Fed leaves policy unchanged

Chris Scicluna

Fed leaves policy unchanged; more upbeat but policy stance unchanged
As widely expected, the Fed left all policy settings unchanged following its April FOMC meeting, including its 0-0.25% target for the federal funds rate and its commitment to monthly purchases of $120bn of Treasuries and MBS. The post-meeting statement contained only a few changes, which predictably gave it a more upbeat tone than the statement delivered in March. Indicators of activity and employment, previously said to have “turned up”, were now said to have “strengthened”. And while the sectors most adversely affected by the pandemic “remain weak”, this time the Fed added that they “have shown improvement”. The recent rise in inflation was said to “largely reflect transitory factors”. Finally, the language concerning risks to the economy was less alarmist, with the previous reference to “considerable risks” replaced with the observation that “risks to the economic outlook remain”.

In the subsequent press conference, Fed Chair Powell reinforced that despite the improved outlook it has no plans to remove accommodation at this stage, with it still being “too early” to even begin a discussion on the tapering of the Fed’s asset purchases. The recovery in the economy was said to be “uneven and far from complete”, with employment and inflation still “a long way from our goals”. Powell repeated that in considering changes to its policy stance the Fed will be acting on actual data, rather than responding simply to a forecast, and reminded investors “it will take some time before we see substantial further progress”. Finally, regarding developments in financial markets, Powell noted that some asset prices are “high” and parts of markets “a bit frothy”, which he attributed mainly to the progress on vaccination and reopening the economy, while (predictably) playing down the contribution of monetary policy. You can read Daiwa America Chief Economist Mike Moran’s review of the meeting at https://bit.ly/3gHUmSe

Biden unveils $1.8trn American Families Plan
Later in the day, President Biden gave his first address to a joint session of Congress, albeit with pandemic protocols limiting the in-person audience to just a fifth of normal levels. Biden’s wide-ranging address spent some time promoting his early achievements in office, in particular the American Rescue Plan which he claimed was already delivering results that had got America ‘on the move again’.

However, the centrepiece was his latest policy proposal: the American Families Plan (AFP). The $1.8trn AFP proposes $1.0trn of new spending and $0.8trn of tax credits over a 10-year period, with most of the benefits targeted at low- and middle-income earners and most of the cost met by high-income earners and the wealthy. A significant focus of the plan is on improving access to early childhood education (including universal preschool for 3 and 4-year olds) and college (including two years of free tuition at community colleges). It also seeks to make childcare more affordable and establish a national family leave programme. The plan will be funded by a 2.6ppt increase in the top marginal income tax rate (to 39.6%), an increase in capital gains tax and dividend tax rates for those that earn more than $1m per year, and the elimination of a provision that reduces assessed capital gains taxes on some inherited assets.

Biden’s plan will undoubtedly face stiff opposition from Republicans in the Senate, as well as challenges from certain Democratic senators, so will almost certainly need to be scaled back if it is to avoid the 60-vote filibuster and pass with bipartisan support. That said, Biden could seek to fast-track the plan as part of the (normally) once-a-year budget reconciliation process, which allows most tax and spending legislation to pass with a simple majority vote. This is a distinct possibility, especially given a ruling made by the Senate parliamentarian earlier this month that could see Biden reopening February’s American Rescue Fund budget plan, effectively allowing the budget reconciliation process to be used a second time in the current fiscal year.

Treasury yields slightly lower post-Fed; US equity futures rally after strong post-close tech sector earnings reports; Japan closed but other Asian equity markets mostly firmer
Predictably, markets were very quiet ahead of the Fed’s meeting, with both equities and bond yields little changed. There was very little reaction to the FOMC statement. However, with Chair Powell reiterating an unchanged outlook for monetary policy during his press conference, the 10Y UST moved down 3bps to close at 1.61%. While the equity market initially rose modestly on Powell’s comments, a late sell-off saw the S&P500 close down 0.1% while the Nasdaq fell 0.3%. Meanwhile, the reiteration of the Fed’s dovish policy outlook weighed on the greenback, which weakened slightly against its main counterparts, with the euro rising to an almost two-month high as a result.

S&P equity futures have rallied ½% since the bell – and Nasdaq futures 0.8% – with both Apple and Facebook shares rising in extended trading after both companies easily beat analysts’ revenue estimates (Ford’s guidance, lowered due to supply bottlenecks, weighed on that stock). So while Japanese markets were closed for the Showa Day holiday – beginning the Golden Week holiday period that will continue next week – it has been a mostly positive day for equities elsewhere in the Asia-Pacific region, albeit with gains across the major indices largely less than ½%. With Japan on holiday there was no cash trading in USTs during Asian time, but the 10Y future weakened fractionally. The Aussie 10Y ACGB yield fell 4bps, reacting to the decline in the UST yield.

First indications of euro area CPI in April to come from flash German and Spanish reports
Today brings the first indications of inflation in the euro area in April with the flash German and Spanish figures. The upward trend in the EU-harmonised measure of German inflation is expected to pause this month, although at 2.0%Y/Y it will still match the highest rate since April 2019. The same measure of Spanish inflation is expected to rise 0.5ppt to 1.7%Y/Y in April, which would be the highest rate since October 2018. Other hard economic data releases due to be published include German labour market figures for April, as well as euro area M3 money supply numbers for March. In addition, this week’s flow of economic confidence surveys concludes with the European Commission’s sentiment survey for April. Improvement is expected to be broad-based across all sectors of the euro area economy, albeit with services and retail still impaired by lockdown measures and – as illustrated by yesterday’s survey results from Germany and France – consumer confidence still below pre-pandemic levels.

Q1 GDP report takes centre-stage in the US; more corporate reporting too
With the Fed out of the way, the focus today will return to the economic data, starting with the advance GDP report for Q1. Given the impetus from two waves of federal stimulus payments, despite a weather-impacted February, Daiwa America Chief Economist Mike Moran expects a 6.0%AR lift in activity during the quarter, which should position the economy to move above its pre-pandemic peak in Q2. Growth will likely be driven mostly by a strong lift in consumer spending and residential investment, whereas net exports and inventories are likely to have subtracted from growth (indeed, yesterday’s trade data suggest that net exports will subtract more than 1ppt). Aside from the GDP report, today will also bring news on pending home sales as well as the weekly jobless claims report. Meanwhile, another very heavy day of corporate reporting features news from the likes of Caterpillar, Merck and Amazon.

Australian export prices surge to record high in Q1, imports prices little changed
The ABS continued to release its suite of quarterly price indicators today, this time in the form of the International Trade Prices Indices report for Q1. Despite the downward influence of an appreciating exchange rate, export prices lifted a very sharp 11.2%Q/Q to a record high, with prices also up 8.6%Y/Y. The improvement reflects the substantial rally in key commodity prices, included petroleum (over 37%Q/Q), gas (over 20%Q/Q) and ores and metal scrap (over 18%Q/Q). By contrast, despite sharply higher prices for imported petroleum, overall import prices increased just 0.2%Q/Q in Q1 and so were down 6.2%Y/Y, largely reflecting the influence of the stronger Aussie dollar.

Kiwi business activity, capex and employment expectations pick up in April
The final release of the ANZ’s Business Outlook Survey for April improved on the preliminary findings released earlier this month. Most importantly, the activity outlook index – which has the best correlation with GDP growth – was revised up about 6pts to 22.2, marking the highest reading since October 2017. Pleasingly, firms’ investment and employment intentions also increased to levels not seen since 2017. Meanwhile, the number of firms reporting an intention to raise their prices increased further, with most sectors moving to the highest levels recorded in the 28-year history of this data. However, firms’ one-year-ahead forecast for inflation was steady at 1.97% – just a fraction below the midpoint of the RBNZ’s 1-3% inflation target.

In other Kiwi news, New Zealand recorded a negligible merchandise trade surplus of $NZ33m in March, almost $NZ700m less than in the same month a year earlier. Exports increased 5.4%M/M but were down 2.3%Y/Y, with the annual decline reflecting a near 9% appreciation of the trade-weighted exchange rate. By contrast, following a soft February, imports surged 14.0%M/M and 11.0%Y/Y (again annual growth was constrained by the appreciation of the exchange rate). Of particular note was a near 30%Y/Y increase in imports of consumption goods and a very encouraging near 26%Y/Y increase in imports of capital equipment. Imports of intermediate goods fell almost 6%Y/Y, weighed down by an usually weak month for imports of crude oil.

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