President Biden unveils American Families Plan proposal
Prior week summary
In an eventful week for market participants, the major U.S. equity indices ended the week mixed while mid- and long-term treasury yields resumed their climb higher as investors digested President Biden’s American Families Plan proposal, the FOMC policy meeting, and a deluge of corporate earnings releases. After mid- and long-term yields moved lower for much of April, yields pushed higher throughout the week with the 10-year Treasury topping 1.68% on Thursday before ending the week around 1.65%. The move up in the 10-year Treasury gave way to a comparable rise in the 10-year breakeven inflation rate. The 10-year breakeven inflation rate, calculated as the difference between the 10-year Treasury and 10-year TIPs, rose nearly eight basis points over the week, setting a multiyear high on Thursday, before falling slightly to end the week at ~2.41%. The rise in yields and inflation expectations has been largely attributed to investors’ expectations for strong U.S. growth and continued fiscal stimulus.
On Wednesday, President Biden unveiled the American Families Plan proposal in a widely broadcast, joint session of Congress. The $1.8 trillion proposal aims to advance childcare, education, and family leave initiatives, among others. According to a fact sheet released by the White House, the American Families Plan will “add at least four years of free education,” “extend tax cuts for families with children and American workers,” and “provide direct support to children and families.” The proposal comes on the heels of the $2.3 trillion American Jobs Plan, a package that aims to improve the country’s infrastructure and one that Congress has been increasingly engaging in negotiations on in recent weeks. After Senate Republicans tabled a $568 billion counteroffer to the American Jobs Plan last week, President Biden and Sen. Shelley Moore Capito, the Republican lead for infrastructure negotiations, held talks on Thursday to find common ground. Following the meeting, Capito released a statement that reiterated a commitment to bipartisan negotiations saying, “We both expressed our mutual desire to work together and find common ground to address these challenges and deliver results for the American people. I stand ready to be a partner in advancing infrastructure legislation in a bipartisan way — just as we’ve done in the past.” While both Democrats and Republicans have expressed an interest in passing bipartisan legislation, Senate Majority Leader Chuck Schumer left the door open for passage of the proposal via the budget reconciliation process, a maneuver that would allow passage without any Republican votes, saying, “Of course reconciliation is an option. We hope to do as much as we can in a bipartisan way. But the number one goal is a big, bold plan along the lines of what President Biden has proposed.” Although negotiations have been picking up steam in recent weeks, many continue to expect the passage of some form of the proposed American Jobs Plan later this year, likely in the summer.
The FOMC held its third policy meeting of the year last week with minimal fanfare. Expectedly, the FOMC held the target range steady at 0%–0.25%, pledged to continue the current pace of asset purchases and noted improvement in economic conditions as the country works to place the COVID-19 behind it. When asked about the timing of asset purchase tapering during the press conference following the announcement of the FOMC’s decision to leave the target range unchanged, Fed Chair Jerome Powell looked to allay any fears that the Federal Reserve will pull back support and move to a more hawkish stance saying, “When the time comes for us to talk about talking about it we’ll do that. But that time is not now. We’ve had one great jobs report. It’s not enough. We’re going to act on actual data, not on a forecast, and we’re just going to need to see more data. It’s no more complicated than that.” Powell also looked to ease concerns of a pick-up in inflation saying that the recent uptick in price pressures is “transitory” and that the Fed had the tools to deal with a persistent rise in inflation over 2%.
Market participants received several high-profile economic updates last week that largely topped expectations, suggesting the U.S. economic recovery may be gaining momentum. The Conference Board Consumer Confidence Index reached a pandemic-era high at 121.7, smashing both the consensus expectation of 113.0 and the March 109.7 level. Analysts noted that the strong reading mostly reflected consumers’ assessment of current conditions — a strong vaccination campaign, direct stimulus payments, and the expectation for additional fiscal stimulus. Thursday’s release of the first-quarter GDP advance estimate indicated that the U.S. economy grew at a 6.4% annualized pace in the first quarter, modestly below expectations, but well above the 4.3% pace seen in the fourth quarter. Expectations are continuing to rise for an even stronger second quarter. The Atlanta Fed’s GDPNow Tool, which attempts to forecast the current quarter’s GDP in real-time, currently forecasts the second-quarter GDP figure to clock in at a strong 10.4%.
Momentum for non-SOFR-based alternatives to LIBOR has been gaining traction in recent weeks. Bank of America recently announced the issuance of a $1 billion floating-rate note tied to the one-month tenor of the credit-sensitive Bloomberg Short-Term Bank Yield Index (BSBY). In a statement released announcing the issuance, Bank of America Treasurer Andrei Magasiner hailed the use of the new index saying, “We are pleased to be in a position to help lead the market’s transition away from LIBOR. The development of a robust alternative term rate, such as BSBY, is an important development for traditional banking products and for our clients.” Another credit-sensitive index and potential alternative to LIBOR, AMERIBOR, also made headlines last week. On Thursday, the American Financial Exchange, the developer of AMERIBOR, announced that PNC Bank, “has joined the exchange, a transparent, rules-based and self-regulated electronic market for overnight and term unsecured lending among banks, financials, and corporates.”
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the ISM Manufacturing Index, construction spending, factory orders, durable goods orders, the ISM Services Index, and the April non-farm payroll report dotting the economic calendar, among others.
Market implied policy path (Overnight indexed swap rates)
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