US
Key points
- FOMC to be uneventful with Chair Powell likely to deflect questions on the timing of the US taper and to remain dovish.
- The pace of immunizations is slowing likely due to lack of demand rather than lack of supply.
Fed
This week is likely to be an uneventful FOMC meeting. Following the BoC decision to taper, and his own comments Chair Powell is likely to face questions around the US taper. He will want to avoid the markets prematurely pricing taper and is likely to remain dovish.
Data
The large downside surprise in initial unemployment claims this week confirmed that the labour market is mending. That said, firms’ layoffs are still well above historical averages: last week’s claims were about 550k, compared with 200k before the pandemic. Labour market slack is still plentiful.
Daily immunizations have slowed, likely due to lack of demand factors i.e. reluctance to get vaccinated since the administration has secured ample supply of vaccines (Chart 3). Some states have requested fewer deliveries of doses that are expensive to store and which they cannot fully use. The administration has announced that small businesses could get a tax credit of up to $511 for each day of leave taken by employees to get vaccinated or to recover from the vaccine side effects. With average hourly earnings only about $30, the $511 per worker and per day could be a powerful incentive. I only see limited risks that anti-vaxxers will cause an end to the recovery, as I will explain in my thematic note this week.
This week’s most eagerly awaited data will be the first estimate of Q1 GDP. Q1 is already behind us and we already know Q1 will be much higher than Q4, so in my view what matters is what the data tells us about economic momentum. From this perspective, the March income data could be more telling than the GDP: I will focus on the breakdown of household income between wage income and government transfers, with the latter still more important than the former. I also expect a further decline in the household savings rate.
I will be looking for signs of moderate inflation in the sequential ECI and PCE data. Unlike average hourly earnings, the ECI is adjusted for changes in the composition of labour and is therefore more likely to reflect the state of the labour market. I agree with the BBG ECI survey showing no QoQ acceleration between Q1 and Q4, and see it as a sign that despite the labour market heating up, workers bargaining power remains weak. The Bloomberg survey on the MoM PCE seems reasonable to me.
Other key data include durable goods orders, Dallas, Chicago, and Richmond Fed business surveys, housing market data, trade balance, consumer confidence, inventories and initial claims.
Events/Political Developments
On April 28th, President Biden will present the second part of his Build Back Better plan, the American Family Plan, to a joint session of Congress. The plan is expected to focus on childcare, education, paid leave, and anti-poverty measures. The plan will not include health related measures which the administration intends to pursue as a separate initiative.
The plan would be funded by raising the top personal income tax rate as well as the capital gains tax, raising effective estate taxes and reducing tax evasion though better funding of the IRS. Markets reacted strongly to the news of a possible doubling of the capital gains tax for tax payers earning more than $1mn a year. As my colleague John Tierney points out however, very few tax payers would be impacted by the measure and the fundamentals remain sound. In addition, with a Senate majority of 1, the White House will need to bring centrist democratic senators on board, which suggests the measure could be watered down.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
G20
This week the BoJ holds its policy meetings and the ECB’s Panetta, Lane, Rehn, Schnabel, Lagarde, Guindos, Elderson and Holzman are speaking, as well as the BoC’s Macklem.
Key data this week include PMIs in China as well as CPI in Australia, Germany, France, Italy and the euro area.
Links to BOJ Rinban , BOE OMO
COVID-19 Monitoring
