Weekly View - Almost there
A select group of Republicans and Democrats came together last week to broker a deal on President Biden’s infrastructure spending plan, ultimately agreeing on a package valued at USD1 trn (from USD2.3 trn, as initially proposed). The new additional spending is even lower, at only about USD580 bn (2.7% of GDP), the rest being repackaged spending. Notably, funding of it will not include any new taxes. Despite its size reduction, the plan’s bipartisan endorsement is what is key. While this plan will mostly cover roads, bridges and broadband networks, Biden’s next plan will be focused on “human infrastructure” and will include tax hikes, which is why we still support our who pays the bill theme.
In politics elsewhere, French electors in regional elections over the weekend failed to endorse the far right. However, President Macron’s La République en Marche came out weakened as well. Rather, it was the traditional centre-left and centre-right parties that emerged ahead, which we interpret as a statement of stability. Meanwhile, Europe’s economy continues to recover, with the first purchasing manager indices for June coming through very strong, but also confirming building inflation pressure.
Last week, the more dovish bankers at the Federal Reserve continued to do damage control in the wake of the Fed’s latest policy meeting while we still expect a quantitative-easing taper announcement around the Fed’s Jackson Hole policy retreat in August. The Fed bought more US Treasuries than there was net issuance over the past quarter for the first time since the pandemic. The supply-demand balance looks set to worsen in the second half, consistent with our forecast of slightly higher yields. Last week brought US Treasury yields and breakeven inflation rates back to where they were before the Fed’s June meeting while equities hovered around their highs. While risks remain, including the spread of the Delta covid variant, the pace of vaccination should keep it contained. The Bank of England was slightly more hawkish, as were some emerging-market central banks that may find it difficult to tolerate an inflation overshoot. In the week ahead, we will be focused on the US ISM and nonfarm payroll numbers.