Markets
The US S&P 500 and Nasdaq closed at all-time highs yesterday, though it was the Dow Jones (+1%) which outperformed yesterday. The outperformance is linked to the blueprint deal reached by US President Biden and a group of bipartisan centrist Senators. It agrees on $579bn in new (infrastructure) spending and nearly $400bn in recurrent baseline transportation spending. A snake pit lays ahead to get final approval, but at least it’s a starting point. Risk sentiment on European stock markets was positive as well earlier on the day with main indices gaining over 1%. The extremely low volatility on FI markets of the past three trading days definitely plays a role. Once the post-FOMC repositioning had been done, rate markets entered some kind of deadlock. Daily changes on the US curve yesterday ranged between +0.8 bps and -1 bp. German yields showed a similar lackluster image (+0.3 bps to -1.1 bp). Ahead of the weekend and with the end of the quarter approaching, core bonds could get some positive momentum going in a daily perspective. Potentially hanging on the other side of the balance are today’s PCE deflators. The May numbers are expected to show a similar bump as US CPI data did earlier. Risks to consensus (headline: 3.9% Y/Y; core: 3.4% Y/Y) are probably tilted to the upside, but should normally be discounted. It would be telling from a market point of view if we’d see a willingness of US Treasuries (and the dollar) to slip away. Yesterday’s positive risk sentiment didn’t really hurt the greenback. Both the trade-weighted dollar and EUR/USD closed nearly spot on opening levels at 91.81 and 1.1932 respectively. Sterling fell prey to small short-term profit-taking the move as the BoE didn’t satisfy the needs of GBP bulls when it comes to normalization bets. EUR/GBP moved away from the lowest levels since early April, but for now, failed to take back the 0.86 big figure. GBP/USD in the run-up tried to conquer the 1.40 big figure (previous support), but afterward dropped back towards the low 1.39 area. The near-term trading band is 1.38-1.40. Asian stock markets remain positively oriented this morning. Higher-than-expected Japanese inflation numbers have no impact. Apart from PCE deflators, we have a continuing chorus of FOMC speakers. Most of them already revealed their personal preferences as discussed earlier this week. It’s probably waiting for some heavyweights like vice-chair Clarida or Brainard for a potential game-changer.
News Headlines
The central bank of Mexico unexpectedly raised policy rates to 4.25% yesterday. The decision followed accelerating bi-weekly headline and core inflation during the first fortnight of June of 6.02% and 4.58% respectively. Banxico, therefore, expects inflation to be above levels published in the last Quarterly Report with the headline figure now seen converging to the 3% target during the third quarter of 2022. “It was deemed necessary to strengthen the monetary policy stance in order to avoid adverse effects on inflation expectations, attain an orderly adjustment of relative prices, and enable the convergence of inflation to the 3% target”, the bank explained.
US financial institutions easily cleared the Fed’s stress tests, as they built up a huge stock of cash during the pandemic. In this year’s test, the effect of (a.o.) an 11% unemployment rate and stock markets dropping more than 50% caused the biggest US banks’ aggregate common equity tier 1 capital ratio to fall to 10.6%. A minimum level of 4.5% is required. The results pave the way for dividend payouts and stock buybacks.
A group of 10 bipartisan Senators reached a deal with the White House on a $579bn infrastructure bill. The plan includes a $109bn expense for roads and bridges, $49bn for public transit, and $73bn for power infrastructure. Funding comes from tax collection reinforcement, sales from the Strategic Petroleum Reserve, and assumptions of greater growth. Getting the proposal through Congress won’t be easy. Some Republicans are still in doubt and many (progressive) Democrats are angered seeing their priorities such as elder and child care not taken up in the bill. Biden hopes to persuade these Democrats by promising a separate bill that does include these provisions.
