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Solid U.S. Job Market May Be Undercutting Trump’s Tax-Cut Case

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  • Solid U.S. Job Market May Be Undercutting Trump’s Tax-Cut Case

President Donald Trump’s economic team says it won’t be satisfied until Americans workers earn more — and aggressive tax cuts are essential for those fatter paychecks.

But with unemployment at its lowest rate since before the financial crisis, the world’s biggest economy may already be nearing top speed. That means a big fiscal boost resulting from tax changes could stoke inflation to levels that would prompt the Federal Reserve to raise borrowing rates faster than anticipated. If that happens, Trump’s ambitious growth goals could be jeopardized.

The unemployment rate now sits at 4.4 percent after U.S. employers hired more workers than expected in April. But wages were a soft spot, climbing just 2.5 percent from a year earlier. In an interview Friday with Bloomberg TV after the figures were released, senior White House adviser Gary Cohn said the administration wants to see wages rise faster.

“We’re doing OK, but you see from the data, we’re doing OK with jobs that don’t pay that much,” said Cohn, director of the National Economic Council. “We need to bring back the manufacturing jobs that pay a lot. We need to bring back the service jobs that pay a lot.”

Cohn along with other administration officials say their plans to revise the tax system, cut regulatory red tape and negotiate better trade deals will convince more companies to stay or return to the U.S., spur more higher paying jobs and ultimately increase consumer spending. They say that will help to lift economic growth to 3 percent within two years, a rate not seen on an annual basis in more than a decade.

“So we’re doing a very big tax cut. We need it,” Trump said during an interview with Bloomberg News on May 1. The U.S. economy’s “not growing, it’s not growing at all. We need something — we need a stimulus.”

Stimulating Demand

The question is whether the U.S. economy is even capable of growing at that level without overheating, economists say. And the scant details included in the Trump administration’s tax plan released last week are creating uncertainty about how much growth the cuts can actually generate.

One way to boost growth through tax reform is by stimulating demand, said Douglas Elmendorf, a former official at the Fed and the Congressional Budget Office, who is now dean of Harvard University’s John F. Kennedy School of Government. But demand isn’t nearly as weak as it was in 2009, when the U.S. government rolled out a $787-billion stimulus package, he said.

The economy was also arguably in deeper trouble in 1986, when Ronald Reagan pulled off what some called the biggest overhaul of the U.S. tax system in history. The economy was coming out of a recession only a few years before, and while the jobless rate was coming down from its peak, it was still about 7 percent.

The situation isn’t nearly as dire now. “Any increase in demand spurred by tax changes will be very much offset by tighter monetary policy,” said Elmendorf.

“The other way to spur economic activity and boost jobs is by creating structural economic changes that boost the potential output of the economy, for example by increasing capital investment,” he said. Whether the administration can do that depends on hundreds of specific features of the tax plan that they have not spelled out.

Individual Cuts

Cohn and Treasury Secretary Steven Mnuchin released an outline of Trump’s tax plan on April 26 that borrowed heavily from the president’s campaign themes. The plan would cut tax rates for all businesses to 15 percent. The current corporate tax rate is 35 percent, though many companies trim their bills via various deductions and credits.

For individuals, Trump wants to consolidate the existing seven tax rates to three, with a top rate of 35 percent, down from the current 39.6 percent.

Former U.S. Federal Reserve Chairman Ben Bernanke said earlier this week in an interview on Bloomberg TV that the Trump administration’s plans to cut personal tax rates appear ill-timed and may do little to spur a higher rate of economic growth.

“Why not think about improving the efficiency of the corporate tax code, or doing infrastructure that I think would have more direct effects on supply and potential output than a personal tax cut?” Bernanke said.

Laffer Curve

The Trump tax plan didn’t specify many pay-fors to balance the cuts, but said it would eliminate individual deductions other than those for home-mortgage interest and charitable giving. It also called for eliminating unspecified “tax breaks for special interests.”

Still, the Committee for a Responsible Federal Budget released a rough estimate that Trump’s plan could cost the government $3 trillion to $7 trillion over a decade — potentially “harming economic growth instead of boosting it.” White House Budget Director Mick Mulvaney has dismissed cost estimates of the plan, saying there’s not enough detail for accurate projections.

Sarah Huckabee Sanders, a White House spokeswoman, said Friday during a press briefing that she wasn’t ready to comment on whether the cuts in a tax package should be offset so they don’t add to the deficit.

Economist Arthur Laffer, who advised the Trump campaign, first popularized the notion that tax cuts spur growth in jobs and the economy — and thus pay for themselves — in a 1974 meeting with Ford administration officials. His simple “Laffer Curve” formula, sketched on a paper napkin, jumpstarted the supply-side and trickle-down economics ethos that underpinned the 1986 Reagan tax cuts. The formula didn’t appear to work, as the federal budget deficit soon ballooned.

The administration may also be prevented from reaching its growth goal by demographic shifts that are holding back labor productivity, according to Peterson Institute for International Economics senior fellow William Cline.

“In the ideal world of the supply side economist, the kind of tax cut you want is the kind that would create its own demand immediately and would not be inflationary,” said Cline. “The evidence for that kind of tax cut is not very strong.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Oil Prices Decline on Rising India COVID-19 Cases, U.S Inflation Concerns

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Global oil prices extended a decline on Friday following a 3 percent drop on Thursday as coronavirus cases rose in India, one of the world’s largest oil consumers.

Brent crude oil, against which Nigerian oil is priced, declined by 35 cents or 0.5 percent to $66.70 a barrel at 5 am Nigerian time on Tuesday while the U.S West Texas Intermediate (WTI) fell by 28 cents or 0.4 percent to $63.54 per barrel.

The commodity super cycle rally just hit a hard stop and the energy market doesn’t know what to make of Wall Street’s fixation over inflation and the slow flattening of the curve in India,” said Edward Moya, senior market analyst at OANDA.

The crude demand story is still upbeat for the second half of the year and that should prevent any significant dips in oil prices,” he added.

Prices dropped over a series of key economic data that stoke inflation concerns and forced experts to start thinking the Federal Reserve could raise interest rates to curb the surge in inflation.

An increase in interest rates typically boosts the U.S. dollar, which in turn pressures oil prices because it makes crude oil more expensive for holders of other currencies.

This coupled with the fact that India, the world’s third-largest oil consumer, recorded more than 4,000 COVID-19 deaths for a second straight day on Thursday, dragged on the oil outlook in the near term.

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Brent Crude Rises to $69 on IEA Report

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Oil prices rose after the release of the International Energy Agency’s (IEA)  closely-watched Oil Market Report, with WTI Crude trading at above $66 a barrel and Brent Crude surpassing the $69 per barrel mark.

Prices jumped even though the agency revised down its full-year 2021 oil demand growth forecast by 270,000 barrels per day (bpd) from last month’s assessment, expecting now demand to rise by 5.4 million bpd. The downward revision was due to weaker consumption in Europe and North America in the first quarter and expectations of 630,000 bpd lower demand in the second quarter due to India’s COVID crisis.

The excess oil inventories of the past year have been all but depleted, and a strong demand rebound in the second half this year could lead to even steeper stock draws, the IEA said yesterday, keeping an upbeat forecast of global oil demand despite the weaker-than-expected first half of 2021.

However, the upbeat outlook for the second half of the year remains unchanged, as vaccination campaigns expand and the pandemic largely comes under control, the IEA said.

Moreover, the global oil glut that was hanging over the market for more than a year is now gone, the agency said.

“After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s COVID-19 demand shock have returned to more normal levels,” the IEA said in its report.

In March, industry stocks in the developed economies fell by 25 million barrels to 2.951 billion barrels, reducing the overhang versus the five-year average to only 1.7 million barrels, and stocks continued to fall in April.

“Draws had been almost inevitable as easing mobility restrictions in the United States and Europe, robust industrial activity and coronavirus vaccinations set the stage for a steady rebound in fuel demand while OPEC+ pumped far below the call on its crude,” the IEA said.

The market looks oversupplied in May, but stock draws are set to resume as early as June and accelerate later this year. Under the current OPEC+ policy, oil supply will not catch up fast enough, with a jump in demand expected in the second half, according to the IEA. As vaccination rates rise and mobility restrictions ease, global oil demand is set to soar from 93.1 million bpd in the first quarter of 2021 to 99.6 million bpd by the end of the year.

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OPEC Expects Increase In Global Oil Demand Raises Members’ Forecast on Crude Supply

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The Organisation of Petroleum Exporting Countries (OPEC) yesterday lifted its forecast on its members’ crude this year by over 200,000 bpd and now expects demand for its own crude to average 27.65mn bpd in 2021.

This is almost 5.2mn bpd higher than last year and around 2.7mn b/d higher than an earlier estimate of the group’s April production.

According to the highlights of the organisation’s latest Monthly Oil Market Report (MOMR), OPEC crude is projected to rise from 26.48 million bpd in the second quarter to 28.7 million bpd in the third and 29.54 million bpd in the fourth quarter of the year.

The report also indicated a fall in Nigeria’s crude production from 1.477 bpd in February to 1.473, a difference of just about 4,000 bpd before rising again in April to 1.548 million bpd, to add 75,000 bpd last month.

OPEC stated that its upward revision of members’ crude was underpinned by a downgrade in the group’s forecast for non-OPEC supply, which it now expects to grow by 700,000 bpd to 63.6mn b/d against last month’s report’s projection of a 930,000 bpd rise to 63.83mn bpd.

The oil cartel projected that US crude output would drop by 280,000 bpd this year, compared with its previous forecast for a 70,000 bpd decline.

On the demand side, OPEC kept its overall forecast unchanged from last month’s MOMR, stressing that it expects global oil demand to grow by 5.95 million bpd to 96.46 million bpd this year, partly reversing last year’s 9.48mn bpd drop.

Spot crude prices fell in April for the first time in six months, with North Sea Dated and WTI easing month-on-month by 1.7 percent and 1 percent, respectively.

On the global economic projections, the cartel said stimulus measures in the US and accelerating recovery in Asian economies might continue supporting the global economic growth forecast for 2021, now revised up by 0.1 percent to reach 5.5 percent year-on-year.

This comes after a 3.5 percent year-on-year contraction estimated for the global economy in 2020.

However, global economic growth for 2021 remains clouded by uncertainties including, but not limited to the spread of COVID-19 variants and the speed of the global vaccine rollout, OPEC stated.

“World oil demand is assumed to have dropped by 9.5 mb/d in 2020, unchanged from last month’s assessment, now estimated to have reached 90.5 mb/d for the year. For 2021, world oil demand is expected to increase by 6.0 mb/d, unchanged from last month’s estimate, to average 96.5 mb/d,” it said.

The report listed the main drivers for supply growth in 2021 to be Canada, Brazil, China, and Norway, while US liquid supply is expected to decline by 0.1 mb/d year-on-year.

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