of worries over a second virus wave
  • The U.K. and European Union moved a step closer to reaching a deal over their future relationship, with the bloc’s top officials confident Boris Johnson is willing to compromise and the prime minister saying the prospects for an accord are “very good”
  • U.K. jobless claims more than doubled to almost 3 million during the virus lockdown, adding urgency to Bank of England and government efforts to cushion the blow
  • The Bank of Japan increased its lending support aimed at struggling companies while leaving its main monetary policy settings untouched as it continues to monitor the economic fallout from the coronavirus pandemic
  • Japanese fund managers sold the most U.S. agency bonds in six years in April after buying an unprecedented amount the previous month, according to data from the Treasury Department

Asia-Pac bourses notched considerable gains as the region took impetus from Wall Street's recovery after the pace of infections slowed in key US states and the Fed announced its Secondary Market Corporate Credit Facility will begin purchasing corporate bonds. ASX 200 (+3.9%) and Nikkei 225 (+4.9%) surged from the open with energy and tech leading the firms gains in Australia and Viva Energy the biggest gaining stock following its guidance, while stocks in Tokyo also rallied as they coat-tailed on the recent favourable currency moves and with focus on the BoJ announcement in which the central bank kept policy settings unchanged as expected but noted the size of market operations and lending facilities to address the pandemic is likely to increase to around JPY 110tln from the current JPY 75tln. Hang Seng (+2.4%) and Shanghai Comp. (+1.4%) were also positive amid some moderation in the US-China related headlines with the US to permit Chinese carriers to continue to operate 4 flights from China per week and with the US to also allow companies to work with Huawei to develop 5G standards despite its blacklisting, although gains for the mainland were relatively reserved compared to its peers after the PBoC’s net liquidity drain. Finally, 10yr JGBs were lower in which they briefly fell below the 152.00 level amid spill over selling from USTs and as stock markets surged, while the losses in bonds also followed the BoJ decision to maintain its monetary policy settings as expected.

Top Asia News

  • Rupee Declines With Stocks on India-China Border Face-Off

European equities drift lower as trade is underway, but the region remains in firm positive territory [Euro Stoxx 50 +2.4%] despite the slew of geopolitical developments in early EU hours including further souring in inter-Korean relations alongside clashes between nuclear powers India and China. Some participants point yesterday’s recovery to the recent Fed decision to directly purchase corporate bonds, but scepticism remains regarding the stock market “shrugging off” stacking negative fundamentals and rising uncertainty – with the latest BofA June Fund Manager survey also noting that a record 98% of investors say the stock market is the most overvalued since 1998. Nonetheless, broad-based gains are seen across Europe of some 2%, whilst sectors also point to risk appetite in the market as cyclicals outpace defensives. In sectoral breakdown mimics the “risk-on” sentiment as Material, Banks and Travel & Leisure stand as the top performers, whilst Health, Retail and Media lag. In terms of individual movers, the strong performance in the Travel sector sees Carnival (+8.8%), easyJet (+7.3%), IAG (+7.7%) and Tui (+6.7%)  leading the gains – with the latter also noting that the easing of travel restrictions allows the group to partially restart its summer 2020 programme. Ashtead (+7.0%) trimmed earlier gains but holds a spot among the leaders following its trading update. Commerzbank (+2.5%) is unfazed by the spat with its second largest shareholder Cerberus, who recently stated the German bank has not executed or embraced any actions put forward by Cerberus.

Top European News

  • U.K. and EU See Brexit Deal a Step Closer After Johnson Call
  • U.K. Jobless Claims Double to Almost 3 Million Amid Lockdown
  • European Construction Stocks Bounce on U.S. Infrastructure Plan

In FX, the DXY is trying to form a base around 96.500 following its late reversal through the 97.000 level on Monday when flagging risk sentiment due to heighted 2nd wave coronavirus fears was given a double boost by the Fed announcing individual corporate bond buying under the SMCCF program and US President Trump’s admin working on a draft proposal for a Usd 1tn infrastructure bill. However, subsequent flare ups on the Korean border, between China and India, Saudi Arabia and the Houthis, Iran and the US, have sapped momentum from riskier assets like stocks and the Dollar has reclaimed some of its losses as a result along with similar rebounds in fellow safe havens. Ahead, US retail sales and ip data before Fed chair Powell’s Senate testimony.

  • GBP - Aside from the broader upturn in risk appetite, Sterling has received an independent boost via latest Brexit news as the Times reports that the EU may be ready to back down on fishing rights rather than somewhat inconclusive UK labour and earnings data. Indeed, Cable is holding relatively firmly above 1.2600 and Eur/Gbp is back down below 0.9000, albeit the former off best levels close to 1.2690 and the 200 DMA (1.2692) and the latter rebounding from a dip under 0.8950.
  • EUR/AUD/CHF/CAD - All moderately firmer against the Greenback, with the Euro reclaiming 1.1300+ status and eclipsing a couple of HMAs (100 and 200) on the way up to around 1.1350, and maintaining gains after an encouraging ZEW survey, while the Aussie has retained a grip on the 0.6900 handle in wake of RBA minutes reaffirming an on hold stance with a bias to do more if needed. Elsewhere, the Franc remains above 0.9500, but flattish vs the Euro either side of 1.0750 following a modest Swiss Government GDP forecast upgrade, though still predicting a deep 2020 contraction and the trough in Q2, while the Loonie is meandering between 1.3510-1.3600 parameters amidst consolidation in oil prices off recent lows as the IEA raises its global demand estimate by nearly 500k bpd for this year.
  • JPY/NZD/SEK - Marginal G10 underperformers with the Yen pivoting 107.50 vs the Buck after the BoJ left key policy metrics unchanged as expected, but increased COVID-19 lending by Jpy 35 tln, the Kiwi relinquishing 0.6500 ahead of NZ Q1 current account balances and the Swedish Crown ruffled by the Swedish Labour Board lifting its 2020 jobless forecast appreciably and the Riksbank reporting a deterioration in bond market functioning to leave Eur/Sek elevated above 10.5000.
  • EM - No surprise to see pressure on the Krw beyond 1210 vs the Usd in light of North Korea destroying the Inter-Korean joint liaison office, according to South Korea’s Ministry of Unification, but regional currencies in general are jittery, bar the Zar and Mxn that have reversed some of Monday’s declines to revisit resistance ahead of psychological/round number levels at 17.0000 and 22.0000 respectively.
  • RBA Minutes from June 2nd Meeting affirmed the target for 3yr yields would be maintained and the central bank will also not increase the cash rate until progress was made on its employment and inflation targets. The minutes stated that members recognized the global economy was in a severe downturn and that the Australian economy was experiencing its largest contraction since the 1930s, while it is prepared to scale up bond purchases if needed but also noted it had only purchased government bonds only on one occasion since the prior meeting. Furthermore, members noted yields on bonds with 1-2 years to maturity had risen to be a few basis points higher than the yields on 3-year bonds and if this should continue, they would consider purchasing bonds in the secondary market to ensure that these short-term yields are consistent with the target for three-year yields. (Newswires)

In commodities, WTI and Brent front month futures continue to grind higher since the European cash open as participants digest a string of geopolitical headlines alongside the IEA monthly oil market report. Firstly, tensions ramped up in the Korean Peninsula after North Korea destroyed the inter-Korean liaison office, as well as a standoff between nuclear powers India and China in which a number of soldiers lost their lives in the clash – which China blames India for instigating. Meanwhile, the IEA raised its 2020 global oil demand growth forecast by 500k BPD amid demand from China and India. 2021 oil demand is forecast to rise by 5.7mln BPD, which remains below 2019 levels. Furthermore, the agency does not expect demand to return to pre-crisis levels until at least 2022. This is in stark contrast to the EIA STEO report last week which downgraded its respective 2020 global demand forecast by 120k BPD. The two reports, however, synchronise on the view that US crude is set to fall this year: the IEA expects a decline of 900k BPD and the EIA a fall of 670k BPD.  WTI July gains a firmer footing above USD 37/bbl (vs. 36.38/bbl low) whilst its Brent Aug prices extends above USD 40/bbl (vs. 38.95/bbl low). Next up in terms of scheduled events, traders will be eyeing the weekly Private Inventory data for a glimpse at crude stocks over the last week. Further head, the JTC will be convening tomorrow ahead of the JMMC meeting on Thursday. Spot gold meanwhile retains an underlying bid above USD 1730/oz amid the aforementioned developments in the geopolitical sphere ahead of Fed Chair Powell’s testimony, albeit the statement is unlikely to divert much from the FOMC script, but the Q&A section of the event will garner attention. Copper prices meanwhile track stocks higher but found resistance at USD 2.625/lb as the red metal remains within Friday’s range.

US Event Calendar

  • 8:30am: Retail Sales Advance MoM, est. 8.35%, prior -16.4%
  • 8:30am: Retail Sales Ex Auto MoM, est. 5.5%, prior -17.2%
  • 8:30am: Retail Sales Control Group, est. 5.2%, prior -15.3%
  • 9:15am: Industrial Production MoM, est. 3.0%, prior -11.2%; Manufacturing (SIC) Production, est. 5.0%, prior -13.7%
  • 10am: Business Inventories, est. -1.0%, prior -0.2%
  • 10am: NAHB Housing Market Index, est. 45, prior 37

DB's Jim Reid concludes the overnight wrap

Sorry to go back to last week’s meanderings, but Chill Acoustic - the radio station I’ve very happily listened to while working from home for the last three months - is still stuck on the same track it was 6 days ago. This has ruined my flow and is starting to hit my productivity as I have to keep going back to check if it’s been fixed. So if anyone knows how on earth I can get them to fix this I’m all ears. I’m not sure if anyone actually controls this radio station. It has 19 twitter followers, hasn’t posted a tweet or a Facebook post for a couple of years and has a seemingly unmanned email address. I suspect I was the only global listener for most of the last three months. It was great while it lasted.

Unlike “Chill Acoustic”, the mood music for markets at the end of yesterday was very different to that at the start. Indeed, a day that started with fears of a second wave ended with waves of liquidity completely reversing the session from the London open. At roughly 7am London time, S&P futures were down -3.29% from Friday’s close but rallied around +4.7% from these lows as the day progressed. The actual S&P 500 closed +0.83% with tech outperforming (NASDAQ +1.43%). The market was slowly recovering from the lows prior to the US open but in the second half of the session a pair of headlines saw the index push higher into the close. First was a report that the US may allow domestic companies to work with China’s Huawei to develop new 5G standards, which could be seen as ameliorating some of the recent tension. The S&P rose around 0.6% on this, but then the real move came in the early afternoon when headlines flashed through that the Federal Reserve would start purchasing a broad portfolio of US corporate bonds. The index rose over 1.3% on that news even if it was hard to find something new in that announcement. Overall it was a remarkable turnaround, given where futures had been earlier in the day. News overnight suggesting that the White House is considering $1tn in infrastructure spending has propelled futures further too (more on that shortly).

As another way to look at the switch in sentiment, at around noon (NY time), 80% of S&P 500 stocks were down on the day, and all sectors except Consumer Staples were in the red, however by the end of the day 77.6% of the index was higher and every sector was up. Furthermore, when S&P futures hit their overnight low, the VIX volatility index hit its highest intraday level (44.37) since April 22, before actually closing down -1.7pts at 34.4pts. While in Europe the STOXX 600 also recovered from its opening lows to close down only -0.27%, but the index missed the real late surge in risk.

Asian markets have made strong headway this morning also. The Nikkei (+3.93%), Hang Seng (+2.95%), Kospi (+4.34%) and Asx (+3.64%) have all posted big gains, while the Shanghai Comp has advanced a more modest +0.87%. As mentioned above, news that the White House is considering a $1tn infrastructure proposal has seemingly also given risk assets a boost. The prospect of further stimulus was already known however the size and timing was more up in the air. According to a Bloomberg story, the preliminary version of the proposal would see funding reserved for traditional infrastructure work like roads and bridges as well as 5G wireless infrastructure and rural broadband. The current infrastructure funding law is due for renewal by the end of September and the House Democrats have already proposed their own $500bn proposal over five years. For now there is no detail on how long the administration’s draft would authorize spending. Nevertheless, long-end Treasuries are up 6bps post the news, while the short-end is little changed.

In other news, the BoJ left rates and asset purchases unchanged this morning while revising up the estimated size of its virus-response measures and pledged to do more to help the economy if needed. The central bank now estimates the size of its overall package of virus measures at JPY 110tn ($1tn), up from JPY 75tn as the government had expanded its aid for businesses in measures linked to one of the BoJ’s lending programs. Elsewhere, North Korea’s state media is reporting that the regime is reviewing a plan to send its army into some areas of the demilitarized zone separating the country from South Korea.

Moving on. As mentioned above, a big part of the late day rally yesterday was the expected news that the Fed was about to start buying corporate debt. This should not be seen as new as this was already lined up as part of the Secondary Market Corporate Credit Facility (SMCCF). Up to this point the central bank has been just purchasing ETFs, but they are now making it official that they'll start buying individual securities this week. What was new information, is that the Fed will be essentially creating its own index against which it will manage its SMCCF bond portfolio. To remind readers the criteria of the bonds that are purchasable remain the same – less than 5yrs to maturity, a US company, IG rated or a fallen angel as of March 22 or later.

The other main story bubbling in the background are the rise in cases across various US states. Cases in the US are slowing overall, but the hot spots we have highlighted in recent days continue to remain the main focus – namely Florida, Texas, Arizona and California. Florida cases were up 2.3% yesterday, compared with a 7-day average of 2.4%, while Texan cases rose 1.9% for the second day in a row. Texas also set a record with most daily hospitalizations for a fourth day in a row with over 2300 people admitted. The governor of California came out yesterday to say that the rate of positive tests continues to fall, and that they would continue to stay ahead of new problem areas. See the full run down in the full report today where we show the usual case and fatality tables including the four current in-focus US states. Elsewhere, India continues to see case growth at just under 4% per day, even as the country gets ready to reopen. India and South America remain the big risks outside the US while China reported 40 new cases on Monday and locked down more residential compounds around the area close to a market where a case had been found.

Back to markets yesterday and sovereign bond yields tracked equity prices yesterday, recovering from overnight lows throughout both the European and US sessions. By the close, yields on 10yr US Treasuries had risen +1.8bps and bunds finished down -0.7bps.There was a slight narrowing in peripheral spreads in Europe, with yields on 10yr Spanish (-2.6bps), Portuguese (-1.8bps) and Greek (-5.7bps) debt all falling over bunds. BTPs were the exception though, with 10yr yields up +1.8bps.

Onto Brexit, and there were a few headlines following the high-level meeting that took place yesterday between UK Prime Minister Johnson and the Presidents of the European Commission, Council and Parliament. Most notably, Prime Minister Johnson said afterwards to Sky News that “What we all really said today is the faster we can do this the better, we see no reason why you shouldn’t get that done in July”, and that “I don’t want to see it going on until the autumn, winter, as perhaps in Brussels they would like.” So a clear aim to conclude matters in the next few weeks, during which intensified negotiations are due to take place, with talks each week between the two sides from the week commencing 29 June to the week commencing 27 July. The press are generally reporting the fact that Mr Johnson was upbeat and keen to accelerate talks as a positive even if lots of areas of disagreements need to be sorted.

In terms of yesterday’s data, the Empire State manufacturing survey from the US beat expectations, with a -0.2 reading in June for the general business conditions indicator (vs. -29.6 expected). Although much better than expected, it’s worth bearing in mind (as with the PMIs) that this is a diffusion index, so a negative reading still means that slightly more respondents said that conditions had worsened in June compared with the previous month, rather than improved. So we shouldn’t get too carried away by the outperformance relative to expectations. It was a similar story for the new orders component, which rose to -0.6 from -42.4 the previous month.

To the day ahead now, and there are a number of data highlights from the US, including May’s retail sales, industrial production and capacity utilisation. Meanwhile there’s also June’s NAHB housing market index, along with UK unemployment data for April and the ZEW survey for June from Germany. Elsewhere, Fed Chair Powell will be speaking before the Senate Banking Committee, while we’ll also hear from Fed Vice Chair Clarida, the ECB’s Visco and Bank of Canada Governor Macklem.

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Stocks for a recession: which companies have historically done well during recessions or are likely to this time?

Last week the Bank of England forecast a recession starting this autumn that it now expects to be deeper and longer than previously assumed. It also expects…

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Last week the Bank of England forecast a recession starting this autumn that it now expects to be deeper and longer than previously assumed. It also expects inflation to hit 13% by the end of the year just months after reassuring that it didn’t expect more than modestly high figures.

Having belatedly acknowledged the extent of the inflation problem, admittedly exacerbated by the impact on energy and food prices the war in Ukraine has had, the UK’s central bank’s nine-member Monetary Policy Committee voted to raise interest rates. Thursday’s 0.5 percentage points rise, which took the BoE’s base rate to 1.75%, was the biggest single increase in 27 years.

The European Central Bank and USA’s Federal Reserve have also taken aggressive measures on rates, with the former also raising rates by 0.5% to 0%. It was the ECB’s first rates rise in 11 years. The Fed went even further, raising rates for the fourth and largest time this year with a 0.75 percentage points hike to between 2.25% and 2.5%.

Aggressive interest rate hikes alongside high levels of inflation tend to result in recession with the combination referred to as stagflation. With inflation expected to remain high next year and not dropping back towards the target 2% before 2023, we could be in for an extended period of recession.

Why stock markets fall during a recession but not all stocks do

Stock markets historically do badly during recessions for the simple reason they are a proxy for the economy and economic activity. When economic activity drops, people and companies have less money or are worried about having less money, so they spend less and companies earn less. Investors also become less optimistic about their prospects and valuations drop.

But the kind of drop in economic activity that leads to recessions is not evenly distributed across all areas of an economy. When consumers cut back on spending, they typically choose to sacrifice some things and not others, rather than applying an even haircut across all costs. And there are goods and services that people spend more on rather than less when tightening their belts.

So while the net impact of a recession has always historically been the London Stock Exchange and other major international stock markets losing market capitalisation, or value, that doesn’t mean all the stocks that constitute them go down. Some go down by more than others. And some stocks grow in value because the companies sell the categories of goods and services people spend more on when they are either poorer or worried about becoming poorer.

Should we be investing “for” a recession?

This surely means all investors need to do to mitigate against a recession is to sell out of the stocks that do badly during an economic slump and buy into those that do well? In theory, yes. In practice, doing that successfully would mean being sure a recession will take place some time before it becomes a reality and timing its onset, then the subsequent recovery, well.

That is of course far easier said than done which is why even professional fund managers don’t attempt the kind of comprehensive portfolio flip that would involve. Some investors will make big bets on events like the onset of a recession or inflation spiralling out of control.

They are the kind of bets that make for dramatic wins like those portrayed in the Hollywood film The Big Crash, which tells the story of a group of traders who predicted and bet big on the 2007 subprime mortgage implosion that triggered the international financial crisis. But as the film relies on for its dramatic tension, the big winners of The Big Crash very nearly got their timing wrong. Another few days and they would have been forced to close their positions just before market conditions turned in their favour and lost everything.

The reality is the big, risky bets that result in spectacular investment wins when they come off are usually far more likely to go wrong than right. Which is why regular investors, rather than high risk traders using leverage, shouldn’t take them. At least not with their main investment portfolio if they don’t have the luxury of being able to justify setting aside 10% to 20% of capital for highr isk-high reward bets.

If you have a well-balanced investment portfolio with a long term horizon and you are happy with the overall quality of your investments, you may choose to do nothing at all to mitigate against the recession that is almost certainly coming. If you have ten years or more until you expect to start drawing down an income from your portfolio, your investments should have plenty of time to recover from this period.

But if you do want to rebalance because you feel your portfolio is generally too heavily weighted towards the kind of growth stocks particularly vulnerable to inflation, higher interest rates and recession, you might want to consider rotating some of your capital into the kind of stocks that might do well in a recession.

How to pick stocks that will do well in a recession?

There are two ways to highlight stocks that might do well in a recession. The first is the most obvious and simplest approach – look at which did well in previous recessions. We had a very brief recession at the start of the Covid-19 pandemic and a much more significant one in 2008/09 in the wake of the international financial crisis. Which companies did well over those periods?

The second approach is to add a layer of complexity into the equation and consider how and why the coming recession might differ from the two most recent historical examples. The 2020 recession was extremely unusual in its brevity. Within a couple of months, stock markets were soaring again as people under quarantine and social distancing restrictions spent more in the digital economy and generally on services and products to enhance their experience being couped up at home.

The 2008/09 recession was also different because it was caused by a systemic failure in the financial sector. Unemployment leapt which is not expected to happen this time around with an especially tight labour market one result of the combination of the pandemic and Brexit. Many households also have higher levels of savings built up during the pandemic which a significant number of analysts believe is softening the impact of inflation.

While there are likely to be constants throughout recessions, there are also differences that should be taken into account. Normally energy companies do badly during a recession as lower economic activity means less energy being used. But energy companies are currently posting record profits because of sky-high energy prices which are one of the major factors behind the expected recession. They should continue to do well while the recession lasts as energy prices dropping again is likely to be one of the catalysts behind the recovery.

The online trading company eToro recently published two baskets of “recession winning stocks” – one made up of Wall Street-listed companies and the other companies listed in the UK. The stocks in each basket were selected because they were the biggest gainers during the last two recessions. Interestingly, they also did well during the intervening period between 2009 and 2020, as well as in the aftermath of the coronavirus crash.

The portfolio of US stocks beat the S&P 500 index of large American businesses by 60 percentage points through the financial crisis between 2007 and 2009 and by 9 percentage points during the Covid crisis in 2020.

The portfolio of UK stocks beat FTSE-100 by 35 percentage points during the financial crisis and by 17 percentage points in the Covid crash. Since 2007, the US portfolio has gained 834%, more than twice the return of the Nasdaq and about five times that of the S&P 500. The UK portfolio’s 129% return is eight times more than the FTSE 100’s, excluding dividends.

eToro says:

“Well represented segments included discount and everyday-low-price retailers as consumers trade down, like Walmart (WMT), Ross Stores (ROST) and Dollar Tree (DLTR).”

“Fast food McDonalds (MCD) is related. Similarly, home DIY, like Home Depot (HD) Lowe’s (LOWE), and auto repair parts stocks Autozone (AZO) and O’Reilly (ORLY). Health care and big biotech is well-represented as inelastic non-discretionary purchases, like Abbott (ABT), Amgen (AMGN), Vertex (VRTX).”

“Also, domestic comforts from toys (Hasbro, HAS) to candy (Hershey, HSY), and getting more from your money and tax (H&R Block, HRB), and educating yourself (2U, TWOU).”

The UK portfolio included the drug makers AstraZeneca and GlaxoSmithKline, which did well because spending money on healthcare and medicines is essential and families don’t tend to cut back even when struggling financially.

The cigarette makers British American Tobacco and Imperial Brands also don’t usually see any downturn in demand because they benefit from a customer base addicted to their products. Both companies pay high and rising dividends. Consumer goods firms such as Unilever and Premier Foods also typically do well because they own strong brands that people bought even after price rises have been passed on.

Proactive Investor also picks out a range of London-listed stocks it expects to do well over the next year or so. In the energy sector that is doing so well at the moment it highlights Harbour Energy as a “core sector stock” and Diversified Energy Company as having “one of the lowest-risk free cash flow profiles in the sector”, while Energean (a client) provides “excellent visibility on multi-decade cash flows”.

Another difference to recent recessions could be how miners do during the one expected from autumn. Normally lower economic activity reduces for demand for commodities but the sector is also facing supply constraints that should see prices supported or rebound quickly.

Copper, mineral sands and diamonds look among the commodities most constrained in terms of supply, with limited supply growth under development. Mining and commodity stocks to look at are suggested as:

“Atalaya Mining (AIM:ATYM, TSX:AYM), Central Asia Metals, Kenmare Resources, Petra Diamonds and Antofagasta, with Tharisa PLC (LSE:THS, JSE:THA) tagged on as platinum group output to be in focus as automotive sales recover.”

“Gold stocks are seen as outperforming the market during the pullback phase, as in March 2020 and in the initial stages of a rebound, with top picks currently Pan African Resources PLC (AIM:PAF, OTCQX:PAFRY, JSE:PAN, OTCQX:PAFRF), Pure Gold Mining Inc (TSX-V:PGM, LSE:PUR, OTC:LRTNF), Wheaton Precious Metals and Yamana Gold (TSX:YRI, LSE:AUY).”

Credit Suisse has also picked out stocks that have historically outperformed during recessions, highlighting:

“London Stock Exchange Group PLC (LSE:LSEG), RELX PLC (LSE:REL), Experian (LSE:EXPN) PLC, Microsoft Corporation (NASDAQ:MSFT) and Visa Inc (NYSE:V).”

Don’t panic

While there is nothing wrong with doing some periodic portfolio rebalancing and potentially rotating more assets into stocks seen as likely to thrive in a recession, don’t panic. Recessions have always come and gone as part of the economic cycle and stock markets traditionally go on to greater heights during the subsequent recovery.

That means the chances are your portfolio will regain its losses and add new gains over the years ahead. Buying cheap growth stocks seen as likely candidates to flourish again during the recovery could be seen as just as sensible a tactic as rotating into recession-proof stocks. But if you do decide to reposition to some extent, look for stocks that have not only historically done well during recessions, or could be expected to during this one ahead, but are also healthy companies you would expect to keep doing well when markets recover. Then your success won’t come down to the fickle fate of whether or not you get your timing right.

The post Stocks for a recession: which companies have historically done well during recessions or are likely to this time? first appeared on Trading and Investment News.

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TDR’s U.S. Stock Market Preview For The Week Of August 8, 2022

A weekly stock market preview and the data that will impact the tape. Sunday Evening Futures Open – Stock Market Preview Weekend News And Developments…

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A weekly stock market preview and the data that will impact the tape.

Sunday Evening Futures Open – Stock Market Preview

Weekend News And Developments

Berkshire Hathaway dramatically slowed new investment in the second quarter after setting a blistering pace at the start of the year, as the US stock market sell-off pushed the insurance-to-railroad conglomerate to a $43.8bn loss.

China’s southern island province of Hainan started mass Covid-19 testing on Sunday, locking down more parts of the province of over 10 million residents, as authorities scramble to contain multiple Omicron-driven outbreaks, including the worst in capital Sanya, often called “China’s Hawaii”.

Cuba: 17 missing, 121 injured as fire rages in oil tank farm in Matanzas City

Equity positioning for both discretionary and systematic investors remains in the 12th percentile of its range since January 2010, according to Deutsche Bank published last week.

Fisker Inc. (NYSE:FSR) unveils a process for qualifying US-based reservation holders of the Fisker Ocean all-electric SUV to retain access to the existing federal tax credit. The current $7,500 tax credit would be unavailable should Congress pass the Inflation Reduction Act of 2022 and President Biden signs the legislation into law.

Former Labour prime minister Gordon Brown has called for an emergency budget before the UK hits a “financial timebomb” this autumn. Mr. Brown said millions would be pushed “over the edge” if the government does not address the cost of living crisis.

Israel said Sunday it killed a senior Islamic Jihad commander in a crowded Gaza refugee camp, the second such targeted attack since launching its high-stakes military offensive against the militant group just before the weekend. The Iran-backed militant group has fired hundreds of rockets at Israel in response, raising the risk of the cross-border fighting turning into a full-fledged war.

NexJ Systems (TSX: NXJ) announced financial results for its second quarter ended June 30, 2022.

Rhine river hit by drought conditions, hampers German cargo shipping. According to reports, transport prices have shot up as drought and hot weather have affected water levels in the river Rhine in Germany leading cargo vessels to reduce loads during transportation.

Taiwan’s defense ministry said it had detected 66 Chinese air force planes and 14 Chinese warships conducting activities in and around the Taiwan Strait on Sunday, Reuters reports. Thursday’s drills involved the live firing of 11 missiles.

Unifor: 1,800 members from across the country arrive in Toronto this weekend before Monday’s start to the union’s 4th Constitutional Convention, where delegates will elect a new National President and vote on key priorities and initiatives. Unifor is Canada’s largest union in the private sector, representing 315,000 workers in every major area of the economy. 

U.S. rate futures have priced in a 69% chance of a 75 bps hike at its September meeting, up from about 41% before the payrolls data. Futures traders have also factored in a fed funds rate of 3.57% by the end of the year.

What The Analysts Are Saying…

Anybody that jumped on the ‘Fed is going to pivot next year and start cutting rates’ is going to have to get off at the next station, because that’s not in the cards. It is clearly a situation where the economy is not screeching or heading into a recession here and now.” — Art Hogan, chief market strategist at B. Riley Financial

“It is not a market bottom, things are not going to go up consistently from here because we are going to be buying low tech products for a while, so everyone has something to make up as COVID demand = pre-COVID​, there are fewer units for this. Reality check – unlike ‘Big Tech’, consumer discretionary related companies are offering more cautious guidance.”Morgan Stanley analyst commentary on a potential market bottom

The fact of the matter is this (Aug. 5 nonfarm payroll report) gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession. It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy”. — Jim Baird, chief investment officer at Plante Moran Financial Advisors

“We are surprised to not see investors start to chase upside calls in fear of underperforming the market. People are just watching.” — Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald

What We’re Watching

Psychedelic Sector Gaining Momentum: What started out as bottoming action after a protracted multi-quarter decline has now morphed into a tangible bullish impulse. We believe Netflix new docuseries How To Change Your Mind has played an important roll in the creation of critical mass awareness for the sector—and a rebound in broad market risk assets hasn’t hurt. At the tip of the spear for this sentiment shift is COMPASS Pathways plc (CMPS), which has risen 62.64% since  the docuseries debuted on July 12. Price on the benchmark Horizons Psychedelic Stock Index ETF has now breached the 20-day MA/EMA.

We are watching to see if investor sentiment shifts into laggard names such as Cybin Inc. and MindMed, which has continued to fall following a proposed 15-1 reverse stock split initiative announced this year. Many Tier-2/3 names still 90%+ off their highs…

Revive Therapeutics (RVV:CSE, RVVTF:OTC): This has been on our radar for the last couple of weeks, and remains on our watch list. The company has already confirmed that their statistician is in possession of 210 unblinded patient data for its Phase 3 clinical trial to evaluate Bucillamine to treat COVID-19. The company is currently attempting to revise endpoint data from a hospitalization/death focus to a symptoms focus. If they are to achieve this, it will mark a material event in the course of the trial.

YTD performance (+33.09%), Revive Therapeutics (RVVTF); Red line = 7day EMA

We believe an endpoint decision, either positive or negative, is imminent and will have cause a material price action event.

Consumer Price Index, August 10: Consumer inflation expectations for July are released by the New York Fed, while the University of Michigan’s preliminary survey of consumers for August is on tap. Taken together, these should give investors a better picture of how consumers are feeling about current economic conditions. 

As of June, it’s running at 9.1% on an annual basis. Investors, economists and consumers will be watching to see if price increases are easing as everything from gasoline to food is elevated.

Given the mixed signals on the overall state of the economy (i.e. indications of recession vs. this week’s strong nonfarm payrolls number), CPI will be in-focus by market participants. Scotiabank expects 8.9% y/y (9.1% prior) and 0.4% m/m for headline CPI; ex-food-and-energy: 6.1% y/y led by a 0.6% m/m gain.

Pot stocks earnings continue, with several Tier-1/Teri-2 names reporting including Curaleaf Holdings, Trulieve Cannabis, Marimed Inc., Cronos Group, TerrAscend Corp. and more. Last Wednesday, Green Thumb Industries allayed fears somewhat that this earnings season would be a write-off, producing solid numbers which beat expectations on several key metrics. An additional strong report or two will go a long way to help improve sentiment for a sector that’s been decimated over the past six quarters.

U.S. Economic Calendar

TIME (ET)REPORTPERIODMEDIAN FORECASTPREVIOUS
Monday, August 8
11:00 AMNY Fed 3-year inflation expectationsJuly3.60%
Tuesday, Aug. 9
6:00 AMNFIB small-business indexJuly89.589.5
8:30 AMProductivityQ2-4.30%-7.30%
8:30 AMUnit labor costsQ29.30%12.60%
Wednesday, August 10
8:30 AMConsumer price indexJuly0.30%1.30%
8:30 AMCore CPIJuly0.60%0.70%
8:30 AMCPI (year-over-year)July-8.70%9.10%
8:30 AMCore CPI (year-over-year)July6.10%5.90%
10:00 AMWholesale inventories (revision)June1.90%1.70%
2:00 PMFederal budget (compared with year earlier)July-$302 billion
Thursday, August 11
8:30 AMInitial jobless claimsAug. 6265,000260,000
8:30 AMContinuing jobless claimsJuly 301.42 million
8:30 AMProducer price indexJuly0.20%1.10%
Friday, Aug. 12
8:30 AMImport price indexJuly-0.80%0.20%
10:00 AMUMich consumer sentiment index (preliminary)Aug.5352
10:00 AMUMich 5-year inflation expectations (preliminary)Aug.2.90%

Meme Of The Week

Key Earnings (US Markets)

DateCompanySymbolEarnings estimate
Monday, August 83D SystemsDDD$0.00 per share
BarrickGOLD$0.22
BioNTechBNTX$7.08
EnergizerENR$0.76
News Corp.NWSA$0.08
NovavaxNVAX$5.18
Palantir TechnologiesPLTR$0.03
Take-Two Interactive SoftwareTTWO$0.86
Tyson FoodsTSN$1.97
UpstartUPST$0.08
Tuesday, Aug. 9Akamai TechnologiesAKAM$1.31
AramarkARMK$0.24
Bausch HealthBHC$0.91
Carlyle GroupCG$1.07
CoindeskCOIN-$2.68
Cronos GroupCRON-$0.07
EbixEBIX$0.58
EmersonEMR$1.29
GlobalFoundriesGFS$0.45
Grocery OutletGO$0.24
H & R BlockHRB$1.24
Hilton Grand VacationsHGV$0.88
Hyatt HotelsH$0.03
IAC/InterActiveCorpIAC-$2.35
iRobotIRBT-$1.55
Maxar TechnologiesMAXR$0.12
Norwegian Cruise LineNCLH-$0.83
Plug PowerPLUG-$0.20
Rackspace TechnologyRXT$0.16
Ralph LaurenRL$1.71
RobloxRBLX-$0.26
Spirit AirlinesSAVE-$0.46
Super Micro ComputerSMCI$2.35
SyscoSYY$1.11
The Trade DeskTTD$0.20
TTEC HoldingsTTEC$0.85
Unity SoftwareU-$0.21
Warner Music GroupWMG$0.20
World Wrestling EntertainmentWWE$0.55
Wynn ResortsWYNN-$0.97
Wednesday, August 10AppLovinAPP$0.50
CoherentCOHR$2.13
CoupangCPNG-$0.10
CyberArk SoftwareCYBR$0.01
Dutch BrosBROS$0.07
Fox Corp.FOXA$0.77
Franco-NevadaFNV$0.98
Jack in the BoxJACK$1.42
Manulife FinancialMFC$0.76
MatterportMTTR-$0.14
Pan Am SilverPAAS$0.14
Red Robin GourmetRRGB-$0.16
SonosSONO$0.21
TraegerCOOK$0.04
Wendy’sWEN$0.22
Wolverine World WideWWW$0.65
Thursday, August 11AerCapAER$1.42
BaiduBIDU$10.92
Brookfield Asset ManagementBAM$0.69
Canada GooseGOOS$2.98
Cardinal HealthCAH$1.18
Dillard’sDDS$2.88
Flower FoodsFLO$0.27
IlluminaILMN$0.64
LegalZoomLZ$0.02
Melco Resorts & EntertainmentMLCO-$0.44
NioNIO-$1.36
PoshmarkPOSH-$0.25
Rivian AutomotiveRIVN-$1.63
Ryan Specialty GroupRYAN$0.35
Six FlagsSIX$1.04
Solo BrandsSOLO$0.28
ToastTOST-$0.12
Utz BrandsUTZ$0.12
Warby ParkerWRBY-$0.02
W&T OffshoreWTI$0.37
Wheaton Precious MetalsWPM$0.32
Friday, Aug. 12Broadridge FinancialBR$2.65
Honest CompanyHNST$-$0.09
Spectrum BrandsSPB$1.42

FDA Calendar

None

Source: CNN Business – TDR’s stock market preview sentiment indicator

Past Week What’s Hot… and What’s Not

Source: TradingView – TDR’ stock market preview what’s hot this past week

Top 12 High Short Interest Stocks

TickerCompanyExchangeShortIntFloatShares O/SIndustry
BBBYBed Bath & Beyond Inc.Nasdaq46.38%61.57M79.96MRetail (Specialty Non-Apparel)
ICPTIntercept Pharmaceuticals IncNasdaq43.76%23.62M29.71MBiotechnology & Medical Research
MSTRMicroStrategy IncNasdaq39.29%9.32M9.33MSoftware & Programming
BYNDBeyond Meat IncNasdaq37.91%56.79M63.54MFood Processing
SWTXSpringWorks Therapeutics IncNasdaq37.51%31.64M49.41MBiotechnology & Medical Research
BIGBig Lots, Inc.NYSE37.37%26.49M28.92MRetailers – Discount Stores
EVGOEvgo IncNasdaq35.65%67.76M69.00MUtilities – Electric
UPSTUpstart Holdings IncNasdaq35.60%72.32M84.77MConsumer Lending
BGFVBig 5 Sporting Goods CorpNasdaq34.65%20.85M22.33MRetailers – Miscellaneous Specialty
SRGSeritage Growth PropertiesNYSE34.38%23.58M43.68MReal Estate Operations
NKLANikola CorporationNasdaq32.77%265.95M421.14MAuto & Truck Manufacturers
BLNKBlink Charging CoNasdaq32.54%33.98M50.20MUtilities – Electric

Tags: stock market preview, stock market preview August 8, 2022.

The post TDR’s U.S. Stock Market Preview For The Week Of August 8, 2022 appeared first on The Dales Report.

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Senate Passes $740 Billion Tax, Climate Package — Will Go To House Next

Senate Passes $740 Billion Tax, Climate Package — Will Go To House Next

Update (1532ET): After much wrangling, the Democrats finally passed…

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Senate Passes $740 Billion Tax, Climate Package -- Will Go To House Next

Update (1532ET): After much wrangling, the Democrats finally passed their sweeping economic package through the Senate on Sunday.

The estimated $740 billion "Inflation Reduction Act" - far less ambitious than their original $3.5 trillion vision - next heads to the House, where its passage is a foregone conclusion. According to Axios, a vote could come as early as Friday before it heads to President Biden's desk.

The package includes provisions to address climate change, pharmaceutical costs, and a supercharged IRS.

"It’s been a long, tough and winding road, but at last, at last we have arrived," said Senate Majority Leader Chuck Schumer (D-NY). "The Senate is making history. I am confident the Inflation Reduction Act will endure as one of the defining legislative measures of the 21st century."

As the Washington Post notes, "Senators engaged in a round-the-clock marathon of voting that began Saturday and stretched late into Sunday afternoon. Democrats swatted down some three dozen Republican amendments designed to torpedo the legislation. Confronting unanimous GOP opposition, Democratic unity in the 50-50 chamber held, keeping the party on track for a morale-boosting victory three months from elections when congressional control is at stake."

And as Axios reports,

The Senate returned to the Capitol Saturday afternoon, and began voting late Saturday night and into Sunday on a series of amendments — part of the process known as "vote-a-rama."

  • Senate Republicans offered dozens of amendments aimed at minimizing the bill, including stripping out funding for the Internal Revenue Service and eliminating COVID-19-related school mandates.
  • Democrats held firm in their unity, with the help of Harris, of preserving the core elements of the package and voting down each GOP amendment.

.  .  .

The bill includes:

  • $370 billion for climate change - the largest investment in clean energy and emissions cuts the Senate has ever passed.
  • Allows the federal health secretary to negotiate the prices of certain expensive drugs for Medicare.
  • Three-year extension on healthcare subsidies in the Affordable Care Act.
  • 15% minimum tax on corporations making $1 billion or more in income. The provision offers more than $300 billion in revenue.
  • IRS tax enforcement.
  • 1% excise tax on stock buybacks.

Drilling down on the climate portion - Axios' Andrew Freedman writes:

  • This includes tax incentives to manufacture and purchase electric vehicles, generate more wind and solar electricity and support fledgling technology such as direct air capture and hydrogen production. 
  • Independent analyses show the bill, combined with other ongoing emissions reductions, would cut as much as 40% of U.S. greenhouse gas emissions by 2030, short of the White House's 50% reduction target. However, if enacted into law, it would reestablish U.S. credibility in international climate talks, which had been flagging due in part to congressional gridlock. 
  • As part of Democrats' concessions to Sen. Manchin, the bill also contains provisions calling for offshore oil lease sales in the Gulf of Mexico and off the coast of Alaska, and a commitment to take up a separate measure to ease the permitting of new energy projects. 

*  *  *

Senate Democrats late on Aug. 6 advanced a mammoth spending bill on climate and energy, health care, and taxes, after overcoming unanimous Republican opposition in the evenly divided chamber.

The procedural vote to advance the Democratic bill - which authorizes over $400 billion in new spending - was 51–50 after Vice President Kamala Harris arrived at the Capitol to cast a vote, breaking the deadlock in the Senate over the measure that Democrats say would reform the tax code, lower the cost of prescription drugs, invest in energy and climate change programs, all while lowering the federal deficit.

The vote means that senators will have 20 hours to debate on the measure, followed by a vote-a-rama, a marathon open-ended series of amendment votes that has no time limit. After that, the bill will head to a final vote. The measure is anticipated to pass the chamber as early as this weekend.

The House, where Democrats have a majority, could give the legislation final approval on Aug. 12, when lawmakers are scheduled to return to Washington.

The vote came after the Senate parliamentarian - the chamber’s nonpartisan rules arbiter - gave a thumbs-up to most of the Democrats’ revised 755-page bill.

But Democrats had to drop a significant part of their plan for lowering prescription drug prices, Parliamentarian Elizabeth MacDonough said.

The provision would have essentially forced companies not to raise prices higher than inflation. MacDonough said Democrats violated Senate budget rules with language in the bill imposing hefty penalties on drugmakers who raise their prices beyond inflation in the private insurance market.

As Mimi Nguyen Ly details at The Epoch Times, while the bill’s final costs are still being determined, it includes about $370 billion on energy and climate programs over the next 10 years, and about $64 billion to extend subsidies for Affordable Care Act program for federal subsidies of health insurance for three years through 2025.

It also seeks generate about $700 billion in new revenue over the next 10 years, which would leave roughly $300 billion in deficit reduction over the coming decade, which would represent just a tiny proportion of the next 10 year’s projected $16 trillion in budget shortfalls.

A large portion of the $700 billion—an estimated $313 billion—is expected to be generated by increasing the corporate minimum tax to 15 percent, while the remaining amounts include $288 billion in prescription drug pricing reform and $124 billion in Internal Revenue Service tax enforcement.

According to the current version of the bill, the new 15 percent minimum tax would be imposed on some corporations that earn over $1 billion annually but pay far less than the current 21 percent corporate tax. Companies buying back their own stock would be taxed 1 percent for those transactions, swapped in after Sinema refused to support higher taxes on private equity firm executives and hedge fund managers. The IRS budget would be increased to strengthen its tax collections.

The White House said in a statement of administrative policy on Aug. 6 that it “strongly supports passage” of the bill.

“This legislation would lower health care, prescription drug, and energy costs, invest in energy security, and make our tax code fairer—all while fighting inflation and reducing the deficit,” the statement reads.

“This historic legislation would help tackle today’s most pressing economic challenges, make our economy stronger for decades to come, and position the United States to be the world’s leader in clean energy.”

Republicans say the legislation is simply an alternate, dwindled version to the Democrat’s earlier Build Back Better bill—a multitrillion-dollar social spending package that was a major agenda of President Joe Biden—that Democrats have now dubbed the “Inflation Reduction Act of 2022.”

Senate Minority Leader Mitch McConnell (R-Ky.) said Democrats “are misreading the American people’s outrage as a mandate for yet another reckless taxing and spending spree.” He said Democrats “have already robbed American families once through inflation and now their solution is to rob American families yet a second time.”

“There is no working family in America whose top priorities are doubling the size of the IRS and giving rich people money to buy $80,000 electric cars,” McConnell said in a separate statement on Twitter.

“Americans want Washington to address inflation, crime, and the border—not another reckless liberal taxing and spending spree.”

Democrats have said the measure would “address record inflation by paying down our national debt, lowering energy costs, and lowering healthcare costs,” but Republicans have criticized the measure as having no potential other than to make matters worse, nicknaming the legislation “Build Back Broke,” in part because the bill would fulfill many parts of Biden’s Build Back Better agenda.

“The time is now to move forward with a big, bold package for the American people,” said Senate Majority Leader Chuck Schumer (D-N.Y.).

“This historic bill will reduce inflation, lower costs, fight climate change. It’s time to move this nation forward.”

But not every Democrat is buying what Chuck is selling...

As John Solomon reports at JustTheNews.com, Sen. Bernie Sanders, the former presidential candidate and proud socialist, on Saturday attacked President Joe Biden‘s Inflation Reduction Act for failing to live up to its name, after the non-partisan Congressional Budget Office declared it would have a minimal impact on surging prices.

“I want to take a moment to say a few words about the so-called Inflation Reduction Act that we are debating this evening," Sanders said just after voting with Democrats to advance the bill to debate on the Senate floor.

"I say so-called because according to the CBO and other economic organizations that have studied this bill, it will in fact have a minimal impact on inflation."

CBO declared this week that the $740 billion piece of legislation would only affect inflation by 0.1% in either direction.

"I don't find myself saying this very often. But on that point, I agree with Bernie," Sen. John Thune, R-S.D., told Insider.

Overall, economic analysts are divided on the measure, with some having predicted that the bill will worsen inflation and lead to stagnation in growth.

As Will Cain explained in an excellent monologue reality check, "look at the name of the bill, whatever it is, you can be sure the legislation will do the opposite."

Finally, as Goldman details in a new notes, the net fiscal impact of these policies continues to look very modest, likely less than 0.1% of GDP for the next several years...

While the final outcome may still yet differ in details, the fiscal impact is likely to be similar.

Tyler Durden Sun, 08/07/2022 - 15:32

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