Expecting the expected

Markets yawn on Biden infrastructure announcement

President Biden released the first details of his highly anticipated infrastructure programme overnight. The package itself totalled around USD2.25 trillion of spending over 10 years, with approximately USD1.60 trillion of corporate tax rises phased in over 15 years. No mention was made of higher income taxes for higher earners or capital gains taxes, but one suspects that will come when the President announces the details of the remainder of his USD1 trillion wish list.

Net-net, the package looks to be roughly revenue-neutral over the next decade, give or take USD500 billion here or there, which should help ease it through the Senate reconciliation process. Of course, getting it past his own party will be the initial challenge, and we can expect a few months of tortuous progress ahead through both Democrat and Republican objections.

The market reaction to the package announcement was muted, to say the least. Given taxes on US corporate global profits will rise (no more parking it in Ireland or the Netherlands), it was somewhat surprising that the tech-heavy Nasdaq rallied overnight. Similarly, US bond yields hardly moved, and although currency markets had a very choppy day, the US dollar finished marginally weaker.

I suspect the news was priced into financial markets at a much higher level than I expected, muting its impact. Also in play were month and quarter-end rebalancing flows from institutional investors globally. I suspect those flows both softened the package’s impact and go a long way to explaining the moves across most asset classes overnight.

The US ADP Employment Change for March disappointed at 517,000 jobs added, although the February number was revised higher to 176,000 jobs. That effectively left the data as a nil-all draw, leaving tomorrow’s US Non-Farm Payrolls all to play for. Depending on who you speak to, the US will add between 600,000 and 1.2 million jobs highlighting the uncertainty out there. With such a wide range this time around, and with liquidity expected to be much lower than usual due to Easter holidays across the world, we can expect a much larger impact across asset classes than usual from the data, especially if it prints at the extreme end of expectations.

Being the first day of the month, the Asian data calendar is packed. Australian Retail Sales fell 0.80%, with the impact primarily due to localised Covid-19 restrictions and not signalling “peak Lucky country.” The trade surplus fell to AUD 7.529 billion in February from AUD 9.61 billion in January, with the fall in exports attributable to Covid-19 restrictions in key markets and possible Lunar New Year effects. Imports rose by 5.0%, though, suggesting domestic demand remains robust.

China’s Caixin Manufacturing PMI eased to 50.6, its lowest since April 2020, and well below the 51.3 markets’ anticipated and a 4th consecutive lower monthly reading. That may cause a few nerves in the markets, with fears that China’s recovery could be faltering. I suspect those nerves will be brief, though, especially as Manufacturing PMIs from South Korea, Indonesia, Japan, Malaysia and Vietnam were all higher than expected today. Additionally, Japan’s Tankan Large Manufacturers survey also outperformed, rising to 5.0 today.

The drops can be explained away partly by Covid-19 restrictions in Europe, the US and other key export markets over the past few months, and given the strength seen in data elsewhere in Asia, China will receive a pass mark today. European manufacturing PMI’s have also remained robust through the Covid-19 restrictions, as have US ones, and I expect that to be repeated by both regions later today.

Despite the optimism surrounding the rollout of Covid-19 vaccines in a select group of countries, the virus continues to wreak havoc elsewhere. France overnight extended its latest lockdown nationally, including the closing of schools. Canada’s Ontario province has announced a 28-day lockdown this morning, and Japan has extended its Covid-19 restrictions to two more prefectures, including the city of Osaka. Equity markets are ignoring these developments in Asia, content to follow the US close last night. The widening restrictions globally should be bullish for technology at the margins, but will most keenly be felt in energy markets.

Regarding energy, OPEC+ holds its monthly meeting today with the Joint Technical Committee (JTC), providing no guidance to the ministers today, with the JTC meeting on Tuesday finishing inconclusive. There will almost certainly be some squabbling as is customary for OPEC+, with OPEC quietly downgrading global consumption by 300,000 bpd overnight due to Covid-19’s impact. That is to some extent offset by US production easing slightly to 11 million bpd.

However, with oil in storage plentiful in Asia, production recovering in the US, widening Covid-19 restrictions and more Iranian crude heading to China, OPEC+ will have no choice other than to leave production targets unchanged. Although Brent futures are in backwardation for far month delivery, spot prices are now in contango, suggesting oil for prompt delivery is plentiful. Only a reversal of production cuts would catch markets off guard this time around, but with OPEC+, stranger things have happened.

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