There is too much market noise for US stocks to continue to their rally into uncharted territory. The reflation rally is taking a timeout as Wall Street digests small earnings results, consistent Fedspeak, and on hopes that Biden’s stimulus deal appears poised to get done by mid-March. Partisan politics will likely remain the case and that means Biden’s USD1.9 trillion stimulus package could end up coming in somewhere between USD1.1-1.4 trillion. This stimulus deal will get done via reconciliation and with Democrats unlikely to raise taxes until after the midterms, that means it needs to be deficit-neutral over the budget window which is around 10 years. A big part of the reflation trade is for infrastructure spending, which might have to wait until after the next fiscal year in October or possibly in early 2022.
Stocks are still where everyone wants to be and that probably won’t change unless we have a major setback with COVID vaccine rollouts or policy miscommunication by the Fed.
Fed says will remain ultra-dovish
Fedspeak from both Kaplan and Bullard reaffirmed the stance that the Fed won’t deviate from the ultra-accommodative script anytime soon. Fed’s Kaplan expects to see big improvements with unemployment and that a temporary jump in inflation won’t faze them. Kaplan is expecting higher inflation but remains uncertain as to how long it will persist. Kaplan is skeptical the US economy will see persistent inflation over the long-term.
Fed’s Bullard provided an academic presentation on policy combinations and a review on income inequality. His presentation did not touch upon risks to the outlook or what will be the Fed’s next move, but it did serve as a reminder that their policy stance is anchored.
NFIB and Jolts
The NFIB small business optimism index dropped to an eight-month low as businesses grappled with the reality of a Biden administration and the winter wave of COVID-19. Lockdowns and lack of aid sent the NFIB index to 95.0, much lower than the analysts’ forecast of 97.0 and the prior reading of 95.9. Small businesses were growing pessimistic that life was going to get harder if President Biden follows through on his pledge to raise both minimum wage and taxes.
The US job openings data painted a rosier picture that hiring wasn’t too bad at the end of the year. The JOLTS job report showed job openings in December rose to 6.65 million, better than the consensus estimate of 6.4 million and the upwardly revised 6.57 million openings in the prior month. Available job opportunities have steadily been above the 6-million level since June and that could dampen the Biden administration’s call for massive stimulus.
This latest round of data doesn’t derail the fast-tracking of Biden’s stimulus package, but possibly supports lowering the final price tag.
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