- Fed Chair Powell reassures the markets that QE tapering isn’t close
- American Families Plan promises a new jolt of fiscal stimulus
- U.S. Q1 GDP expected to be very strong at +6.9%
- U.S. claims expected to show further improvement
Fed Chair Powell reassures the markets that QE tapering isn’t close — The stock and bond markets yesterday were reassured by Fed Chair Powell’s continued insistence that QE tapering is “some time” away. Mr. Powell successfully managed market sentiment by remaining dovish and reiterating the Fed’s recent themes at his press conference following the 2-day FOMC meeting.
Stock indexes moved to their highs early Wednesday afternoon on the FOMC’s upbeat post-meeting statement that said, “amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” The FOMC also said “risks to the economic outlook remain,” softening previous language mentioning “considerable risks.” In addition, the FOMC said that a pickup in inflation is due to “transitory” factors.
Wednesday afternoon’s comments from Fed Chair Powell were supportive for stocks when he said the economy is a long way from the Fed’s goals and that a transitory rise of inflation won’t warrant an interest rate hike. He added that “it is not time yet” to start talking about tapering asset purchases.
A recent survey by Bloomberg found that 14% of the analysts surveyed expect the Fed to start tapering its QE program in Q3, and 45% of the analysts expect tapering to begin in Q4. Opportunities for the Fed to announce the tapering could come as soon as the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference. The consensus is for the tapering to last 7-12 months.
The market is not expecting the Fed to start raising rates until early 2023. The Bloomberg survey found a consensus for two +25 bp rate hikes in 2023 that would bring the funds rate target up to 0.50%/0.75% from the current level of 0%-0.25%.
American Families Plan promises a new jolt of fiscal stimulus — The Biden administration yesterday released the main elements of the American Families Plan ahead of President Biden’s joint address to Congress on Wednesday evening.
The American Families Plan involves $1 trillion of spending and $800 billion of tax cuts and credits for lower income persons, for a grand total of $1.8 trillion. The plan would be paid for with $1.5 trillion of tax hikes on people making more than $400,000. The proposed tax hikes were in line with previous reporting and did not spark any surprise in the markets.
The Biden administration has now presented Congress with the American Jobs Plan of $2.25 trillion and the American Families Plan of $1.8 trillion. That totals up to a massive $4 trillion of additional fiscal stimulus, adding to the $5 trillion of pandemic aid bills that have already been passed over the past year.
The question is how much of the American Families Plan and American Jobs plan will be left after going through the meat-grinder of Congress. Democrats remained cohesive and easily passed the $1.9 trillion pandemic aid bill earlier this year. However, the Biden administration’s new plans totaling $4 trillion are fraught with political land mines and will be more difficult to pass.
Democratic West Virginia Senator Joe Manchin yesterday greeted the American Families Plan by saying that it involves an “uncomfortable” cost. Mr. Manchin already said he would like to see the corporate tax rate raised from 21% to only 25% rather than the Biden administration’s push for 28%. Mr. Manchin is clearly enjoying his role as the king-maker for Democratic legislation since his vote is critical in the 50-50 Senate.
U.S. Q1 GDP expected to be very strong at +6.9% — The consensus is for today’s Q1 GDP to show a very strong increase of +6.9% (q/q annualized), adding to Q4’s rise of +4.3%. Today’s GDP increase is expected to be driven mainly by a +10.5% surge in U.S. personal consumption from stimulus checks and the excess cash that consumers saved up during the pandemic shutdowns.
Today’s expected report would mean that U.S. GDP has recovered 93% of the plunge seen in the first half of 2020 during the pandemic shutdowns. U.S. GDP in Q2 should then easily post a new record high and finish recovering the 1H-2020 plunge.
The consensus is for even stronger growth in Q2 and Q3 as stimulus checks and consumer spending surge with the fading pandemic. The consensus is for GDP growth of +8.1% in Q2 and +7.0% in Q3, tailing off to +4.7% in Q4. The consensus is for 2021 GDP growth of +6.3%, which would easily recover the -3.5% decline seen in 2020. The markets are expecting strong growth to continue in 2022 at +4.0% but GDP growth is then expected to fall back to the more normal level of +2.4% by 2023.
U.S. claims expected to show further improvement — The consensus is for today’s initial unemployment claims report to show a -8,000 decline to 539,000, adding to last week’s decline of -39,000 to 547,000. Meanwhile, continuing claims are expected to fall -84,000 to 3.590 million, adding to last week’s -34,000 decline to 3.674 million.
The labor market has improved substantially in recent weeks as business restrictions ease and businesses reopen. Initial unemployment claims in the first three weeks of April plunged by a net -182,000 to a 13-month low of 547,000. However, initial claims are still up by 331,000 from the pre-pandemic level, and continuing claims are up by 1.97 million from the pre-pandemic level.
