Financial Markets Continuing to React to American Rescue Plan

March 11, 2021

The $1.9 trillion American Rescue Plan will be signed by President Biden tomorrow. This is an aggressive relief effort aimed predominantly at the middle class and includes another round of direct payments to households, an extension of unemployment benefits, and — something excluded from the CARES act — support for state and local governments.

In combination with lower-than-reported U.S. CPI inflation reported yesterday, the ongoing roll-out of Covid-19 vaccines, a drop in coronavirus case and death numbers, and upwardly revised forecasts of global and U.S. economic growth in 2021, investors continued to push up equity and commodity prices and to depress the dollar.

  • Stock markets in Asia rose Thursday by 2.4% in China, 1.7% in Taiwan and Hong Kong, 1.9% in South Korea, 1.5% in Indonesia, 0.9% in Singapore, and 0.6% in Japan. Continental European markets have mostly risen today, but not nearly as much as those in Asia. U.S. stock futures are higher, too.
  • The trade-weighted dollar has declined 0.3%.  The dollar fell 0.5% overnight relative to the Swiss franc, Mexican peso, and Aussie dollar, 0.4% versus the kiwi, 0.3% vis-a-vis the loonie and yuan, 0.2% against the euro and 0.1% versus sterling. The yen didn’t even keep pace with the dollar, dropping 0.2%.
  • Prices for WTI oil and gold climbed 1.2% and 0.4% overnight.

The movement of wealth into riskier assets and consensus among central bankers that the present rise of inflation will be self-limiting in the face of continuing enormous economic slack has allowed sovereign debt yields to pare earlier gains. The ten-year Japanese JGB yield fell back three basis points overnight, comparable Italian and U.S. Treasury yields settled back two basis points, and the ten-year sovereign debt yields fell a single basis point in Germany, France and Great Britain.

This week’s monetary policy review by the Governing Council of the European Central Bank left the interest rate structure unchanged, with a zero percent refinancing rate flanked by a negative 0.5% overnight deposit rate and a +0.25% rate on the marginal lending facility. Euroland has been less successful than many other places rolling out Covid-19 vaccines; the need for fresh pandemic restrictions led to negative GDP growth in the final quarter of 2020 and apparently in the present quarter as well. In response, the ECB plans to increase the pace of bond purchases next quarter to a significant degree. Other quantitative policy tools are being continued, and forward guidance points to a forcefully accommodative ECB stance continuing for the foreseeable future.

The ECB Governing Council unveiled updated macroeconomic forecasts at today’s press conference. Scant change was made in projected GDP growth: the estimate for 2021 was nudged 0.1 percentage point higher to 4.0%, that for 2022 was nudged down 0.1 percentage point to 4.1% and growth in 2023 continues to be projected at 2.1%. Due to “a number of idiosyncratic factors, such as the end of the temporary VAT rate reduction in Germany, delayed sales periods in some euro area countries and the impact of the stronger than usual changes in HICP weights for 2021, as well as higher energy price inflation, the 2021 CPI inflation forecast was increased from 1.0% to 1.5%, but the longer term CPI projections of 1.2% in 2022 and 1.4% in 2023 were left virtually as before. Significant, inflation at the end of the policy horizon remains below target, and near-term risks surrounding the GDP growth forecast are still skewed to the downside.

The National Bank of Serbia‘s monetary policy stance was also reviewed today, ending with a decision to maintain a record low 1.0% policy interest rate. That rate last year was slashed by 50 basis points in March and 25 bps each in April, June and, most recently, December. Inflation currently remains below 1.0% versus a target corridor of 1.5-4.5%, but it is expected to pick up as Serbia’s economy recovers. Nonetheless, the Executive Board has projected no immediate urgency to start tightening its stance.

Monetary policy is also being reviewed today at Peru’s central bank.

New U.S. jobless insurance claims fell even more sharply last week than analysts were predicting. The 712k number of new claims was the lowest weekly figure since November 7 and resulted in a 34k drop in the 4-week moving average to 759k. Continuing jobless claims in the latest reported week also shrunk to 4.144 million.

Most economies continue to exhibit an increase in price pressures. For example, Japanese producer price deflation diminished to -0.7% last month from -1.5% in January and -2.3% as recently as November. Whereas import prices between November 2019 and November 2020 had dived 10.7%, their on-year decline in February was just 3.5%.

And Romanian CPI inflation rose to a 13-month high of 3.2% in February from 3.0% in January and 2.2% last October. Brazilian CPI inflation of 5.2% in February was a tad more than forecast and up from 4.5% in January and 3.14% last September.

The Swiss government updated its GDP and CPI forecasts, now projecting growth of 3.0% this year followed by 3.3% in 2022 and CPI inflation of 0.4% in both 2021 and 2022. The 2022 projections are a bit above the previous ones.

Turkey experienced its 14th consecutive monthly current account deficit in January. Its $1.863 billion size was down from a deficit of $2.03 billion a year earlier.

Denmark’s current account surplus widened to DKK 16.8 billion in January, which constitutes a 4-month high and the second largest surplus in 15 months.

South African factory output fell 0.6% on month and 3.4% on year in January. Mining production that month was 6.2% less than in January 2020.

Consumer confidence in Thailand rebounded from a 9-month low in January to a 2-month high in February.

The British Royal Institute of Chartered Surveyors house price balance improved 3 points to a 2-month high in February.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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