President Biden speaks with President Xi; Inflation remains muted

Prior week summary

The major U.S. equity indices touched new highs last week as stimulus bill optimism, sustained decline in COVID-19 cases, sustained increase in COVID-19 vaccinations, and dovish comments from the Federal Reserve Chair buoyed investor sentiment and drove equity prices higher. After leaders of the Democratic Party moved forward with plans to pass President Biden’s proposed COVID-19 relief package via budget reconciliation the week prior, work continued last week as the relevant committees drafted their piece of legislation that plans to be rolled up into a single $1.9 trillion relief package. With the March 14 expiration of jobless benefits for many Americans looming, House Speaker Nancy Pelosi is aiming for passage of a relief package by the end of this month. Keeping with that timeline, several House Committees acted swiftly last week and advanced their portion of the $1.9 trillion relief package. Notably, the Ways and Means Committee advanced legislation on Thursday that would send $1,400 direct payments to most Americans, extend enhanced unemployment benefits through August, and award families up to $3,600 per child. Many market participants have been encouraged by the size of the proposed bill, over twice as large as the $900 billion relief bill passed in December, but remain wary of pitfalls as the Democrats can’t afford to lose a single Democrat vote given that the Senate is split 50-50 with Vice President Kamala Harris holding the tie-breaking vote. In remarks delivered on Thursday, Speaker Pelosi outlined the envisioned timeline for passage of the package saying, “We hope to finish our markups in committee this week and then send it to the Budget Committee next week for them to work their will on it, then to the Rules Committee, and then to the Floor. We hope to have this all done by the end of February, certainly on the President's desk in time to offset the March 14 deadline where some unemployment benefits will expire.”

Elsewhere in Washington, President Biden held his inaugural call with Chinese President Xi Jinping on Wednesday evening. According to the White House's readout of the call, President Biden took issue with and pressed President Xi on China’s, “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang and increasingly assertive actions in the region, including toward Taiwan.” The Biden administration has expressed the need to keep the pressure on Beijing in recent weeks and tariffs placed on Chinese goods by the Trump administration remain in place.

COVID-19 cases continued to decline in the U.S. last week with the seven-day average daily case count falling to 86,964 cases on Monday compared to the 111,131 seven-day average observed last Monday. Notably, deaths and hospitalization remain on the decline while vaccinations continue to pick up steam. As of Sunday, 52.88 million Americans have received a shot of one of the COVID-19 vaccinations authorized for emergency use with approximately 2.25 million Americans receiving a shot on Sunday alone. Vaccinations have risen approximately 28% over the week with nearly 12% of the U.S. population receiving at least a single shot. Director of the National Institute of Allergy and Infectious Diseases Dr. Anthony Fauci has expressed optimism over the rollout of vaccines recently, but cautioned that COVID-19 variants may pose effectiveness issues with the existing vaccines. Speaking to NBC’s “Meet the Press” on Sunday, Dr. Fauci said, “But we do know that it (the South Africa variant) evades the protection from some of the monoclonal antibodies, and it diminishes somewhat the capability and the effectiveness of the vaccine to block it. It doesn’t eliminate it, but it diminishes it by multiple fold.”

In a light week for economic data releases, market participants turned their attention to the inflation outlook, as well as the employment situation. Wednesday’s release of the Consumer Price Index (CPI) indicated that consumer prices rose 0.3% in January, driven primarily by an uptick in energy prices. Inflation appears to remain muted with the CPI rising 1.4% year over year. While the increase in the headline figure was in line with expectations, the Core CPI, which excludes the more volatile food and energy components, fell below expectations and remained unchanged from the month prior. Jobless claims ticked lower last week to 793,000 claims, but only because the week prior’s reading was adjusted upward from 779,000 to 812,000 claims. Continuing claims remained on a downward trend as 4.55 million individuals continued to receive unemployment benefits last week compared to the 4.69 million individuals reported the week prior.

Speaking to the Economic Club of New York on Wednesday, Federal Reserve Chair Jerome Powell painted a dark picture of the employment situation and suggested that the real unemployment rate is far higher than that reported by the Bureau of Labor and Statistics (BLS) saying, “The BLS reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.” With this in mind, Chair Powell reiterated the Federal Reserve’s commitment to supporting the U.S. economy through the pandemic and called for continued support from the U.S. government saying, “Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity,” and noted, “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector.”

The look forward

In a busy week for economic data releases, market participants will be looking forward to updated figures on the Empire Manufacturing Index, retail sales, industrial production, jobless claims, housing starts, the Philadelphia Fed Business Outlook Survey, and existing home sales, among others. The minutes of the FOMC’s January policy meeting will be released on Wednesday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)