There is too much market noise for US stocks to continue to their rally into uncharted territory. The reflation rally is taking a timeout as Wall Street digests small earnings results, consistent Fed speak, and on hopes that Biden’s stimulus deal appears poised to get done by mid-March. Partisan politics will likely remain the case and that means Biden’s $1.9 trillion stimulus package could end up coming in somewhere between $1.1-1.4 trillion. This stimulus deal will get done via reconciliation and with Democrats unlikely to raise taxes until after the midterms, that means it needs to be deficit neutral over the budget window which is around 10 years. A big part of the reflation trade is for infrastructure spending, which might have to wait until after the next fiscal year in October or possibly in early 2022.
Stocks are still where everyone wants to be and that probably won’t change unless we have a major setback with COVID vaccine rollouts or policy miscommunication by the Fed.
Fed speak from both Kaplan and Bullard reaffirmed the stance that the Fed won’t deviate from the ultra-accommodative script anytime soon. Fed’s Kaplan expects to see big improvements with unemployment and that a temporary jump in inflation won’t phase them. Kaplan is expecting higher inflation but remains uncertain as to how long it will persist. Kaplan is skeptical the US economy will see persistent inflation over the long-term.
Fed’s Bullard provided an academic presentation on policy combinations and a review on income inequality. His presentation did not touch upon risks to the outlook or what will be the Fed’s next move, but it did serve as a reminder that their policy stance is anchored.
NFIB and Jolts
The NFIB small business optimism index dropped to an eight-month low as businesses grappled with the reality of a Biden administration and the winter wave of COVID-19. Lockdowns and lack of aid sent the NFIB index to 95.0, much lower than the analysts’ forecast of 97.0 and prior reading of 95.9. Small businesses were growing pessimistic that life was going to get harder if President Biden follows through on his pledge to raise both minimum wage and taxes.
The US job openings data painted a rosier picture that hiring wasn’t too bad at the end of the year. The JOLTS job report showed job openings in December rose to 6.65 million, better than the consensus estimate of 6.4 million and the upwardly revised 6.57 million openings in the prior month. Available job opportunities have steadily been above the 6-million level since June and that could dampen the Biden administration's call for massive stimulus.
This latest round of data doesn’t derail the fast-tracking of Biden’s stimulus package, but possibly supports lowering the final price tag.
Crude prices just want to keep going higher. Crude shrugged off a modest pullback earlier after European crude oil stockpiles fell 0.8% from December to 483.4 million barrels. If global crude stockpiles continue to come down, that should keep oil prices elevated.
The EIA’s short-term energy outlook showed the persistent levels of COVID uncertainty continue to weigh on the demand outlook for the rest of the year, but that optimism is high for an even stronger rebound in 2022. The EIA cut the 2022 world demand outlook by 180,000 barrels and now sees a 5.38 million year-over-year increase. The world demand outlook in 2022 is expected to grow by 190,000 barrels, delivering a 3.5 annual gain. The EIA targets Brent prices to average $55/barrel in 2022, a most cautious forecast given the COVID uncertainty for the first half of the year.
Both WTI crude and Brent appear to be riding this reflation wave high, but it seems a new catalyst will be needed to take oil prices much higher from here.
Gold’s move higher is running out of steam as lawmakers start to dissect Biden’s $1.9 trillion relief package. While it seems very likely a massive stimulus package will get pushed through by mid-March, it seems President Biden’s willingness to negotiate will make the final price tag a lot closer to $1.2 trillion.
Today is not a widespread risk-on trading session, but optimism persists that the monetary and fiscal stimulus in the US could help this economy run hot and that keep the inflation hedges flowing into gold.
Gold was in grave danger last week and it’s not out of the woods until it clears the $1,855 region. Fighting against a potential death-cross and a nagging dollar rebound, gold’s longer bullish trend should reassert itself if the current rebound continues for the rest of the week.
Bitcoin is the epitome of the millennial momentum trade. Today is day two of Elon Musk’s big $1.5 billion bet on Bitcoin coverage. Bitcoin’s social sentiment is off the charts and volatility will remain wild. The next big move for Bitcoin could come if other companies follow Tesla’s lead in diversifying into cryptocurrencies and accepting them as a form of payment. Given where prices have ended up, Bitcoin needs big-ticket retailers that sell cars or high-end luxury items to embrace crypto payments. A few years Bitcoin failed at mainstream acceptance when Bitcoin was used for buying a coffee or beer. Bitcoin needs a couple more big endorsements and that could be the key to take prices above the $50,000 level.