President Biden signs the American Rescue Plan Act
- March 15, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
Mid and long-term treasury yields continued their push higher last week along with the major U.S. equity indices as strong economic data, declining COVID-19 case counts, and the passage of the American Rescue Plan Act dominated headlines and worked to improve investor sentiment. Yields showed no signs of stopping their impressive run-up last week as the 10-year treasury yield ended the week at 1.64%, approximately eight basis points higher than a week earlier and over 70 basis points higher than the 10-year yield seen at the turn of the year. Much of the rise in yields has been attributed to the expectation of strong consumer demand materializing in the second quarter of this year and beyond, as well as an ever-increasing expectation of rising prices. This increase in inflation expectations has been observed in the 10-year breakeven inflation rate, which represents the market’s expectation of inflation over the next 10 years and is calculated as the difference in the yield on the 10-year treasury and the 10-year TIPS. The 10-year breakeven inflation rate now sits at 2.26%, roughly 0.25% higher than the rate seen in early January and nearly 1.50% higher than the 10-year breakeven inflation rate seen one year ago. While realized inflation remains rather muted, recent price indicators have suggested that inflationary pressures are firming. Wednesday’s release of the Consumer Price Index (CPI) indicated that consumer prices rose 0.4% in February, in line with expectations but above the 0.3% increase seen in January. Roughly half of the increase was attributed to the 6.4% increase in gasoline prices seen over the month. Notably, the core CPI, which excludes the often-volatile food and energy segments, rose 0.1% over the month, breaking a 3-month streak of flat readings. Wholesale prices appear to be continuing their run higher as well. Friday’s release of the Producer Price Index indicated wholesale prices rose 0.5% in February, in line with expectations but far below the record-setting 1.3% jump seen in January. Producer prices are up 2.8% year over year, the largest 12-month pick-up in over 2 years.
After the Senate amended and passed the House of Representatives $1.9 trillion stimulus bill the week prior, The House of Representatives passed the bill, dubbed the American Rescue Plan Act, in a party-line vote on Wednesday and President Joe Biden signed the bill into law on Friday afternoon. The bill remained in a substantially similar form to the bill the House of Representatives passed just over two weeks ago. Of note, the American Rescue Plan Act includes up to $1,400 in direct payments to qualifying individuals, an extension of the $300 per week enhanced unemployment benefit through September, $350 billion in aid for state and local governments, an increase in the child tax credit up to $3,600 per child, $47 billion in small business aid, and approximately $70 billion in funds dedicated to COVID-19 testing and vaccine distribution. Before signing the bill President Biden touted the importance and impact of the bill saying, “This historic legislation is about rebuilding the backbone of this country and giving people in this nation, working people, middle-class folks, people who built the country, a fighting chance.” With a COVID-19 relief package now signed into law under the Biden administration, efforts now look to be focused on an infrastructure bill. On Friday, House Speaker Nancy Pelosi released a statement on an “infrastructure and jobs package” announcing that she has, “called upon the Chairs of the Committees of Jurisdiction to work with their Republican counterparts to craft a big, bold and transformational infrastructure package.”
COVID-19 case counts in the U.S. continued their decline last week with the seven-day average daily case count falling approximately 10% to 55,500, marking a stark contrast to the 197,000 seven-day average daily case count seen at the beginning of January. Vaccinations continued to be administered at a breath-taking pace as over 100 million doses of COVID-19 vaccines have been administered as of last week. The 100 million vaccination milestone, reached on Friday, comes only one day after President Joe Biden announced that he directed every state to make all adults eligible for a COVID-19 vaccine by May 1. In Europe, the situation appears to be deteriorating as several countries, including Germany and Italy, have seen a notable rise in COVID-19 infections in recent weeks. Italian Prime Minister and former European Central Bank President Mario Draghi announced new COVID-19 restrictions last week that will see the entire country placed under the strictest level of the new measures for the Easter holiday. Beginning Monday, any region that has over 250 cases per 100,000 inhabitants will be deemed a “red” zone, which will see the closure of all bars, restaurants, and schools in the impacted region. Speaking to reporters following the unveiling of the new restrictions, Draghi said, “More than a year after the beginning of the health emergency, we are unfortunately facing a new wave of contagions. The memory of what happened last spring is alive, and we will do everything to prevent it from happening again.” Finally, on Thursday, the European Medicines Agency announced that Johnson & Johnson’s Janssen vaccine was authorized for emergency use.
The look forward
Market participants are gearing up for a busy week of economic data releases as updated figures on the Empire Manufacturing Index, retail sales, industrial production, building permits, housing starts, and jobless claims, among others, dot the economic calendar. The FOMC holds its two-day monetary policy meeting on Tuesday and Wednesday.
Market implied policy path (Overnight indexed swap rates)
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