President Biden unveils infrastructure package

Prior week summary

In a holiday-shortened week, the major U.S. equity indices moved higher with the S&P 500 crossing the psychologically significant 4,000 level as the recovery narrative gained steam on the back of expected fiscal stimulus, new vaccination milestones, and strong economic data releases. Market participants turned their heads on Wednesday when President Biden unveiled a $2 trillion infrastructure package that he deemed as a “once-in-a-generation investment in America.” The proposed package plans to repair 20,000 miles of roadway, expand broadband internet access throughout the country, and fund several sustainability and climate-focused initiatives, among other projects. The plan proposes to hike the current corporate tax rate from 21% to 28% and up the tax rate placed on companies’ foreign earnings to generate the funds needed to pay for the bill. Lobbying and negotiations are expected to kick off immediately and persist for months with passage expected this summer at the earliest. The proposed bill faces opposition on both sides with Republicans arguing that the package is too expensive and progressives arguing that the plan doesn’t go far enough in both scope and spending. President Biden indicated he was open to negotiation as long as tax hikes were limited to those making above $400,000 per year saying, “I’m open to other ideas, so long as they don’t impose any tax increase on peoples making less than $400,000.” Speaking in Kentucky following the unveiling of the package, Senate Minority Leader Mitch McConnell expressed opposition to the plan in its current form stating that it includes, “not only significant more borrowing, but raising taxes on the most productive parts of our economy,” and that, “If it’s a Trojan horse for a massive tax increase, put me down as highly skeptical.” The package is expected to be the first of two pieces of economic legislation that the Biden administration aims to sign into law in the coming months. The second package, scheduled to be unveiled later this month, is rumored to cost an additional $1–2 trillion and focus on childcare, education, and healthcare.

Significant progress has been made in the U.S’s fight against COVID-19 since the turn of the year. While daily case counts have ticked higher in the last week, current daily levels remain well below the pandemic peak seen in early January. Much of that progress has resulted from the nationwide push to vaccinate American citizens. The Centers for Disease Control and Prevention (CDC) reported that over four million individuals were vaccinated on Sunday bringing the seven-day average vaccination count to over three million per day, a record. Over 165 million doses have been administered with 32% of the total population and over three quarters of the 65+ population receiving at least one shot. In a move that reflects the improving situation in the U.S., the CDC released updated guidance on Friday that gave the go-ahead for fully vaccinated individuals to resume recreational travel. When speaking at a White House briefing last week, CDC Director Rochelle Walensky cautioned against too much optimism and warned of a possible fourth surge in the coming weeks saying, “I’m going to lose the script, and I’m going to reflect on the recurring feeling I have of impending doom. We have so much to look forward to, so much promise and potential of where we are, and so much reason for hope. But right now, I’m scared.” While the situation in the U.S. appears to grow ever more optimistic, the situation in Europe remains precarious with case counts edging higher in several countries and France announcing a nationwide four-week lockdown on Wednesday. Speaking in a televised address announcing the restrictions, French President Emmanuel Macron emphasized the need for a lockdown saying, “We did everything we could to make these decisions as late as possible, when they became strictly necessary. That is now,” and argued that the COVID variants are “more contagious and deadlier.”

Market participants were the beneficiaries of a deluge of economic data releases last week that largely reinforced the recovery narrative. Tuesday’s release of the Conference Board Consumer Confidence Index indicated that consumer confidence rose to a one-year high in March and marked the biggest month over month gain in almost 18 years. Analysts speculated that the $1.9 trillion relief bill and the increased pace of vaccinations were the main drivers of optimism. After the regional manufacturing surveys had largely pointed to a significant pickup in business conditions, the release of the March ISM Manufacturing Index on Thursday reinforced that notion posting a 64.7 level, well above the consensus estimate of 61.5 and marking the strongest reading since 1983. Every component that makes up the index saw gains in March and only one of the 18 industries reported a pullback from February. Notably, both the new orders and production components posted their strongest readings since 2004. Attention turned to the labor market late in the week as investors digested the releases of the ADP employment report, jobless claims, and the March non-farm payroll report. Wednesday’s release of the ADP employment report suggested that the U.S. economy added 517,000 private-sector jobs in March, modestly below expectations but well above the 176,000 job additions seen in February. After falling to a pandemic low the week prior, jobless claims ticked higher for the week ended March 27 to 719,000 claims. Notably, the figure for the week prior was revised downward to 658,000 claims. Continuing claims also came in higher than expectations but still notched a week over week decline. Lastly, Friday’s release of the non-farm payroll report smashed expectations as it reported the U.S. economy added 916,000 jobs in March, well above both the 660,000 consensus expectation and the upwardly revised 468,000 job additions seen in February. Additionally, the unemployment rate nudged lower to 6.0% from 6.2% and the labor force participation rate moved modestly higher from 61.4% to 61.5%.

The look forward

Market participants are gearing up for another busy week with updated figures on the ISM Non-Manufacturing Index, factory orders, durable goods orders, jobless claims, and wholesale inventories, among others, dotting the economic calendar. The minutes for the FOMC’s latest meeting are released on Wednesday. Federal Reserve Chair Jerome Powell will speak about the global economy at an IMF panel on Thursday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)