Senate Republicans unveil $928 billion infrastructure counterproposal
- June 1, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
The major U.S. equity indices pushed higher for the week with the S&P 500 notching a modest month-over-month gain amid mixed economic data, continued negotiation of the American Jobs Plan, and an improved COVID-19 outlook in the U.S. The 10-year U.S. Treasury yield moved modestly lower over the week to the tune of three basis points, ending the week at 1.58%. While the 10-year yield neared 1.70% in the middle of the month, long-term yields have moved lower during May, taking a breather from the rapid rise in the level of rates seen in the first quarter. Additionally, 10-year inflation expectations broke out to multiyear highs mid-month but have since retreated to levels seen near the beginning of the month as investors continue to digest both commentaries from Federal Reserve officials and updated economic data. There is no doubt that prices in the commodity markets have been on the rise, but the argument continues to center around the persistence of price appreciation. Many market participants, including Federal Reserve officials, have dubbed the recent rise in prices as “transitory” and have attributed the rise to a unique combination of supply chain bottlenecks and robust consumer demand as the U.S. economy works its way out of the COVID-19 pandemic. Perhaps not the most high-profile data release of the week, but one that the Fed surely had its eye on is the PCE Deflator. The Fed’s preferred measure of inflation reported that prices, excluding the food and energy components, rose 0.7% month over month, marking the largest monthly advance since the fourth quarter of 2001. The year-over-year figure produced similarly historic increases rising 3.1%, the largest increase experienced since the third quarter of 1992. As many market participants remain hopeful that an explosion of economic activity is on the horizon, Thursday’s release of the second estimate of first-quarter GDP indicated that the U.S. economy is already off to a strong start to begin the year expanding at a 6.4% annualized pace on the back of trillions in federal stimulus and a nationwide vaccination campaign. Expectations for the second quarter appear even more optimistic than the strong results seen in the first quarter. The Atlanta Fed’s GDPNow Tool, which attempts to forecast the current quarter’s GDP in real-time, currently forecasts the U.S. economy to expand at a 9.3% annualized pace in the second quarter.
Aside from updated figures on the PCE Deflator and first-quarter GDP, market participants were the beneficiaries of several high-profile data releases last week that largely painted a mixed picture of the U.S. economic recovery. New home sales increased at an 863,000 annualized pace in April, below both the March reading and the consensus expectation. The Conference Board Consumer Confidence Index fell moderately below expectations, but assessments of current conditions remained strong. Notably, the inflation expectation component of the report increased and remains at levels near the highs of the series’ history. As COVID-19 restrictions have eased around the country, the number of individuals applying for unemployment insurance has fallen dramatically and last week was no different. Initial jobless claims fell to yet another pandemic-era low on Thursday when reports indicated that 406,000 individuals filed for unemployment for the week of May 22. After moving higher the week prior, continuing claims have resumed their descent falling to 3.64 million claims, below expectations and the 3.75 million cases reported the week prior. Federal Reserve Vice Chair for Supervision Randal Quarles offered his thoughts about the Fed’s asset purchase program on Wednesday and suggested that discussions may be held in the coming meetings saying, “If my expectations about economic growth, employment, and inflation over the coming months are borne out, it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings,” and noted that, “We may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment.”
After the Biden administration tabled a $1.7 trillion counteroffer to Senate Republicans earlier this month, Republicans responded on Thursday with their second counterproposal unveiling a $928 billion infrastructure plan, just over half the price tag of the current Biden administration proposal. The newest Republican proposal builds on the back of the original $568 billion counteroffer and increases funds mainly for items dubbed as “traditional” infrastructure, such as roads and bridges. In a letter sent to the White House with the proposal, Senate Republicans outlined their reasoning for keeping the items in the American Jobs Plan to “traditional” infrastructure saying, “As a group, we were explicit that policies unrelated to physical infrastructure do not fit in this package. This is not because we do not value these important issues. We simply believe that these policies should be addressed in separate legislation that does not dilute our shared objective of passing this package. We can address these important issues separately without weakening our commitment to building America's infrastructure.” While negotiations have heated up in recent weeks, many political analysts do not see the passage of a bill until later this summer.
After unveiling the AMERIBOR Term 30 rate in April, the American Financial Exchange (AFX) announced earlier this month that they have constructed an IOSCO-compliant 90-day forward-looking rate, AMERIBOR Term 90. In a statement released announcing the development, the AFX touted the benefits of the new forward-looking rates saying, “These new AMERIBOR benchmarks will provide short-term borrowers and lenders with insight into future funding costs, enhancing transparency and liquidity in the short-term, unsecured market,” and noted, “We will be publishing a 180- and 360-day forward-looking term rate, shortly.”
The look forward
Market participants will look forward to the release of updated figures on the ISM Manufacturing Index, the ISM Services Index, construction spending, the ADP employment report, durable goods orders, factory orders, and most notably, the May non-farm payroll report.
Market implied policy path (Overnight indexed swap rates)
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