Biden to present budget proposal
President Biden’s Preliminary Budget is envisaging a USD1.8 trillion deficit next year, after tax rises. Of course, what the President would like, and what he will get from Congress could be quite different, but with that level of spending, Asia appears to feel that some of that goody bag will fall their way, and Asian equity markets have risen yesterday. I’m not sure what that will mean for the US yield curve, as that is a lot of government financing to get away, with JP Morgan and Goldman Sachs forecasting tapering to start from the Federal Reserve in Q4 of this year and Q1 of 2022, respectively. I’m going to play a waiting on game on higher US rates after several false starts this year.
The data yesterday from the US was a mixed bag. Durable Goods ex transport rose respectably by 1.0%, above expectations of 0.80%. Pending Home Sales fell 4.40%, which isn’t much of a surprise given mortgage applications have been falling. With the US freshly vaccinated, escaping the zombie apocalypse in the city and escaping to suburban Wisteria Lane is now less appealing. Most notably, Initial Jobless Claims fell to 406,000, which seems to have supported some modestly bullish sentiment for the remainder of the session.
The two-speed Covid world was evident in Asia yesterday as Japan Unemployment rose slightly to 2.80%, and Tokyo CPI YOY for May printed at -0.40%. No inflation problems for Japan then, business as usual after 30 years. Malaysia’s Trade Balance at 1200 SGT may show similar base effects as Covid-19’s return in force continues to wreak havoc with the country. Singapore PPI will be flattered by YoY base effects, but as a bellwether for world trade, rapidly rising Export and Import Prices plus PPI could cause some inflationary nerves.
We may see the same story with German Export/Import Prices today, which also features pan-Europe sentiment data. The US saves the best for last. It releases April Personal Spending and Income, Core PCE Price Index, a Fed favourite, Chicago PMI for May and Michigan Consumer Sentiment, Inflation Expectations and Consumer Expectations. That will be followed by President Biden formally presenting his FY2022 Budget. Any combination of those could spark inflationary nerves as the week finishes, and I wouldn’t bet on either a soft finish for US equities or a bout of cyclical rotation into the Dow Jones.
Next week the data calendar accelerates into the first week of June, with pan-Asia PMIs followed by the rest of the world. We also have a swath of other data globally, but all will culminate with the US Non-Farm Payrolls on Friday. After last month’s huge downside miss, this month’s data really needs to perform to keep that inflation story alive and taper-talk on track. That is followed mid-month by the June FOMC meeting, which will be a live one. No changes in rates or QE, but will the “t-word” be mentioned? We should have a much better idea about the direction of travel for the US Dollar bonds and equities by the end of June.