Markets react to impeachment vote, stimulus plan, and pandemic outlook

While the house voted to impeach President Trump for a second time during his presidential term, the markets seemed equally focused on anticipated actions expected out of President Elect Biden’s incoming administration, speculation over what the Federal Reserve might do in 2021, and the competing forces in the battle against the COVID-19 pandemic.

Stimulus optimism

Driving equities upward for most of the week was optimism over additional stimulus promised by the incoming Biden administration, coupled with increased hopefulness as the coronavirus vaccine distribution continued with many states expanding current eligibility to any people over 65 or with specific pre-existing conditions. Meanwhile, the incoming 46^th U.S. president on Thursday afternoon announced a $1.9 trillion strategy that would include additional coronavirus relief for individuals and funds for a national vaccination program. This “American Rescue Plan” would also raise direct payments to Americans to $2,000 from the original $600 and lift the minimum wage to $15 an hour while extending eviction moratoriums until September. Yet, it appears the market had already priced in most of what was included in the plan and, upon release, there were dueling viewpoints on its merits and drawbacks. Friday saw equities fall and head towards a losing week.

The Federal Reserve and interest rates

Comments from Federal Reserve chairman Jerome Powell dispelled speculation circulating in the markets that the Fed might start reducing bond purchases as early as this year. The Fed chair said the recovery of the economy from the pandemic recession “is far from our goals” and, until the economy made “substantial further progress” toward the Fed’s goals of maximum employment and stable 2% inflation, that it would continue its commitment to buy $120 billion in bonds each month. “When that happens — and we can see that clearly — we’ll let the world know,” Powell said. “We will communicate very clearly to the public and we’ll do so well in advance before actively considering any tapering of asset purchases.” Ten-year treasury rates had rallied to a nearly 10-month high on Tuesday as investors sold treasuries, and the yield kept solidly above 1% throughout the week. Mid- and longer-term swap rates were relatively flat last week but inched downward at the back half of the week. Still, the bigger picture in moves in long-term rates continues to compel interest in pre-issuance hedging for corporates.

(Related insight: Read “Hedging future fixed rate debt”)

The week ahead

With Martin Luther King Jr. Holiday on Monday, we expect a light week in terms of new economic data, but many will follow the inauguration of Joe Biden on Wednesday and the unfolding of the impeachment trial process in the days and weeks that follow.

(Related insight: Register for the webinar, "An Altered Currency Landscape and Impact to Corporate Hedging Programs")