- Democrats commit to two-track infrastructure process
- PCE deflator expected to surge in May, as did CPI and PPI
- U.S. consumer sentiment expected to remain buoyant
Democrats commit to two-track infrastructure process — Democrats are now officially following a two-track process for an infrastructure bill, pursuing the bipartisan framework agreement announced yesterday while at the same time proceeding with a Democratic-only reconciliation bill.
The bipartisan infrastructure agreement announced yesterday sounded encouraging but has little chance of becoming law. First, it was only a “framework” agreement where there were still areas of disagreement and the pay-fors were not disclosed. Second, Senate Minority Leader McConnell later Thursday criticized President. Biden for saying he would veto a bipartisan bill if there wasn’t a concurrent reconciliation bill. Mr. McConnell’s comments suggested that he plans to oppose the bipartisan plan due in part to the Democrats’ two-track process.
In the end, Republicans have little incentive to help the Democrats, who are making clear they will simply take whatever they can get from a bipartisan infrastructure bill and then do whatever they want on a reconciliation bill.
From the Democrats’ perspective, the bipartisan agreement could turn out to be a net positive. On the one hand, the bipartisan agreement was bad for Democrats since it could dilute or slow down a reconciliation infrastructure bill. However, the bipartisan agreement did have the critical benefit for Democrats of unlocking the support of a moderate Senator like Joe Manchin for a reconciliation bill.
Mr. Manchin said yesterday that a Democratic-only infrastructure bill is now “inevitable,” although he would not commit to a size or its content. Previously, Mr. Manchin had been noncommittal on a reconciliation bill.
In fact, getting the support of Mr. Manchin may have been the whole goal of the White House’s rationale for signing on to an unfinished bipartisan infrastructure proposal that is not likely to have the support of enough Republicans in the end to prevent a filibuster.
President Biden, House Speaker Pelosi, and Senate Majority Leader Schumer yesterday all stated very clearly that there would be no bipartisan infrastructure bill without a companion reconciliation infrastructure bill. Mr. Biden said he wouldn’t sign a bipartisan bill unless there was a companion reconciliation bill on his desk. Ms. Pelosi said the House would not pass a bipartisan bill unless there was also a companion reconciliation bill to vote upon. Mr. Schumer said he will seek votes in the Senate in July on both a bipartisan infrastructure bill and a reconciliation bill.
The stock market yesterday reacted favorably to the news of a bipartisan infrastructure agreement, with a rally in infrastructure stocks such as Caterpillar and steel companies. Infrastructure spending would obviously be bullish for stocks, but the stock market was also likely encouraged about the fact that any bipartisan infrastructure bill would not include corporate tax hikes.
However, the fact that Democratic leaders yesterday clearly stated that they are on a two-track infrastructure process means that corporate tax hikes are still on the table for the reconciliation portion of any infrastructure bill.
The Senate late yesterday left Washington for its 2-week Fourth of July recess, which means there is likely to be little additional progress on a bipartisan infrastructure bill over the next two weeks. However, the House will still be in session through next Thursday, and votes are expected next week on portions of an eventual infrastructure bill. The House will leave late next week for its Fourth of July recess.
After returning from their Fourth of July recess, Congress will only be in session for about the last three weeks of July and the first week of August before then leaving for their August recess. When Congress returns to Washington after Labor Day, the first order of business will be to pass a spending bill to avoid a U.S. government shutdown when the new fiscal year begins on October 1.
PCE deflator expected to surge in May, as did CPI and PPI — Today’s May PCE deflator is expected to show large increases, as did the May CPI and PPI reports that have already been released. The PCE deflator is the Fed’s preferred inflation measure.
The consensus is for today’s May PCE deflator to show increases of +0.5% m/m and +3.9% y/y, following the April report of +0.6% and +3.6%, respectively. Today’s May core PCE deflator is expected to show increases of +0.6% m/m and +3.4% y/y, following April’s report of +0.7% and +3.1%, respectively.
The year-on-year inflation statistics have been artificially boosted by last year’s low base during the pandemic shutdowns. However, inflation has clearly surged just in the past several months. On a 3-month annualized basis, the PCE deflator in April rose sharply by +5.9% for the headline figure and +4.9% for the core figure. Today’s report is likely to be even worse considering that the May CPI rose by +8.4% headline and +8.3% core. Yet, the markets won’t be too concerned since the Fed is sticking to its insistence that the current inflation surge is transitory.
U.S. consumer sentiment expected to remain buoyant — The consensus is for today’s final-June University of Michigan U.S. consumer sentiment index to be revised +0.1 point higher to 86.5, producing a +3.6 point increase from May rather than the preliminary increase of +3.5 points. The consumer sentiment index is near a 15-month high but has recovered only about half of its 2020 plunge and is still well below its pre-pandemic level.
