Market sentiment remains positive ahead of Biden’s speech on his planned infrastructure package. US equity markets are higher overnight, led by tech stocks, while the USD is broadly weaker. The US 10-year yield has consolidated just above the 1.7% mark. Nonfarm payrolls data is released on Friday night, with the market looking for a big rise in employment in March.
Biden is set to outline his highly anticipated infrastructure package at a speech in Pittsburgh later this morning, although most of the details have been released to the media overnight. The infrastructure spending will be in the region of $2 trillion (~10%/GDP) and spread over eight years, covering areas including public transport, aged care help and subsides for manufacturers, among others. The package will be paid for with higher corporate taxes. Biden plans to raise the corporate tax rate from 21% to 28%, partially reversing the Trump tax cuts, raise the minimum tax on US corporates’ foreign profits from 10.5% to 21% and eliminate some other corporate tax breaks. The US administration estimates it will take 15 years for the corporate tax changes to pay for the infrastructure package, implying it will add to the fiscal deficit in the meantime. The US fiscal deficit is forecast to be around 15%/GDP this year, the biggest since WWII.
A second part to the spending package, which will cover childcare, education and healthcare, is expected to be outlined in the coming weeks. This second package, expected to cost more than $1 trillion, will be paid for with higher taxes on wealthy individuals. Biden hopes to pass the infrastructure bill in the Northern Hemisphere summer. Given the Democrats’ wafer thin majority in the Senate, he will need to keep the party unified to pass the legislation.
The details of the infrastructure package shouldn’t have come as much of a surprise to the market and, for the bond market at least, there hasn’t been much reaction. The US 10-year yield is hovering around 1.73%, 1bp lower than at the time of the NZ market close. Yields may have been temporarily held down by month-end rebalancing, which was expected to result in large buying of bonds from investors that maintain fixed weights between equities and bonds (such as so-called ‘balanced funds’). Market-implied inflation expectations continue to drift higher, with the US 10-year breakeven inflation rate up 3bps to 2.38%, its highest level in almost eight years.
US equity markets are up overnight, led by the NASDAQ (+1.8%). The S&P500 (+0.8%) is set to close the quarter at a fresh all-time high. The sectoral breakdown of the S&P500 also suggests little surprise from the Biden infrastructure package. Infrastructure-sensitive sectors such as Industrials and Materials are little changed on the day.
Amidst the positive tone to risk sentiment, the USD is broadly weaker. The Bloomberg BBDXY index, which made a new high for the year yesterday, has fallen 0.2% over the past 24 hours (reversing more than half its move from yesterday). Month-end rebalancing was expected to lead to selling of the USD.
Movements in the major currencies have been reasonably contained. The EUR found support just above the 1.17 mark yesterday afternoon and it has rebounded overnight to around 1.1740 (+0.2%). The market seemed to brush off dovish comments from ECB President Lagarde in which she said the market “can test us as much as they want.” The comments suggest the ECB may be prepared to further increase stimulus to counteract rising bond yields.
The JPY continues to underperform amidst the risk-on backdrop and upward pressure on US Treasury yields. USD/JPY traded up to almost 111 yesterday afternoon, its highest level in 12 months, although it has eased back a little overnight. The NZD and AUD are both up around 0.15% over the past 24 hours against a backdrop of a weaker USD. The NZD trades this morning just under 0.70.
In economic data, the ADP employment survey showed a big increase in US jobs in March, albeit slightly less than consensus. The market looks for a similarly large increase in jobs growth from the payrolls report on Friday night (+650k consensus). The Chicago PMI increased to its highest level since mid-2018, which bodes well for the ISM manufacturing survey which released tonight. In China, there were upside surprises to both the manufacturing and non-manufacturing PMIs. The non-manufacturing survey was particularly strong, jumping to 56.3, its highest level since last November, helped by the government’s decision to remove some Covid-related restrictions. The data are consistent with the market’s expectation that the global economy will experience a very strong expansion this year.
On the Covid front, the situation in Europe remains bleak. French President Macron announced a four-week nationwide lockdown starting Saturday, which will include school closures and a ban on traveling between cities. Italy is expected to extend its current lockdown restrictions until the end of the month. The situation in Europe hasn’t been enough to derail positive market sentiment yet, with investors focused on the impressive vaccine rollout in places such as the US and UK.
Turning to domestic developments, NZ swap and bond rates increased again yesterday, mainly reflecting global forces. The 10-year swap rate increased 5bps, to 1.97%, while the short-end of the curve remained better anchored, at just below 0.5%.
The final version of the March ANZ business survey showed a slight softening in activity indicators from the preliminary report. Own activity expectations slipped to +16.6 from the +17.4 preliminary reading and +21.3 in February. Activity indicators point to positive, albeit subdued, GDP growth over the next 12 months. Inflation indicators, on the other hand, remain robust. A net 47.3% of businesses intend to increase prices, the highest reading since the survey was introduced in 1992 (not including preliminary results). Inflation expectations were a whisker below 2%. We expect CPI to head higher later this year, consistent with record high pricing intentions, although its unlikely to show up in the data until the Q2 CPI figures are released in July.