US Infrastructure Bill.
We believe the much-anticipated infrastructure spending plan in the US gives the Biden Administration an unprecedented opportunity to reverse secular stagnation and raise inflation. Although details around the plan are yet to be confirmed, the broad market consensus headline number appears to be around $2-3tn to be spent over a period of 10 years, and is expected to be passed any time between end-Q3/start-Q4 2021. The bill is largely expected to be 50% deficit financed, with the remaining 50% being financed via increased tax revenues, particularly from high-net-worth individuals and large corporates. Whilst it will take several years for the effects of this plan to be seen on the real economy, we are hopeful that the long-term benefits on job creation, productivity and efficiency increases will outweigh the short-term costs.
Central Banks – Brace for policy divergence across G10.
Since the outbreak of the pandemic, G10 policy rates converged to near zero or below. Now, investors must prepare for policy divergence, as economies exit the pandemic at different speeds. As the only G10 central bank, Norges Bank projects a first rate hike for H2 2021 based on their favourable economic outlook. However, it has no asset purchase programs to unwind, unlike all its peers which must taper first before hiking. The BoC and RBNZ may already start this year, while the FED may taper from 2022. Accordingly, besides for Norway, interest rate markets assign very little probability for any other rate lift-off this year. Only for Canada, markets see a chance of 31% – while for the US, it’s just 6%. For the FED, rate hikes are forecasted to occur between 2023 and 2024, but continued strong economic data could bring those estimates forward. Between USD and EUR rates, we believe that EUR rates are vulnerable and have material upside to catch-up, if the growth differential narrows and if Germany elects a structurally looser fiscal policy in September.
Virus update – Different roads to recovery.
Looking at Covid trends, several major European countries are still facing rising new cases, including France, Germany, Norway, Sweden. A similar trend can be seen in emerging markets, with daily new cases in India, Turkey and Brazil looking particularly worrisome. We believe the vaccine rollout remains the most important topic in the months to come, as encouraging results in daily new cases can be seen in vaccine leaders. In the UK, daily vaccination rollout re-accelerated, with almost 44% of the population having received at least one dose. In the US this number is 27%, with Biden announcing last week his intention to double down on his vaccine rollout goal. At current speeds we estimate the UK and US to vaccinate 75% of their populations by June and July, respectively. Europe’s vaccination rollout speed improved over the past week, however it continues to lag behind that of the US and UK as vaccination efforts had stalled due to supply constraints and logistical issues over the past weeks.
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