Daily BriefsMacro

Macro: Biden Stimulus+ Will Be Inflationary; Policy Stability Is Enabling a More Leftward Tilt and more

In today’s briefing:

  • Biden Stimulus+ Will Be Inflationary; Policy Stability Is Enabling a More Leftward Tilt
  • Population/ Food Security/ Consumption/ PLAN/ Space
  • Something Has Got to Give
  • Elevated US Corporate Cash Levels to Underpin M&A Activity, but Leverage Will Rise Still Further
  • EA: HICP Boosted by Spanish Energy

Biden Stimulus+ Will Be Inflationary; Policy Stability Is Enabling a More Leftward Tilt

By Prasenjit K. Basu

With the US economy growing 6.4%QoQsaar in 1Q 2021,  the output gap has narrowed to just 2.1% below its potential growth path. Headline inflation is already at 2.6% YoY, and likely to exceed 3% in 2Q 2021. 

While the FOMC reiterated its determination to keep adding US$120 billion to its balance sheet every month, it will be impossible for it to stick to this commitment in the face of a soaring economy and roaring labour market. Expect monetary tightening surprises ahead! 

Population/ Food Security/ Consumption/ PLAN/ Space

By Diana Choyleva

China News That Matters

  • Please marry and procreate, more
  • Buying corn, rebuilding herds, punishing waste 
  • Dying for a pee (bag)
  • Three new warships, one fine day
  • Heavenly Harmony heads to Heavenly Palace

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Something Has Got to Give

By Olivier Desbarres

The Federal Reserve has in the past six weeks diligently stuck to its “patience until substantial further progress is seen” monetary policy mantra. Its “reward” has been range-bound US Treasury yields, a slowly depreciating Dollar and a metronomic rise in US equity indices, with all three financial markets exhibiting only modest volatility.

Since 19th April the Dollar NEER has depreciated a further 0.6% to within striking distance of a 14-week low, in line with “our core scenario that the Dollar will indeed lose further ground”. We remain bearish the US Dollar, a theme we will explore in greater detail in forthcoming FIRMS reports.

Fed Chairperson Powell would argue that keeping US Treasury yields in check has been a worthy achievement given the backdrop of President Biden’s ambitious fiscal stimulus plans and accelerating US economic growth and rising domestic and global inflation.

A GDP-weighted measure of headline CPI-inflation in 32 major economies rose to 2.1% yoy in March from 1.4% yoy in February, the largest monthly increase since December 2009. But core CPI-inflation in developed economies rose only marginally in Q1 2021, with the rate of inflation in March of 1.2% yoy below its 10-year average of 1.5% yoy.

While backward looking these data they may explain in part why developed central banks, with the exception of Bank of Canada, have so far felt justified in keeping their policy rates on hold and the modalities of their asset-purchase programs broadly unchanged.

In the past month currencies in Emerging Europe, Africa and Latin America have been main beneficiaries of still reasonably low US yields, weakening Dollar, burgeoning global growth and robust risk appetite. The timing of this EM rebound has coincided with our forecasts.

Non-Japan Asian currencies have lagged, which we attribute in part to portfolio outflows and NJA central banks keeping a close eye on a flat-lining Chinese Renminbi.

This differentiated EM currency rally will extend near-term, in our view, but high-yielding EM currencies in particular remain vulnerable to any spikes in US and other developed market government bond yields and more generally market volatility.

Elevated US Corporate Cash Levels to Underpin M&A Activity, but Leverage Will Rise Still Further

By Said Desaque

Liquidity at US corporations has risen significantly over the past 12-months, partly due to the efforts of the Fed in the wake of the COVID-19 pandemic to make it easier for them to raise cash. Elevated cash balances will provide an important funding source for future M&A activity. 

Legacy issues from the pandemic will impact M&A strategy across sectors differently, notably technology companies will face greater regulatory scrutiny due the greater prosperity they enjoyed during 2020. Shifts in consumer behaviour towards online and digital platforms, particularly in gaming and media, will force companies to acquire content providers. Meanwhile, pledges by governments to “Build Back Better” and keep health care prices down will also spur M&A activity in the energy and health care sectors.

Elevated equity valuations are not currently conducive for private equity firms making acquisitions of public companies at high premiums, but public markets provide ideal exits for earlier leveraged transactions. The short-lived boom in special purpose acquisition companies (SPACS) will underpin a strong pipeline of acquisitions of private companies in 2021, but the need to deploy funds over a 24 month period from their IPO will raise concerns about deal quality.

The much-anticipated rise in M&A will produce higher leverage in the corporate sector, thereby raising fears about loan quality at a subsequent date, particularly for acquisitions by SPACS which could involve the use of leveraged loans. The Fed has pledged to keep financing costs low, while improving economic conditions should prevent a rise in concerns about credit quality, at least for the time being.    

EA: HICP Boosted by Spanish Energy

By Phil Rush

  • Flash EA HICP inflation increased by 0.3pp to 1.6% in Apr-21, in line with the consensus. It was 0.1pp above our forecast, though, as energy and food strengthened by more. Services and non-energy industrial goods were in line, so the core was too.
  • Most of the upside news came with Spain’s flash release yesterday. We have enhanced our model for Spain with daily retail energy prices to avoid future surprise here. Overall, our EA forecast stays about a tenth higher, averaging almost 1.8% in 2021.

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