28.05.2021 -
Mixed US economic data released since the underwhelming April US employment report have soothed worries that the US economy will soon overheat. In Europe, Improving COVID trends helped propel several regional benchmarks to record highs this week. After testing the bottom of its recent trading range at 1.55% on Monday, the yield on the 10-year US Treasury note traded at 1.61% at midday Friday, down 2 basis points on the week. The price of a barrel of West Texas Intermediate crude oil rallied $4.50 from week-ago levels while volatility, as measured by the Cboe Volatility Index (VIX), slid to 16.75 from 20.6.
MACRO NEWS
Biden to propose largest US budget since World War II
The White House is expected to release US President Joe Biden's first budget proposal on Friday and the plan would push government spending to its highest level since the Second World War. The measure would appropriate $6 trillion during the fiscal year which begins in October, with outlays expected to reach $8 trillion annually over the coming decade. The spending blueprint forecasts that total debt held by the public will rise to the highest levels in US history by 2024, at 117% of gross domestic product. The outline assumes inflation will rise no faster than 2.3% a year and that the economy will grow just under 2% annually over the coming decade. It also assumes that a retroactive capital gains tax hike have been passed and will have taken effect at the end of April 2021.
Gap narrows in US infrastructure talks
While the White House and Republican negotiators remain hundreds of billions of dollars apart on its cost, the two sides moved closer to an agreement that would modernize the nation's infrastructure this week. GOP lawmakers proposed a package totaling nearly $1 trillion while the White House lowered its offer to $1.7 trillion in new spending from its $2.3 trillion opening bid. Negotiations will continue next week, extending beyond Biden's self-imposed Memorial Day deadline. If the talks prove unproductive, Democrats may attempt to pass a bill using the budget reconciliation process, which requires only a simple majority to pass in the US Senate but imposes certain legislative constraints.
Fed's favorite inflation measure surged in April
On Friday, the US Department of Commerce reported that the core personal consumption expenditures index rose 3.1% year over year. The US Federal Reserve aims to maintain core PCE at around 2% but has undershot that level on a sustained basis for more than a decade. Fed officials believe the inflation surge, fueled largely by base effects and production bottlenecks, will be temporary. The Commerce Department also reported that personal income, after surging 20.9% in March on stimulus payments, fell 13.7% in April. The savings rate remained elevated at 14.9% while consumer spending rose 0.5%. Data released earlier in the week were mixed, showing a slowdown in homes sales as price rises and low inventories kept many buyers on the sidelines. Durable goods orders were mixed as well, falling at the headline level though core orders rose. First quarter GDP was unrevised at 6.4% while jobless claims fell to the lowest level of the pandemic at 406,000. Overall, US economic surprises have been to the downside lately, cooling fears that the Fed will have to abruptly shift away from its superloose policy stance.
ECB policy shift concerns fade
Anticipation of a slowdown in the pace of bond purchases by the European Central Bank eased this week after a series of top officials emphasized that while the eurozone's economic outlook is improving, it is still too early to discuss dialing back policy accommodation. ECB Executive Board member Fabio Panetta said that he sees no signs of sustained inflation pressures. He also said the region's recovery is incomplete and its economy remains reliant on monetary and fiscal support.
QUICK HITS
The European Union barred Belarus' state airline from landing at airports within the EU after Belarus forced a Ryanair jetliner to land in Minsk in order to arrest a dissident journalist.
The Fed mopped up huge amounts of excess liquidity this week, pushing demand for reverse repurchase agreements to record levels.
President Biden has asked the US intelligence community to determine the origins of the coronavirus outbreak.
China halted the sale of commodities-linked products to retail investors amid runaway inflation in raw materials.
The US Federal Aviation Administration downgraded Mexico's air safety rating. As a result, Mexican airlines cannot add new US routes or code-share with US carriers.
The S&P Case-Shiller home price index rose 13.3% year over year in April, the fastest growth rate since December 2005.
The Federal Reserve Bank of New York projects that the Fed's balance sheet will hit $9 billion by the end of 2022, or 39% of GDP.
Due to coronavirus concerns, the US Department of State this week issued a Do Not Travel advisory for Japan in advance of this summer's Olympic Games.
China and the US held the first high-level trade talks since Biden assumed office. The negotiations were described by China as candid, pragmatic and constructive.
India stocks closed at record levels on Friday as COVID case counts continued to recede. The Reserve Bank of India this week warned investors that high equity valuations are not grounded in reality.
A Dutch court ruled this week that Royal Dutch Shell is partially responsible for climate change and ordered the company to reduce its carbon emissions. The ruling was the first of its kind.
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