Capital gains tax proposal briefly shakes equities; J&J vaccine hold lifted

Prior week summary

During a week of sparse economic data releases and a Fed speak blackout, the major U.S. equity indices, along with mid- and long-term treasury yields, moved lower over the week as market participants reacted to a deluge of corporate earnings releases, an improving COVID-19 outlook in the U.S, and a proposed increase to the capital gains tax rate. The modest rally in Treasuries continued last week with the 10-year Treasury yield falling to 1.58%, down approximately two basis point week over week and down roughly 16 basis points from the recent highs of late March. While yields have fallen modestly in the last three weeks, current mid- and long-term treasury yields remain well above levels seen at the turn of the year. Investors priced in the expectation of a strong U.S. recovery and firmer price pressures on the back of an improved COVID-19 outlook and significant government spending. The limited economic data updates received last week largely reinforced that narrative and pointed to a strengthening U.S. economy. The March Chicago Fed National Activity Index reading topped expectations posting a 1.71 level, a significant improvement over February’s -1.09 reading. Over 80% of the individual indicators showed signs of growth with the production, personal consumption, and housing indicators leading the charge. The labor market outlook grew more upbeat on Thursday when it was reported that weekly jobless claims fell for the second consecutive week to 547,000 claims, a pandemic low. Continuing claims sustained its momentum falling to 3.67 million claims, substantially lower than the 5,240 continuing claims seen at the beginning of the year.

As of Sunday evening, the U.S. tally of confirmed COVID-19 cases stands just over 31.8 million cases with nearly 600,000 individuals succumbing to the virus. After seeing a brief uptick in cases at the start of the month, cases have resumed their decline with the seven-day average daily case count sitting at 57,123 cases. The current situation marks a stark contrast to the level of cases seen during the height of the pandemic in early January and has fueled market participants’ hopes for a return to normalcy and the return of the consumer.

Much of the progress seen since the start of the year has been attributed to the mass vaccination campaign that is currently underway. According to the Centers for Disease Control and Prevention (CDC), over 42% of the U.S. population has received at least one dose and 28.5% of the population is now “fully vaccinated.” The figures appear even more encouraging when looking at vaccine adoption rates in the most vulnerable subset of the U.S. population, individuals 65 years of age or older. In that group, over 81% have received at least one dose, and over 67% are “fully vaccinated.” The U.S. looks to have a third option for vaccination available again after the CDC and Food and Drug Administration lifted the pause that was put in place nearly two weeks ago on the Johnson and Johnson vaccine after reports of serious blood clots emerging in a few individuals who received the vaccine. To date, just over eight million doses of the Johnson and Johnson vaccine have been administered in the U.S. which pales in comparison to the 100+ million doses of both the Pfizer and Moderna vaccines that have been administered in the U.S. National Institutes of Health Director Dr. Francis Collins looked to allay any fears stemming from the reports of adverse side effects and encouraged use of the vaccine on Sunday saying, “I think that was the right decision. I do think people will want to read the fact sheet. But when you consider the nature of this risk, this is truly a rare event. And when you measure that against the benefits of preventing somebody from dying of COVID, there’s no comparison. We clearly have a situation where the benefits greatly outweigh the risks, even for younger women.”

On Thursday, reports indicated that President Biden plans to propose an increase in the capital gains tax rate to 39.6%, up from 20%, for Americans earning more than $1 million per year as the administration looks to fund education and childcare initiatives for the American Families Plan. The news briefly sent equities and treasury yields lower, resulting in the biggest one-day drop in the S&P 500 in over a month. When asked about the proposal at a press briefing following the reports, White House Press Secretary Jen Psaki declined to confirm the reports but said, “We’re still finalizing what the pay-fors look like.” Republicans were quick to push back on the idea of increasing the capital gains tax rate and lauded the 2017 tax cuts. President Biden is expected to formally unveil the details of the American Families Plan in a joint address to Congress on Wednesday. Talk of the American Families Plan comes as Congress currently negotiates the terms of a proposed infrastructure bill, the American Jobs Plan. Senate Republicans unveiled a $568 billion counteroffer on Thursday. The proposal looks to limit “infrastructure” to items that are considered traditional infrastructure, such as roads and bridges, and notably has a much smaller price tag than the $2.25 trillion proposal from the Biden administration. The White House responded to the counteroffer saying that, “It’s the beginning of a discussion,” while Senator Bernie Sanders denounced the $568 billion proposal as, “totally inadequate.” Although talks have begun to heat up, many do not expect passage of the proposed bill, in some form, until the summer.

The look forward

To close the month, market participants are looking forward to the release of updated figures on durable goods orders, the Conference Board Consumer Confidence Index, wholesale inventories, jobless claims, the first-quarter GDP advance estimate, and consumer spending, among others. The FOMC holds the latest monetary policy meeting on Tuesday and Wednesday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)