The Market Implications of President Biden 100 days in Office

President Joe Biden’s first one hundred days in office could not have been more different to his predecessor’s four years ago; the tumultuous beginnings of President Trump’s tenure were mired in ethics violations as well as suspected Russian ties which eventually resulted in twelve officials losing their jobs. Four years later President Biden has been quietly and efficiently going about his job with minimum fanfare, under promising and over delivering, and the implications of his policies are likely to extend far beyond the borders of his own country.

Looking back at Biden’s previous time in the White House, one of the criticisms levelled at the Obama administration is that it proceeded too softly in order to try build a consensus with moderate Republicans. President Biden has taken a different approach, ploughing ahead with reforms even without support from across the aisle, with his $1.9trillion stimulus package signed off in early March receiving no Republican backing. Looking ahead, the “American Jobs Plan” is expected to cost a further $2 trillion although the spending itself is likely to be spread out over 10 years with infrastructure spending partly covered by higher corporate taxes. Another package called the “American Families Plan” focusses primarily on education and health, is expected to cost $2 trillion along with tax hikes for high earners, however given the spending and taxation elements, these packages may be trickier to get through Congress.

Despite this, and the emerging divisions within the Democratic Party around President Biden’s agenda, there is a belief that Democrats will be able to once again bypass the need for Republican support by using a fast-track budget process called ‘budget reconciliation’ which was used for the stimulus plan in recent months. It’s easy to get lost in the different policies being brought forward, but each one of them is substantial in size. Budget deficits are expected to widen significantly over the near term, but if there is a marginal downturn in the US economy in the months ahead, how long before additional – and larger – stimulus cheques are in the post to Americans?

For President Biden and his new administration the next election battle will not occur until the mid-terms in 2022. However the risk of losing Democratic control of Congress, which happened to both Obama and Clinton in their first terms is likely to compel the administration to continue acting and thinking big. Promoting a progressive agenda with a rapid rebound in economic activity is likely to improve President Biden’s strong start to life in the Oval Office. The latest polls suggest that over 60% of Americans approve of his pandemic response and economic policies, while US economic data is outperforming most other major economies.

Financial markets have so far welcomed the new administration’s policies – even despite the potentially higher corporate/capital gains taxes. The S&P 500 is up over 25% since the November election (not that you’d hear President Biden talk about it very often!). The US Federal Reserve has also played its part with a commitment to maintain low interest rates in the coming years despite the supercharged growth and inflation pressures that markets are beginning to see coming through in the data.

Longer term interest rates like US 30yr bonds have recently seen a shift higher, reflecting the upgraded growth forecasts and a higher than expected inflation outlook rather than any immediate concerns around the US’s ability to attract capital. One market-related aspect worth noting is the weak demand at US government bond auctions so far this year which could lead to a sharp increase in debt servicing if it continues in the months ahead. In currency markets, after falling in 2020 the performance of the Dollar has been more mixed this year as US growth expectations and higher interest rates have offset Federal Reserve policy actions that saw the currency weaken for much of last year.

For an open economy like Ireland, with close social and economic links to the US these extraordinary US spending plans are likely to indirectly help our own path to recovery. However, the proposal of most concern within Biden’s first 100 days from an Irish context is for a global minimum tax rate at 21%. Given the rising disdain that low corporation tax structures are now being viewed with on both sides of the Atlantic, it seems only a matter of time before our competitive advantage is somewhat eroded. The Finance department have estimated a potential €2 billion loss in annual corporation tax collections by 2025 if Global tax reform is implemented (total Corporation tax receipts were €12bn in 2020). There has been little reaction in Irish Government bonds to this development as of yet, which likely reflects the fact that this is likely to be a drawn out discussion.

Stimulus packages are common at the beginning of a presidency; President Obama kicked off with a relatively modest stimulus package in today’s terms but quickly assumed a fiscally prudent approach. It’s unlikely that President Biden will pivot so quickly to conservative spending patterns. This bout of government spending is starting to edge into the spheres of Universal Basic Income and Modern Monetary Theory, ideas that were seen as radical not long ago.

Debt and deficits are no longer seen as a sometimes necessary short term evil that must be tackled. Treasury secretary Janet Yellen said “The world has changed,” with regard to interest rates “A great deal of work suggests that it (the low interest rate environment) is a long-term structural shift, so I think we have a lot more debt capacity than we used to.” Europe, with even lower long term interest rates, is yet to fully grasp this opportunity.

Daragh Fitzgerald
Head of FX Desk
Bank of Ireland