- Weekly global market focus
- FOMC this week may begin QE tapering discussions
- Markets wait to see if the bipartisan group of Senators gets any traction with their infrastructure proposal
- U.S. Covid infections fall to new 14-month low
Weekly global market focus — The U.S. markets this week will focus on (1) whether the FOMC at its meeting on Tue/Wed begins its QE tapering discussions, (2) bipartisan talks in Washington on an infrastructure bill, (3) the Treasury’s sale of 20-year bonds on Tuesday and 5-year TIPS on Thursday, (4) earnings from five of the S&P 500 companies (Oracle, Lennar, Kroger, Adobe, and Carnival), and (5) oil prices, which rallied to a new 2-1/2 year high last Friday.
This week’s key U.S. economic reports include Tuesday’s May retail sales report (expected -0.6% m/m and +0.4% ex-autos), Tuesday’s May manufacturing report (expected +0.8% after April’s +0.4%), Wednesday’s May housing starts report (expected +4.5% to 1.640 mln), and Thursday’s May LEI report (expected +1.3% m/m after April’s +1.6%).
President Biden on Tuesday will hold a summit with EU leaders in Brussels. Mr. Biden meets with Vladimir Putin on Wednesday in Geneva. Treasury Secretary Yellen will testify on the proposed 2022 federal budget before the House Ways and Means Committee on Thursday.
The European markets this week will continue to focus mainly on the pandemic statistics and when Europe can open more fully. Today’s Eurozone April industrial production report is expected to show a +0.4% m/m increase after March’s +0.1% report.
In Asia, the BOJ is expected to leave its policy unchanged at its meeting that concludes on Friday. On Tuesday, China’s May industrial production is expected at +9.2% y/y (down from April’s +9.8%) and the May retail sales report is expected at +14.0% y/y (down from April’s +17.7%).
FOMC this week may begin QE tapering discussions — Fed officials in the past several weeks have run what seems to be a planned PR campaign to warn the markets that discussions are likely to begin soon on when to taper QE. The markets should therefore not be surprised if the FOMC at its meeting this Tuesday and Wednesday begins to discuss when to announce QE tapering.
However, the markets would be surprised if an official announcement of QE tapering comes as soon as this week. The markets are generally not expecting an early warning of QE tapering until the Fed’s August Jackson Hole conference or the September 21-22 FOMC meeting, and a formal announcement sometime between September and December.
A survey taken by Bloomberg in early June found that only 16% of respondents expect the Fed’s early-warning to take place in June or July. The largest plurality of 40% believe that the Fed’s early-warning will come at the Fed’s Jackson Hole Conference in August. The second-highest percentage of 24% believe the early warning will come in September. Only 14% of respondents expect the early warning to come in October or later. Regarding the formal QE tapering announcement, 33% of the respondents expect the announcement in September, 10% in October or November, and 33% in December.
Aside from QE tapering, the markets are waiting to see whether the FOMC this week boosts its short-term administered rates to put a higher floor under short-term rates. The overnight federal funds rate has been trading at 0.06%, which is 6 bp below the midpoint of 0.125% of the Fed’s 0.00%/0.25% target range.
The recent Bloomberg found that 71% of respondents are expecting the FOMC at its meeting this week to leave its interest on excess reserves rate (IOER) unchanged. However, 29% of the respondents are expecting the FOMC this week to raise the IOER rate by +5 bp to 0.15%.
Markets wait to see if the bipartisan group of Senators gets any traction with their infrastructure proposal — The markets this week will find out whether the bipartisan group of ten Senators can get any traction with their infrastructure proposal. The group late last week reached an agreement on an infrastructure proposal to pitch to their respective caucuses and the White House.
The size of the proposal is around $1.2 trillion, not all of which is new money. The group said they agreed on pay-fors and that the deal would not add to the deficit. However the proposal relies mainly on indexing the U.S. gasoline tax to inflation and also extending the tax to electric vehicles by making it a per-mile tax.
The gasoline tax idea may not get far with President Biden, who opposes user fees of any kind since that would represent a new tax on people making less than $400,000, in violation of his campaign promise. Mr. Biden’s proposal is to raise taxes on corporations to pay for an infrastructure deal, which the Republicans have already rejected for a bipartisan deal.
The odds for a bipartisan deal continue to be extremely slim. The only real question is how long Democrats will wait for bipartisan negotiations to play out. Speaker Pelosi has said that she wants to pass an infrastructure bill in the House by the 4th of July, which is now only about three weeks away. Senate Majority Leader Schumer wants the Senate to work on an infrastructure bill in July.
U.S. Covid infections fall to new 14-month low — The 7-day average of new U.S. Covid infections on Saturday fell to a 14-month low of 13,530, the lowest level since March 2020. The 7-day average of U.S. Covid deaths on Saturday fell to a 14-month low of 311. The CDC says that 43.4% of the U.S. population is now fully vaccinated and 52.4% of the U.S. population has received one vaccination dose. The pandemic situation has improved enough that restrictions are quickly ending, including the re-emergence of public sporting and entertainment events.
