Rundown on Monetary & Fiscal Stimulus

The stock market opened mixed today after stalling out yesterday. At the moment, the Dow is up 26 points and the S&P 500 is down .5%. Bond yields are rising today, explaining much of the movement in capital markets. Cyclical sectors like energy and financials are up nicely while tech and consumer discretionary are down. Commodities are trading risk-on, with oil and copper rallying while gold falls. The bond market is selling off as yields tick higher.

The Biden Administration decided to stick with Jerome Powell as Fed Chair for another term, and the move was cheered by investors who see his plan to gradually remove monetary stimulus as credible. Immediately after the announcement bond yields ticked up. Since Friday the 10-year Treasury Note yield climbed 11 basis points to 1.66%. In this case, rates backing up doesn’t signal higher inflation ahead but rather the expectation that Mr. Powell is committed to raising the Fed’s policy interest rate beginning at mid-year 2022. Indeed, trading activity in the Treasury inflation-protected bond market is signaling lower inflation expectations ahead. All of this is healthy and positive.

Oil prices recently turned lower after a monster run over the past 18 months. WTI crude peaked out at $84/barrel; now hovering around $78/barrel. Even as OPEC is reluctant to increase oil production both US and Chinese governments have complained loudly about high gasoline prices. The Biden Administration decided to sell as much as 50 million barrels of oil from the Strategic Petroleum Reserve in hopes that energy prices will fall further. Some other countries—China, Japan, India, South Korea—will also participate.

Last week the House of Representatives narrowly passed President Biden’s social spending bill and it will now go to the Senate. The bill proposes to spend $1.64 trillion over 10 years, although depending on who you ask that figure could be upwards of $2.4 trillion. Mr. Biden’s original plan asked for $3.5 trillion. According to the Congressional Budget Office (CBO), the plan would increase government spending deficits by a total of $367 billion over a decade. But Treasury Secretary Yellen says it’s “clear that Build Back Better is full paid for.” The bill includes universal pre-K education, expanded tax credits for using clean energy, a tax on methane generation, more funding for IRS enforcement, and some tax increases on businesses and high-earning individuals. Democrats plan to use a special process called “reconciliation” that avoids the necessity of 60 votes to pass major spending legislation. Senate Majority Leader Schumer says he hopes the process will be complete before Christmas.

This is not to be confused with the $550 billion infrastructure bill passed by the House of Reps on November 5^th, which was then signed into law by the president. This bill began its life as a $1 trillion bi-partisan bill aimed at improving the nation’s roads, bridges, municipal water systems, public transit and power grids. This is the Infrastructure Investment and Jobs Act, which provides $110bil for roads & bridges, $66bil for railways, $65bil for broadband, $65bil for electric grids, $55bil for water systems, $39bil for public transit and $25bil for airports.

Existing home sales accelerated more than expected in October to an annualized rate of 6.34 million units. That’s the highest rate of transactions since January. Home sales activity is well above pre-Covid levels, and according to the National Association of Realtors, we’re on track for about 6 million transactions for the year, the highest since 2006. With demand so strong, the inventory of for-sale homes is down 12% from a year ago. That, combined with rising wages and low mortgage rates, suggest continued strength.

Last Friday CNBC interviewed LA Port Executive Director Gene Seroka. He says port congestion is getting better despite the fact that overall cargo volume is up 22% year-to-date. The number of containers waiting 9 days or more to unload is down 35% since late October. But there is still considerable conflict between port “stakeholders.” He said, “We would be open 24 hours a day but we’ve had very few takers. Warehouses traditionally work during the days. And for truckers, we’ve seen 30% of our appointments to pick up cargo continue to go unused every day. And it’s 50% on the weekends.”