- McConnell plans to vote on another small stimulus bill next week
- Johnson and von der Leyen will talk today ahead of Thursday’s EU Summit
- U.S. PPI inflation expected to move higher but remain subdued
McConnell plans to vote on another small stimulus bill next week — Senate Majority Leader McConnell on Tuesday said that the Senate next week will vote on another small stimulus bill that includes at least another round of PPP funding for small businesses. He did not say what else might be in the bill, but could be similar to the Senate’s recent $650 billion version.
Speaker Pelosi on Tuesday quickly told her caucus that Mr. McConnell’s plan was a non-starter. Ms. Pelosi continues to reject any attempt to address stimulus measures on a piecemeal basis. Both the House and Senate have recently passed stimulus bills that were mostly just political messaging ahead of the November 3 election rather than a serious attempt to pass a bill that would be addressed by the other house of Congress.
Meanwhile, the White House seems to be making no progress in getting Speaker Pelosi to more seriously consider its $1.8 trillion offer from last Friday. Speaker Pelosi is sticking to her demand for a $2.2 trillion bill. President Trump on Tuesday told Congress to “go big, or go home,” but isn’t matching Speaker Pelosi’s offer.
Mr. McConnell said he would have the Senate vote on his limited fiscal stimulus bill this coming Monday when the Senate returns to session. Meanwhile, the House remains on recess until after the election, but can be recalled to Washington on 24 hours notice if a vote is necessary on a stimulus compromise.
Mnuchin, Pelosi, and McConnell seem destined to keep going around in circles in the three weeks left until the election as each party tries to convince voters they want to take action on stimulus without actually reaching a compromise. A compromise after the election during the lame-duck session may not be any easier than it is now.
Johnson and von der Leyen will talk today ahead of Thursday’s EU Summit — UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen are scheduled to hold a phone call today to see if there is any space for a compromise ahead of the 2-day EU Summit that begins on Thursday.
The EU had hoped there would be a Brexit trade deal to approve at this week’s Summit, thus giving national parliaments time to approve the treaty before December 31, when the UK is scheduled to leave the single market. Unless there is a last-minute deal today, the two sides appear ready to blow through the Summit deadline as they continue to engage in maximum brinkmanship. EU officials do not appear to believe Mr. Johnson’s threat that he will walk away from the talks by tomorrow (Oct 15) if he doesn’t think there is a chance for a deal.
Time is running very short because there is still the need for two weeks of so-called “tunnel” talks to wrap up negotiating details after the outline of an agreement has been reached. The EU can always hold an emergency summit to approve a Brexit deal, if and when one occurs, which means the two sides probably have another few weeks to negotiate. The main sticking points continue to be fishing rights, UK state aid rules, and the deal’s enforcement mechanism.
The markets became less optimistic about a deal with GBP/USD on Tuesday falling sharply by -0.97% from Monday’s 1-month high.
U.S. PPI inflation expected to move higher but remain subdued — The consensus is for today’s Sep final-demand PPI report to increase to +0.2% y/y from Aug’s report of -0.2% y/y. The Sep core PPI is expected to move higher to +1.0% y/y from Aug’s +0.6%.
Inflation at the producer level of the economy remains subdued compared to consumer prices since producers have little pricing power. The core PPI in August of +0.6% y/y was far below January’s pre-pandemic level of +1.7% y/y.
Yesterday’s Sep CPI report was exactly in line with market expectations. The Sep CPI rose to +1.4% y/y from Aug’s +1.3%, and the Sep core CPI was unchanged from Aug at +1.7% y/y.
The Fed’s preferred inflation measure, the PCE deflator, is at similar levels as the CPI. In August, the PCE deflator was at +1.4% y/y and the core PCE deflator was at +1.6% y/y. The core PCE deflator has already rebounded higher to +1.6% y/y from the 9-1/2 year low of +0.9% posted in April, but is still 0.3 points below February’s pre-pandemic level of +1.9% and 0.4 points below the Fed’s 2.0% inflation target.
The Fed has said that it will not start raising interest rates until inflation has matched its +2.0% target and is on its way to moving above target as a means of meeting its new average inflation target of +2.0%. The Fed is not projecting that the PCE deflator will hit +2.0% until 2023. However, inflation is running ahead of the Fed’s forecasts since the current core PCE deflator of +1.6% is already above the forecast of +1.2% for late 2020 and is nearly at the +1.7% forecast for the end of next year.
Meanwhile, current market expectations for inflation are only modestly below the Fed’s +2.0% target and are back to pre-pandemic levels. The 10-year breakeven inflation expectations rate is currently at +1.71%, up sharply from March’s low of +0.47% and just slightly below the +1.74% level seen at the end of 2019 before the pandemic struck in early 2020. Inflation expectations are back to pre-pandemic levels because of (1) the upward rebound in the economy, and (2) the Fed’s extraordinarily easy monetary policy with near-zero interest rates and its QE program of $120 billion per month.
