Biden signs American Rescue Plan into law

• On March 11, US President Joe Biden signed his American Rescue Plan pandemic relief package into law. The plan was pushed through Congress along party lines, with no Republican lawmakers voting for the bill in either house, and utilising Vice President Kamala Harris’s deciding vote in the Senate, which is equally divided. Given it was pushed through as a budget reconciliation, it was not possible to increase the minimum wage, while other components were also watered down modestly as the administration sought to guarantee universal support among Democratic lawmakers. A key measure included in the bill was a USD 1,400 direct payment to qualifying individuals, which on top of the USD 600 already delivered takes the total to an extra USD 2,000 over the second and third checks. The second check already caused US personal incomes to rise 10% m/m in January and helped retail sales climb 5.3% m/m, and March is now expected to see an even greater boost as people have already started receiving the payments.
• Other key components of the package included extending the USD 300/week unemployment benefit until September (though this was not increased to USD 400/week as originally sought). While the non-farm payroll figures for February saw a better-than-expected increase in net jobs, they remain nearly 10mn off pre-pandemic levels, and weekly initial jobless claims remain elevated. In data released Thursday, the week previous saw 712,000 new jobless claims. This is down from the (upwardly revised) 754,000 recorded the previous week, and beat expectations of 725,000, but is still over three times as many as the 200,000 pre-pandemic average.
• While there remain challenges in the labour market, the trend is improving, and the rapid rollout of vaccinations, alongside the massive stimulus package, has led to a marked improvement in US consumer confidence. The University of Michigan consumer sentiment index rose to 83.0 in March, the highest reading since prior to the pandemic crisis.
• The stimulus package has also contributed heavily to reflation fears however, and we have seen volatility in markets as a result. Yesterday, Treasury Secretary Janet Yellen said that there would be a 'temporary in prices' as the economy recovers from the pandemic crisis, but that it will not be a sustained trend of higher price growth as seen in the 1970s. She continues to iterate that unemployment is the bigger risk to the economy. On Wednesday it will be Jerome Powell's turn to calm the reflation jitters in the post-FOMC meeting press conference. 
• In Dubai, the 2040 Urban Master Plan has been announced. The plan envisages population growht of 76% over the next 20 years or so, and this will be focused around the development of five urban centres, including two new developments around the Expo site and Silicon Oasis. Inhabitants are at the very centre of the plan which pays particular attention to the ease of living, with considerable expansions to leisure and recreation facilities planned, alongside nature reserves, public transport, and increased education and healthcare services.
• UK GDP declined -2.9% m/m in January as restrictions on movement and activity were deepened in a bid to control the Covid-19 pandemic. This compared to a 1.2% expansion in December. Nevertheless, the contraction was markedly shallower than projected by Bloomberg consensus (-4.9%), in a further illustration that economies are starting to cope with the upheavals caused by lockdowns better.  Nevertheless, industrial production in January fell -1.5% m/m and manufacturing production -2.3%.
• At its meeting last week, the ECB pledged to accelerate the pace of its bond-buying scheme as it seeks to rein in rising bond yields. Policy was broadly unchanged with the deposit rate kept at -0.5%, but the bank said that it would conduct its pandemic emergency purchase programme (PEPP) at a ‘significantly higher pace.’ The weekly purchases are expected to rise to as much as EUR 20-25bn/w over the next three months, before reverting back to the recent average of EUR 15bn/week after the second quarter. The Eurozone economy has been struggling and the slow pace of vaccination rollouts will weigh on growth this year, but there was some positive data last week as industrial production rose 0.8% m/m in January, and was up 0.1% y/y.
• In Turkey, President Erdogan has presented the government’s economic reform package, where he pledged to keep public spending under control, and inflation under 10.0% y/y – it is currently exceeding 15% each month. The measures announced included that the Turkish treasury should borrow predominately in lira, price and tax increases will be indexed to inflation targets, and the Turkish Statistical Institute will be granted autonomy.

Today’s Economic Data and Events

16:30 US Empire manufacturing (Mar): forecast 14.5

Fixed income

• The FOMC will be in focus for bond markets this week with no changes expected to policy—either rates or asset purchases. More attention will be on whether the Fed will revise its economic projections, particularly for growth and inflation in light of the passage of the USD 1.9trn American Rescue Plan. Commentary from Fed officials continue to tout the ‘transitory’ nature of any pending bumps in inflation but markets will fixate on whether there is any dissent to keeping rates low in perpetuity via the distribution of assumptions on the dot plot.
• Treasury markets displayed another week of relatively wide moves in yields, hitting a low of 1.4729% on the 10yr on Thursday before selling pressure resumed at the end of the week to take the yield up to 1.6247% on the close. Yields on the 2yr ended the week up 1bp at 0.147% although they did encroach on 0.17% at one point during the week.
• European bond markets did manage to gain thanks to the ECB announcing it would buy bonds at a “significantly higher pace” over the next three months. Yields on 10yr bunds moved to as low as -0.3679% following the ECB before settling the week at -0.3066%, a modest drop week/week. The ECB did not increase its overall limit for asset purchases, however, which remains at EUR 1.85trn.
• The Bank of England also sets policy this week—no change expected—and focus will be on whether the run up in gilt yields threatens the outlook for the economic recovery. Yields on 10yr gilts closed at over 0.8% last week, a rise of more than 6bps.
• Among emerging markets, Brazil, Indonesia, Turkey, Egypt and Russia set policy this week while the Bank of Japan will round off a heavy week of central bank activity.

FX

• An end of week pop failed to reverse the dollar’s misfortunes last week as risk-on positions took hold of markets in a meaningful way. The DXY index fell by 0.3%, closing the week at 91.663. As equity markets grow more sanguine about the rise in yields, the greenback may lose momentum to the benefit of currencies leveraged toward improving growth.
• EURUSD endured a volatile week capped off by the ECB’s persistent dovish approach. Overall the single currency gained 0.3% over the week and closed out at 1.1953 but given the sluggish performance in the regional economy we think gains may be short-lived. USDJPY extended its rally for a fourth week in a row, driven by improvements in risk appetite.
• Among economies where the growth outlook is improving thanks either to good vaccination rollouts or effective virus management strategies, currencies snapped a few weeks of losses. GBPUSD was up 0.6% although at 1.3924 remains someway below recent peaks of more than 1.4237. AUDUSD added more than 1% while the CAD also strengthened against the USD, with USDCAD settling down 1.4% at 1.2475.

Equities

• Global equity markets on the whole had a far stronger week last week than the one previous, with some modest losses seen on Friday insufficient to offset the robust performance earlier in the period. Nevertheless, there remained some evidence of stock rotation as in the US the blue chip Dow Jones – the laggard throughout the pandemic crisis – was the strongest gainer, climbing 4.1% w/w. The S&P 500 closed up 2.6% and the NASDAQ 3.1%.
• In Europe the composite STOXX 600 closed up 3.5% w/w, as European markets hit the highest levels in a year after the ECB declared that it would accelerate its bond purchasing programme. Italian stocks were a particular beneficiary of the ECB’s decision to try and rein in bond yields, and the FTSEMIB closed up 5.0% w/w.
• The notable exception to the risk-on tone last week was in China and Hong Kong, where the Shanghai Composite lost -1.4% and the Hang Seng -1.2%. Warnings of asset class bubbles have dampened enthusiasm in China, where even efforts by domestic funds to support the Shanghai Composite failed to stop the decline.

Commodities

• Oil prices fell last week despite OPEC+ committing to keeping oil markets tighter. Brent futures fell 0.2% to settle at USD 69.22/b, their first weekly loss since mid January while WTI fell by 0.7% over the week to close out at USD 65.61/b. The lower prices reflect a moment of consolidation after a strong run up in recent weeks.
• The IEA will set the tone for oil this week as their next oil market report will take into account the additional OPEC+ cuts and give an outline for how demand will perform amid solid economic recoveries underway in some key markets.

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