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More US Fiscal Stimulus And Still Dovish Fed

Market movers today

  • Euro Area consumer confidence, economic sentiment, and consumer inflation expectations are released. German inflation figures for April are released.
  • The US GDP Q1 advance estimate is released. US private consumption jumped in Q1 due to the second and third stimulus checks and the gradual re-opening. Consensus is looking for an increase of 6.6% q/q AR. US jobless claims likely fell further but the data is quite volatile.
  • We will not publish a Danske Morning Mail tomorrow (Danish Bank Holiday) but tomorrow euro area inflation, Q1 GDP, and China PMI’s are due out. We expect HICP inflation in April increased to 1.6% y/y driven by higher energy prices, while core inflation likely stayed at 1.0% y/y. We expect euro area GDP declined by 0.5% in Q1, as restrictions and lockdowns continued weighing on services and private consumption despite the manufacturing boom.

The 60 second overview

Dovish Fed (expansionary monetary policy): As expected, the Fed kept monetary policy and policy signals unchanged. Interim meeting so there were no new forecasts or ‘dots’. Most importantly, Fed chair Powell said that “It is not the time to start talking about tapering”, highlighting what we wrote in our preview: The Fed is outcome-based, not forecast-based. The Fed is more upbeat on the economy, downgraded the risk outlook to “risks remain” (from “considerable risks”) and says higher inflation is mostly due to “transitory effects”. Based on our very positive US macro outlook, we continue to see the Fed moving in a more hawkish direction later this year when more positive US macro data start to arrive. Our base case is September. We still think actual tapering will start in January 2022. For more details see Fed Monitor: Review – “It is not the time to start talking about tapering”, 28 April.

President Biden’s American Families Plan (expansionary fiscal policy): The third part of Biden’s “Build Back Better” agenda (the first part was the relief package (American Rescue Plan) and the second part was the infrastructure package (American Jobs Plan)) was published yesterday. The plan will cost roughly USD1,800bn spent on education (USD506bn), families and children (USD495bn) and expansion of tax credits, in particular Child Tax Credit (USD855bn). The plan is only partly financed over 10 years by higher taxes on high-income households (USD1,500bn in total) but neutral over 15 years. We expect the political negotiations on both the American Jobs Plan and the American Families Plan to be difficult. Still, we think US fiscal policy will be expansionary in coming years meaning upside potential for growth in 2022-24. The Committee for a Responsible Federal Budget has a great overview. So overall, we have a combination of still expansionary US fiscal policy and a still dovish Fed, which is positive for risk sentiment.

Equities: Equity markets started in a cautious setting yesterday as investors nerved themselves for the FOMC-meeting, Biden’s second proposal and big tech earnings. US markets higher, with Dow -0.5%, S&P 500 -0.1%, Nasdaq -0.3% and Russell 2000 up 0.1%. Sector performance earnings-driven, with tech (Microsoft), industrials and health care trailing. On the other front, communication services led the gains (post-earnings rally in Google) with energy on oil strength. Mostly higher markets in Asia this morning, and US futures indicates a rebound of 0.5-1%.

FI: European rates have been under pressure this week heading into the FOMC meeting – and that theme continued yesterday with EGB yields up by 1.5-2bp with 10y Germany closing in on 1y highs. US yields dropped 4bp yesterday during the press conference on ‘It is not the time to start talking about tapering’ and that it would take ‘some time to achieve substantial progress on their policy goals’, in what was otherwise a relatively uneventful FOMC meeting leaving the Fed being outcome-based, not forecast-based.

FX: NOK led commodity currencies higher yesterday vis-à-vis EUR, JPY and USD. EUR/NOK broke firmly below 10.00 level and EUR/USD rose above 1.21 on dovish Fed.

Credit: The subdued daily moves in credit continued yesterday where iTraxx Xover widened ½bp (to 252bp) and Main closed unchanged in 50½bp. HY bonds ended ½bp tighter and IG more or less unchanged.

 

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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