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Dow almost flat on the suspense of a big CARES Act 3.0 and an early QE tapering

calendar 14/01/2021 - 11:17 UTC

The U.S. Stock market (Dow Jones Industrial Average: DJ-30) closed around 31060.47 Wednesday, ticked down -0.03% on the suspense of a big CARES Act 3.0 and an early QE tapering. The risk trade was under stress as various Fed policymakers are now actively discussing pros & cons of the eventual QE tapering as per their usual strategy of jawboning and keeping the market well-prepared for an orderly correction so that 2013 like taper tantrum volatility does not repeat this time. But on Wednesday, techs were upbeat led by Intel (CEO change) and Apple, Microsoft, and Netflix.

On Wednesday, the focus was also on U.S. inflation as price stability is the Fed’s primary mandate. The headline CPI for Dec was printed at +1.4% from prior +1.2%, slightly above the market expectations of +1.3% (y/y). The U.S. core CPI for Dec was unchanged at +1.6%, right on the expectations. As per the present correlation, the U.S. core PCE inflation for Dec should be around +1.40%, still way below the Fed’s primary target of +2.00%.

The Fed will watch primarily the corona curve for its QE tapering and subsequent gradual hikes. The U.S. COVID curve (reported active cases) is still far from the flattening process. But it should start to flatten by Dec’21 and by Mar’22; there could be a visible flattening due to mass-vaccinations and natural infections. By then, the U.S. unemployment rate should also fall below 5% and core PCE inflation may advance towards 2%.

Thus, the Fed may start its gradual QE tapering from Jan-Mar’22 and may also start to hike rates from Dec’22- Mar’23 and ECB may also follow the Fed, at least in pandemic QE tapering. Apart from incoming Biden admin, U.S. politics & policies, all focus would be also on 28th Jan FOMC meeting-whether Powell provide any further guidance about the inevitable QE tapering and normalization of monetary policies.

Now, talking about Bidenomics, on late Wednesday, there was a report that Biden admin may unveil CARES Act 3.0 for almost $2T, which will include additional $2000 stimulus checks/PUA and significant state and local funding- including for COVID vaccine distribution and other emergency spending measures.

As per reports, despite the 11th hour ‘Trump chaos’ and Trump’s removal/impeachment move by the U.S. Congress, Biden will focus on trillion-dollars COVID stimulus package (including $2000 stimulus checks/$465B CASH Act) in his first 100-days and may unveil the proposal as early as Thursday (14th January). But a big CARES Act 3.0 is not 100% assured as some Centrist/fiscal hawk Democrat Senators may oppose it beside the filibuster rule requirement of 60 vote majority; presently Democrats have an effective majority of only one tie-breaking vote (VP Harris) in the 50:50 Senate.

Although team Biden believes it may have some scope to pass a big CARES Act 3.0 after some negotiations and reconciliations in a bipartisan way, the market is concerned whether the U.S. Congress can handle multiple tasks at a time in the first 100-days of Biden admin; i.e. Trump impeachment trial, cabinet confirmation hearings and CARES Act 3.0!

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On Wednesday, Biden tweeted:

“Today, in a bipartisan vote, the House voted to impeach and hold President Trump accountable. Now, the process continues to the Senate—and I hope they’ll deal with their Constitutional responsibilities on impeachment while also working on the other urgent business of this nation. We’re in the teeth of this crisis, and we need to take immediate action to get the virus under control. That’s why tomorrow, I’ll be laying out my vaccination and economic rescue package to beat COVID-19 and build back better”.

Biden also issued an official statement, stressing U.S. Senate not only focus on Trump's impeachment but also other important legislative agenda like confirmation of key cabinet posts and negotiations/passing of CARES Act 3.0.

Statement by President-elect Joe Biden on the House of Representatives Impeachment of President Trump

“Last week, we saw an unprecedented assault on our democracy. It was unlike anything we have witnessed in the 244-year history of our nation. A violent attack on the United States Capitol itself. On the people’s representatives. On police officers who every day risk their lives to protect them. And on fellow citizens who serve as public servants in that Citadel of Liberty. Windows and doors were destroyed. Offices ransacked. A Capitol Hill police officer was murdered. Another lost his life a few days later. Four other people died in the senseless mayhem of that day.

This criminal attack was planned and coordinated. It was carried out by political extremists and domestic terrorists, who were incited to this violence by President Trump. It was an armed insurrection against the United States of America. And those responsible must be held accountable.

Today, the members of the House of Representatives exercised the power granted to them under our Constitution and voted to impeach and hold the president accountable. It was a bipartisan vote cast by members who followed the Constitution and their conscience. The process continues to the Senate.

This nation also remains in the grip of a deadly virus and a reeling economy. I hope that the Senate leadership will find a way to deal with their Constitutional responsibilities on impeachment while also working on the other urgent business of this nation.

From confirmations to key posts such as Secretaries for Homeland Security, State, Defense, Treasury, and Director of National Intelligence, to getting our vaccine program on track, and to getting our economy going again. Too many of our fellow Americans have suffered for too long over the past year to delay this urgent work.

I have often said that there is nothing we can’t do, if we do it together. And it has never been more critical for us to stand together as a nation than right now. So we must remember who we are as Americans and what we stand for and believe. It’s time for us to be what at our best we have always been. The United States of America”.

Bottom line:

Overall, it now seems that along with Democrats, some Republican lawmakers also want to prevent Trump from running as the next Presidential candidate, and on this ‘Trump chaos’ issue, the Republican party is now divided and is also a victim of Trump's tantrum. Thus, although theoretically, it’s maybe very difficult to impeach Trump as it would require a 2/3rd Senate majority, it may not be impossible.

Stimulus addicted Wall Street is now concerned about U.S. political & policy paralysis amid Capitol Hill/Trump chaos, which may affect CARES Act 3.0 roll out in the coming days. But if Biden eventually pardons Trump (even after actual impeachment) for the sake of U.S. peace & harmony, he may also get cooperation from Senate Republicans to pass CARES Act 3.0, which is much more important than ‘Trump’.

In any way, the U.S. bond yield remains elevated for possible higher issuance of debts (bonds) to fund Bidenomics. Trumponomics already caused more than $6T debt (including CARES Act 1.0 & 2.0). Bidenomics may result in another $6T and by 2024, the U.S. debt may be around $30T; earlier than 2030 assumed previously. Higher U.S. bond yields; i.e. higher borrowing costs will be negative for equities and Gold.

Technical Outlook: SPX-500, DJ-30, and NQ-100 (Futs):

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