For all the noise about the Biden USD1.9 trillion stimulus package that we are writing about ad nauseum, and the follow-on remake America spending the new President also wishes to enact, one critical risk remains and is being totally ignored by financial markets everywhere. That is the inclination of the Republican minority in the US Senate to bipartisanship. Their silence has been deafening until now on how cooperative they intend to be with the new President.
Certain aspects of the Biden stimulus plan, and his follow-on spending wishes will almost certainly require a 60-vote majority in the Senate under the Byrd Rule. Otherwise, they will enter reconciliation, piece by piece in Senate committees to work around the filibuster. The net result will be a long drawn out process and risks momentum being lost on the Biden plan. It should also be noted that some Democrat Senators are more right of centre, making controversial passages potentially challenging to pass even within their own party.
With financial markets all in on USD1.9 trillion, it could be an unwelcome surprise when that number almost certainly gets put on a diet. The momentum has clearly swung back to the stimulus-driven, global recovery FOMO trade, notably the US dollar correction higher appears to have finished for now. However, don’t count out its reappearance once Senate Republicans make their positions clear.
We have a flurry of central bank decisions due today. The Bank of Japan should release an unchanged decision shortly with the main risk being a surprise tweaking of their quantitative easing programme. Bank Indonesia (BI) releases its latest rate decision at 1530 SGT. The re-imposition of partial Covid-19 lockdowns across the most populous parts of the country will slow the economic recovery. That raises the base case for more easing, but BI is likely to place more weight on the Indonesian rupiah, which had slid back above 14,000 versus the dollar. BI is expected to remain unchanged at 3.75%.
Bank Negara Malaysia (BNM) surprised markets by leaving rates unchanged at 1.75% yesterday. Although most of the country is now under Covid-19 movement control orders, BNM broke with market expectations and said it saw signs of domestic recovery, despite the short-term situation. The ringgit traced out a chunky rally in response, USD/MYR falling from a high of 4.0480 yesterday to 4.0330 this morning, and well off its highs near 4.0700 last week.
The European Central Bank (ECB) also releases its latest decision this afternoon, but it is unlikely to have much market impact. The ECB will hold pat while noting the downside growth risks associated with the pan-European Covid-19 restrictions. Potentially, the only surprise will be if it mentions elevated medium inflation risks. Given that they have been waiting for inflation to appear for about 15 years, they should be grateful. The euro underperformed versus the commodity-bloc overnight, and the technical picture suggests the recent correction lower is not out of the woods yet.
Weekly US Initial Jobless Claims is expected to print another dire number above 800,000 jobs lost this evening. Any market impact will be muted though unless the number seriously blows out to the topside. Markets remain target fixated on the Biden USD1.9 trillion stimulus plan as an instant panacea to America’s ills, and the claims data will be swept aside in that euphoric rush.
For now, Biden’s honeymoon in DC is the one ring to rule them all, with 1.9 trillion reasons to back it up. Unlike Honeymoon in Vegas, President Biden can’t rely on squadrons of Flying Elvis’ parachuting in to save the day in the Senate. That is a Return of King I’d love to see though.
