Dow Future almost flat amid concern of Taper Tantrum 2.0 and stimulus optimism

calendar 22/02/2021 - 06:59 UTC

Dow Future closed almost flat Friday around 31433.00 amid concern of Taper Tantrum 2.0 and stimulus optimism. Dow Future made a low around 31302.00 in the early Asian Friday as U.S. 10Y bond yield ticked up again above +1.30% on hopes of big fiscal/infra stimulus & reflation. On late Thursday, the Biden administration declined to play down a report indicating an additional stimulus package could follow Biden’s $1.9T proposal. The White House Press Secretary Psaki told reporters that discussions remain ongoing about the admin's future agenda and that no decisions have been made.

On late Thursday, the U.S. Treasury Yellen also said the White House will likely propose a second economic recovery package (fiscal/infra stimulus) later this year that would include spendings on longer-term investments like infrastructure, renewable energy, education, job training, and research and development. The proposal would also include temporary tax increases on corporates (as MAT?) and rich Americans that would phase in slowly over time. 

Yellen said in an interview that although inflation is a risk because of various factors, the Fed and others will have to manage it with various tools but Biden admin has to take pro-active steps so that the COVID pandemic do not have long-lasting scarring and bankruptcy effects on people’s lives & livelihoods:

“We think it’s very important to have a big package (that) addresses the pain this has caused – 15 million Americans behind on their rent, 24 million adults and 12 million children who don’t have enough to eat, small businesses failing---I think the price of doing too little is much higher than the price of doing something big. We think that the benefits will far outweigh the costs in the longer run--Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address.

The greater risk is of scarring the people, having this pandemic take a permanent lifelong toll on their lives and livelihoods. You know, there’s so much pain in this economy. I think these checks really will provide relief and they’ll help jump-start our economy, giving people money to spend when we can get out again and go back to our former lives. So you know-- there’re a lot of families that are operating on the margin. And I think these checks will really help them”.

In any way, by early U.S. Session Friday, Dow Future jumped to the session high around 31583.00 (+152 points) on infra stimulus optimism and progress of CARES Act 3.0 by the House Democrats as they officially unveiled their version to transmit the same for Senate/budget reconciliation. But at the same time, Dow Future slips from the session high as the proposed minimum wage of $15/h may be passed through the budget reconciliation process, which may cause lower profitability for U.S. corporates, especially for the smaller companies.

Earlier, there was a perception and even Biden admitted that his minimum wage of $15/h may not be passed through the budget reconciliation process (being permanent, as it’s not deficit-neutral over the next 10-years). Although now there are still confusions over this minimum wage issue, Byrd Rule and Democrat ‘king maker’ Senator Manchin’ stance, the market may be worried that once it passes, it may affect the bottom line of various MSMEs as the minimum wage would be almost doubled.

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In the late trading hours Friday, Dow Future again got some boost as Biden emphasized quick COVID vaccinations as early as possible and a bipartisan CARES Act 3.0, infra stimulus to recover & rebuild America. But again Dow Future slips from the Biden high as he indicated the development of herd immunity in America only by Dec’21 or even Mar’22, considering the real situation/progress on the ground (COVID mass-vaccinations). Dow Future was also undercut as US 10Y bond yields again surged to +1.363% on hopes of reflation as Biden talked about huge CARES Act 2.0 and an infra stimulus.

Biden said in a speech at Pfizer’s vaccine manufacturing plant that he is ready to hear in open mind from Senate Republicans on their ideas about how to make CARES Act 3.0 better & cheaper, but he needs quick action from them as the vast majority of public, economists as-well-as state/local governments are now in favor for a big & quick economic relief package to prevent long-lasting damage to the U.S. economy:

“We need Congress to pass my American Rescue Plan that deals with the immediate crisis — the urgency. Now, critics say my plan is too big, that it costs $1.9 trillion.  So that’s too much.  Well, let me ask them: What would they have me cut?  What would they have me leave out?  Should we not invest $20 billion to vaccinate the nation?  Should we not invest $290 million [billion] to extend unemployment insurance for the 11 million Americans who are unemployed so they can get by while they get back to work?  Should we not invest $50 billion to help small businesses stay open when tens of thousands have had to close permanently?  Should we not invest — and, by the way, they make up half the employment in America. Should we not invest $130 million [billion] to help schools across the nation open safely? 

Right now, 24 million adults, 11 million children don’t have enough food to eat. And unless you think I’m exaggerating, think of those scenes you’ve seen on the television with cars lined up, which seemed like miles, to wait to have someone put a box of food in their trunk.  People never, ever, ever, ever, ever, ever thought they would need help, and through no fault of their own, they’re in that circumstance.

If we don’t pass the American Rescue Plan, 40 million Americans will lose [some of their] nutritional assistance through a program we call SNAP, the old food stamp program.  Do we not invest $3 million — $3 billion to keep families from going hungry?

One in five Americans is behind in their rent.  One in ten are being in their mortgages.  How many people do you know that will go to bed tonight staring at the ceiling, saying, “God, what is going to happen if I don’t get my job if I don’t have my unemployment check?  What’s happened to me?  I’m losing my health insurance.  What do I do?”

This is the United States of America, for God’s sake.  We invest in people who are in need.  Do we not invest $35 billion to help people keep a roof over their heads?  I could go on, but you get the point.  I’m grateful that the Senate and the House are moving quickly.  And I’m prepared to hear their ideas on how to make the package better and make it cheaper. I’m open to that. But we have to make clear who is helped and who is hurt.  And I hope that the Republicans in Congress listen to their constituents. 

According to the polls, there is overwhelming bipartisan support. The vast majority of the American people — more than 70 percent of the American people, with all the polls you all conduct, including a majority of Republicans — want us to act, and act big and quickly and support the plan.

Major economists — left, right, and center — say we should focus on smart investments we can make now in jobs, in our people to prevent long-term economic damage to our nation and to strengthen the economic competitiveness going forward. In fact, an analysis by the Wall Street firm Moody estimates that if we pass my American Rescue Plan, the economy will create 7 million jobs this year--This year. 

We’ve also been in constant contact with mayors and governors, county officials, members of Congress — both parties---Both parties.  I’ve met with them in my office; I’ve met with them in — on the — on the Internet — on — Zooming on with them-- Both parties in every state.  And guess what?  They agree we have to act now.  I got a letter from more than 400 mayors, from big cities and small towns. They understand we’re not going to get our economy back in shape and the millions of people back to work until we beat this virus. 

That’s why the American Rescue Plan puts 160 million — billion dollars into more testing and tracing, manufacturing and distribution, and setting up vaccination sites — everything that’s needed to get vaccines into people’s arms, which is the most difficult logistical effort the United States has undertaken in peacetime.  It includes $4 billion for new manufacturing plants so we’re ready to manufacture vaccines in the future.  We don’t have to wait”.

Bottom line:

There is still fiscal space for the U.S. economy to accommodate Biden’s CARES Act 3.0 for around $1.9T and a possible infra stimulus for around $4T over the next ten years (2021-31) as the net interest/revenue may hover around 11-16% under various scenarios (stable bond yield around 1.25-1.50% or incrementally higher bond yields 1.75%-2.25% as Fed will normalize) assuming even no incremental revenues. Also, in reality, the interest/revenue ratio should decrease further because of the higher multiplier effect of the $4T infra/green stimulus and likely higher revenue.

But if U.S. revenue does not increase proportionately by 2025 (as expected), there will be an alarm bell as the U.S. interest on deficit spending (public debt) would almost double to over 16% of revenue from around 8% pre-COVID levels. Biden admin is expecting incrementally higher tax revenue as a result of higher investments (fiscal stimulus/spending) on the U.S. economy/people so that the overall cost of debt servicing will not jump materially and the interest/revenue ratio stays around 10%. Although in extreme cases, a stressed country may pay 30-35% of its revenue as interest (like a stressed company), for a developed/wealthy economy (AE) like the U.S., 15-20% may be a red line.

Technical view: SPX-500, DJ-30, and NQ-100 Futures:

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