Dow, gold soared on hopes of rate & tax cut stimulus in 2025

·         Trump 2.0 may continue all aspects of TCJA-2017 with additional corporate & middle-class tax cut

·         Fed may start 11 QTR rate cuts cycle from Dec/Sep’24

·         Trump may also go for his $2T infra stimulus plan (over 10 years) in his 2nd term

·         Nasdaq (NQ-100) plunged on reports of US tech restrictions on China by the Biden admin, which may continue under Trump 2.0

On Monday US bond yields, Wall Street, and Gold slips after less dovish Powell/Fed talks, indicating wait & watch stance at least for another QTR (Sep’24) to assess the disinflation pace. The implying probability of a July rate cut is now almost nil, but the same for Sep’24 remains high around 90%. Although Powell refrained from any specific forward guidance, the Fed may clear the stance on the 31st July meeting that the Fed will assess the inflation data for at least another QTR (Q3CY24) before getting the required confidence to go for the 11 QTR rate cuts cycle from Dec’24.

On Monday, Powell said almost the same thing as his last few public comments: The Fed is getting incrementally additional/higher confidence for inflation data in Q2CY24 after getting no additional confidence in Q1CY24:

“On inflation, we’ve had three better readings including the last one, and if you average them, that’s a pretty good pace--so turning on the policy--those figures do add somewhat to confidence that inflation is slowing sustainably-- what we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was moving sustainably down to 2%--- we've been waiting on that—I would say we didn't gain any additional confidence in the first quarter but the readings in the second quarter including the one from last week do add somewhat to confidence—“

On Monday as well as last week in his Congressional Testimony, Powell said recent inflation data add somewhat to confidence that inflation is returning to +2.0% targets and that the central bank will not wait until inflation hits 2% before cutting rates. Subsequently, the markets have almost fully priced in a September rate cut, with two more reductions seen before the end of the year; i.e. total of -75 bps in H2CY24 against the Fed’s dot-plot projections of -25 bps.

In brief, stimulus-addicted Wall Street soared on hopes of an early Fed pivot and also Trumponomics optimism amid rising odds of a 2nd Trump presidency on a sympathy wave following a failed assassination attempt on Trump over the weekend. Trump’s policies are seen as inflationary due to tax cuts, tighter immigration, and higher import tariffs; although they may theoretically support USD/US bond yields, Trump’s known stance on weak USD to promote US exports is also well known.

On Monday, Wall Street soared on Trump’s corporate tax cut proposal/narrative; Trump may cut the US corporate tax to 15% from the present 21% (w/o any other tax deductions provisions). Trump may also go for his $2T infra stimulus (spending) plan over 10 years in his 2nd term (Trump 2.0).

Trump, during his 1st term of Presidency (Jan’17-Jan’21), had enacted significant changes to the U.S. corporate tax system as part of the Tax Cuts and Jobs Act (TCJA) of 2017, which is permanent unless otherwise by new legislation:

·         Corporate Tax Rate Reduction: The TCJA reduced the federal corporate income tax rate from 35% (with tax deductions provisions) to 21% (w/o tax deduction provisions); although it was seen as one of the largest single reductions in U.S. history, intended to make U.S. companies more competitive internationally and to encourage businesses to invest domestically, on an average, the effective US corporate tax rate was around 22-28% before the TCJA-2017. The exact income tax rate varied depending on the industry and the specific tax planning strategies employed by individual corporations. Larger profitable US corporations with extensive resources for tax planning often had lower effective tax rates to the tune of 13-16% in some states.

·         Shift to a Territorial Tax System: Before the TCJA, the U.S. operated under a worldwide tax system, where U.S. corporations were taxed on their global income but could defer U.S. taxes on foreign profits until they were repatriated. The TCJA shifted to a territorial tax system, meaning that U.S. MNCs (corporates) would primarily be taxed only on their U.S. income, with some exceptions.

·         Repatriation of Overseas Profits: The act included a one-time repatriation tax on profits that U.S. companies held overseas. These profits could be brought back to the U.S. at a reduced tax rate of 15.5% for cash and 8% for non-cash holdings.

·         Expensing (Depreciation) of Capital Investments: The TCJA-2017 allowed businesses to immediately expense (write off) the full cost of certain capital investments, rather than depreciating them over time. This provision was aimed at encouraging businesses to invest in new equipment and infrastructure (fresh CAPEX)

·         Changes to Interest Deductibility and Other Deductions: The TCJA-2017 act placed limits on the deductibility of interest expenses and altered other business deductions and credits. For example, the deduction for net interest expense was limited to 30% of adjusted taxable income.

·         Base Erosion and Anti-Abuse Tax (BEAT): The TCJA introduced BEAT to prevent multinational corporations (MNCs) from shifting profits out of the U.S. to lower-tax jurisdictions. It imposes a minimum alternate tax (MAT) on certain large corporations that make deductible payments to foreign affiliates.

·         The proponents of the TCJA; i.e. Trump admin argued that these changes would stimulate economic growth, increase wages, and create jobs by making the U.S. a more attractive place for businesses to operate and invest. Critics, however, contended that the tax cuts would disproportionately benefit wealthy individuals and corporations, contribute to the federal deficit, and potentially lead to cuts in public services and programs.

·         Before the implementation of the Tax Cuts and Jobs Act (TCJA) in 2017-18, the statutory Federal corporate tax rate in the US was 35%, one of the highest among developed countries. However, the effective corporate tax rate, which is the rate that corporations pay after deductions, credits, and other adjustments, was typically lower than the statutory rate of around 25-15%; i.e. around 20% on average.

·         But after the implementation of TCJA from FY18, the effective US corporate tax rate (~14%) has generally been lower than the previous period, reflecting the new statutory rate and other TCJA provisions

·         Average Effective Tax Rate: Various studies and reports indicate that the average effective US corporate tax rate has been in the range of 11-16% (~14%) following the TCJA's enactment, depending on depreciation, R&D, fresh CAPEX, tax planning and global operations

Trump also enacted significant changes to the U.S. personal tax system as part of the Tax Cuts and Jobs Act (TCJA) of 2017, most of which are set to expire by FY25, unless extended or made permanent by future legislation. If they expire, tax rates and provisions will revert to their pre-TCJA levels starting in 2026:

·         Individual Income (Personal) Tax Rates: The TCJA reduced individual income tax rates across the board. The previous vs present seven tax brackets/rates are: 10% vs 10%; 15% vs 12%; 25% vs 22%; 28% vs 24%; 33% vs 32%; 35% vs 35%; and 39.6% vs 37%

·         Standard Deduction (SD): The standard deduction was nearly doubled, increasing from $6,350 to $12,000 for single filers, from $9,350 to $18,000 for head-of-household filers, and from $12,700 to $24,000 for married couples filing jointly

·         Personal Exemption: The personal exemption, which was $4,050 per person in 2017, was eliminated

·         Child Tax Credit: The Child Tax Credit was increased from $1,000 to $2,000 per qualifying child. The refundable portion of the credit was increased to $1,400, and a new non-refundable credit of $500 was introduced for other dependents

·         State and Local Tax (SALT) Deduction: The deduction for state and local taxes paid was capped at $10,000, affecting taxpayers in high-tax states

·         Mortgage Interest Deduction: The mortgage interest deduction was limited to interest on up to $750,000 of mortgage debt, down from the previous $1 million limit

·         Miscellaneous Itemized Deductions: Miscellaneous itemized deductions subject to the 2% floor were eliminated

·         Medical Expense Deduction: The threshold for the medical expense deduction was temporarily lowered to 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018, before reverting to 10%

·         Alternative Minimum Tax (AMT): The exemption amounts for the AMT were increased, and the phase-out thresholds were raised, reducing the number of taxpayers subject to the AMT

·         Estate Tax: The estate tax exemption was doubled from $5.49 million to $11.18 million per individual, reducing the number of estates subject to the tax

·         Alimony Payments: For divorce agreements executed after December 31, 2018, alimony payments are no longer deductible by the payer and are not considered taxable income for the recipient

·         529 Plans: The TCJA allowed 529 education savings plans to be used for up to $10,000 per year in K-12 tuition expenses, in addition to college expenses

Most of these changes are set to expire at the end of FY25 unless extended or made permanent by future legislation. If they expire, tax rates and provisions will revert to their pre-TCJA levels starting in 2026. The TCJA-2017 includes several provisions that are set to expire or change after 2025. However, the reduction in the corporate tax rate from 35% to 21% is permanent and does not have an expiration date:

·         Individual Tax Provisions: Many of the individual income tax cuts, such as lower individual tax rates, the doubled standard deduction, and changes to itemized deductions, are set to expire at the end of 2025. If no legislative action is taken, these provisions will revert to pre-TCJA levels in 2026

·         Pass-Through Business Income: The TCJA introduced a 20% deduction for qualified business income from pass-through entities (such as S corporations, partnerships, and sole proprietorships). This deduction is also set to expire at the end of 2025

·         Expensing (Depreciation) of Capital Investments: The TCJA allowed for full expensing of certain capital investments (100% bonus depreciation) through 2022, with a phase-out starting in 2023. By 2027, the provision will be fully phased out, unless extended by future legislation

·         Changes to Individual Tax Credits and Deductions: Several changes to individual tax credits and deductions, such as the increased Child Tax Credit and changes to the Alternative Minimum Tax (AMT) exemption are set to expire at the end of 2025

·         Other Business Provisions: Some business-related provisions, such as limits on interest deductions and changes to the net operating loss (NOL) rules, have varying expiration dates or phase-out periods

Overall, while the corporate tax rate cut to 21% is permanent, many other significant provisions of the TCJA will expire at the end of 2025 unless the US Congress takes action to extend them or make them permanent. This creates an opportunity for future legislative changes that could impact both individual and corporate taxpayers.

Payroll taxes in the U.S. fund Social Security and Medicare programs. These taxes, often referred to as FICA (Federal Insurance Contributions Act) taxes, are paid by both employers and employees. The payroll tax rates remained largely unchanged by the TCJA-2017. Here is a comparison of payroll tax rates before and after 2017:

·         Social Security Tax: Employee: 6.2% on earnings up to the Social Security wage base limit; Employer: 6.2% on earnings up to the Social Security wage base limit; Total: 12.4%;

·         Medicare Tax: Employee: 1.45% on all earnings; Employer: 1.45% on all earnings; Total: 2.9%; Additionally, there is a 0.9% Medicare surtax on employees earning over $200,000 (single filers) or $250,000 (married filing jointly), which is paid only by the employee

After 2017: The TCJA-2017 did not change the payroll tax rates. Thus, the payroll tax rates have remained the same. But normally, the Social Security wage base limit changes annually based on changes in national average wages. For example: In 2017, the limit was $127,200; in 2024, the limit is $160,200. The unchanged payroll tax rates mean that employees and employers continue to contribute the same percentage of earnings to Social Security and Medicare, ensuring the funding for these programs remains stable.

The U.S. import taxes or tariff rates, often referred to simply as tariffs, have undergone significant changes over the years, influenced by various economic and political & policy factors under Trump and Biden admin:

Before Trump-2017:

General Tariff Rates: Before 2017, the U.S. maintained various tariff rates on imports across different categories of goods. Tariffs varied widely depending on the product and country of origin.

Specific Tariff Rates: For example, the average tariff rate for industrial goods was around 2%, while agricultural products often faced higher tariffs, which could reach up to 30% or more in some cases

After 2017 (During Trump Administration):

Section 232 Tariffs: In March 2018, the Trump admin imposed tariffs under Section 232 of the Trade Expansion Act of 1962 on certain steel (25%) and aluminum (10%) imports, citing national security concerns. These tariffs affected imports from several countries, including China, India, Turkey, and even close allies like Japan, South Korea, Canada, Mexico, and the EU.

China Tariffs: In July 2018, the U.S. began imposing tariffs on goods imported from China as part of the infamous U.S.-China Trump trade war. Initially, tariffs were applied to $34B worth of goods, with subsequent rounds increasing the tariff coverage to hundreds of billions of dollars worth of goods. The tariff rates varied, with some goods facing tariffs of 25%

Pre-COVID: 2020

Phase One Trade Deal: In January 2020, the U.S. and China signed a Phase One trade deal, which included commitments from China to increase purchases of U.S. goods and structural changes to improve intellectual property protection. As part of the agreement, some tariffs on Chinese goods were reduced, but many remained in place, while Trump’s efforts to change China’s SOE and state capitalism system failed

2022 (Post-COVID under Biden admin):

U.S.-EU Trade Dispute: In March 2022, the U.S. and EU agreed to suspend tariffs related to the Boeing-Airbus subsidy dispute for five years, significantly reducing tariffs on certain good.

Chinese-Section 301 Tariffs: The U.S. (under the Biden admin) continues to maintain tariffs on a range of goods from China under Section 301 of the Trade Act of 1974, primarily as a response to China's trade practices related to technology transfer, intellectual property (IP) and also AI related chips/techs

Ongoing Tariff Adjustments: Tariff rates on specific goods can be adjusted periodically based on trade negotiations, economic conditions, domestic political compulsion, and global geo-p0litical situations; tariffs and tech restrictions now become a weapon to score under lingering cold war situations and also in attempts to compete against China

Overall, U.S. tariff policy has seen significant changes in recent years, reflecting broader trade policy goals and international trade dynamics. Tariff rates can vary widely depending on the product category and the specific trade relationships between the U.S. and its trading partners, like China, and even allies like the EU, and India.

Trump’s tax and fiscal/infrastructure stimulus and other plans for the 2024 election and afterward include several key proposals aimed at boosting economic growth and reducing taxes. Here are some of the main points:

Corporate Tax Cuts:

·         Proposed lowering the corporate tax rate further from the current 21% to 15%

·         Aims to make the 2017 Tax Cuts and Jobs Act (TCJA) provisions permanent

Middle-Class Tax Cuts:

·         Plans to introduce a new round of tax cuts for middle-income earners

·         Suggested a “10% middle-class tax cut” to provide relief to working families

Regulatory Reforms:

·         Intends to continue rolling back regulations that he believes stifle economic growth

·         This includes easing restrictions on businesses to encourage investment and job creation

Infrastructure Investment:

·         Trump has proposed a significant investment in infrastructure to rebuild America’s roads, bridges, and other critical infrastructure (potential infra spending around $2T over ten years in line with Trump 1.0)

Energy Independence:

·         Trump’s plan includes promoting energy independence by expanding oil and gas drilling and reducing reliance on foreign energy sources

·         Supports deregulation in the energy sector to boost production

Healthcare Reform:

·         Aims to reduce healthcare costs through market-based reforms

·         Proposed measures to increase price transparency and reduce prescription drug prices

Education and Workforce Development:

·         Investment in vocational training and apprenticeship programs to equip workers with skills needed for the future economy

·         Support for school choice initiatives

Trade Policies:

·         Continuing to pursue fair trade deals that protect American jobs and industries

·         Emphasis on reducing the trade deficit and holding trading partners accountable

Immigration:

·         Border Security: Reinforcement of the border wall along the US-Mexico border

·         Deportation Policies: Increase in deportations of undocumented immigrants

·         Visa Policies: Stricter controls and reduced numbers for certain types of visas

Abortion:

·         Roe v. Wade: Advocacy for the overturning of Roe v. Wade

·         State Legislation: Support for state-level restrictions on abortion access

Economy:

·         Tax Policies: Potential reduction in corporate taxes to stimulate economic growth

·         Regulations: Deregulation of industries to promote business growth

Healthcare:

·         Obamacare: Repeal and replace the Affordable Care Act with a new system focused on private healthcare options

·         Drug Prices: Efforts to reduce prescription drug prices through negotiation

National Security:

·         Military Funding: Increased funding for the military and defense projects

·         Counterterrorism: Stronger measures to combat terrorism both domestically and internationally.

Education:

·         School Choice: Promotion of school choice, including charter schools and voucher programs

·         Curriculum Reforms: Changes to educational curricula to promote patriotic education

Climate Change:

·         Paris Agreement: Continued withdrawal from international climate agreements like the Paris Accord

·         Energy Policies: Support for fossil fuel industries and deregulation to boost energy production

These proposals reflect Trump’s broader economic vision focused on tax cuts, deregulation, and infrastructure investment. However, the implementation of these plans would depend on various factors, including Congressional support and the political climate after the election.

Republicans (Trump & Co) are generally considered right-wing or conservative with an emphasis on limited government intervention in the economy, lower taxes, deregulation, a strong national defense, and traditional social values. Trump's approach is often seen as more populist and nationalist, focusing on issues like immigration control, trade protectionism, and "America First" policies (with anti-China, and even anti-German rhetoric).

Trump’s extreme nationalist rhetoric and policies compared to traditional conservative positions, leading to the label of ‘far-right’; although Trump is less war savvy compared to some of his predecessors, his fiery exchange of war words with North Korea’s Kim may be aimed as forcing Japan and South Korea to buy more US weapons. Also, Trump may again infuriate Iran to induce Saudi Arabia to buy more military easements from the US instead of Russia or China. Trump may also help Russia/Putin to have a face-saving exit from the long Ukraine war and he may not allow the ‘smartest salesman’ Zelensky-Ukraine’s Prez to have a free USD run (access/grants) amid the Russian imperialism story, which could trigger WW-III under any serious miscalculations. Trump may also help to end the Gaza war quickly if Biden is not able to enforce a permanent ceasefire plan.

Market impact:

On Monday Wall Street Futures soared on hopes & hypes of a dual stimulus boost from early 2025 led by the Fed’s likely rate cuts (eleven) cycle from Dec’24 or even Sep’24 and continuation of Trump’s tax cut policy along with any additional corporate tax cut (from present 21% to 15%). Gold also jumped to a fresh life time high of almost 2482 early Tuesday as all these tax cuts may add to US fiscal deficit & public debt, resulting in more devaluation of LCU (USD) and also inflation.

In Brief, Trump may be positive for USD/US bond yields and mixed for Equities (higher borrowing costs, China/EU trade tantrum, nationalistic trade policies, and tax cuts), and also positive for Cryptos to some extent; but overall, there may be limited ability for a monumental change in policies by Trump and even Biden due to various checks & balances in the US political & policy system. Trump may not get a trifecta this time unlike his first two years (2016-18). Trump’s policies are seen as inflationary due to attempted tax cuts, tighter immigration, and higher import tariffs (import taxes), but tax cuts and deregulation (if any) are positive.

On Monday, United Health, BOA also helped Wall Street with an upbeat report card along with industrial stocks like Boeing and Caterpillar. Also escalated geopolitical tensions over the Gaza war (Israel-Hezbollah/Iran) have boosted Gold despite some progress on a permanent ceasefire.

But NQ-100 Future stumbled also early Tuesday on the renewed concern of US tech restrictions on China. As per reports, ahead of the Nov’24 election, due to domestic political compulsions, the Biden admin may impose severe trade restrictions if US MNCs/ tech companies continue giving China access to advanced AI semiconductor technology.

On early Tuesday, stocks of American semiconductor companies dropped following a report suggesting that the US might impose stricter trade restrictions to limit China's access to AI chip technology; specifically, the White House could invoke the Foreign Direct Product Rule (FDPR), potentially restricting companies like Tokyo Electron and ASML Holding NV from supplying Chinese semiconductor firms due to their incorporation of American hi-tech. Subsequently, AI chip giants registered significant losses led by Nvidia, Micron, Broadcom, Qualcomm, AMD, and Intel; mega caps were all in the red in premarket trading led by Microsoft, Apple, Amazon, Meta, and Alphabet.

There was also a report that Google and Microsoft helped Chinese firms skirt the ban on Nvidia chips. There was another unconfirmed report that Chinese President Xi suffered a stroke during a China's Communist Party (CCP) meeting, which may create leadership/political & policy uncertainty in the 2nd largest economy of the world and the largest trading partner of the US, the EU, and also India.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700 for any further rally to 41000/41300-41500/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 40650, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (20600) has to sustain over 21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21000/20900-20700/20300 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5680), now has to sustain over 5750 for any further rally to 5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5700/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2410) has to sustain over 2435 for a further rally to 2455*/2475-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2425/2390-2375/2355, may further fall to 2320/2300-2290/2275* in the coming days.