Wentz Weekly: The American Rescue Plan Finalized

Wentz Weekly Insights
The American Rescue Plan Finalized

Another $1.9 trillion in Covid relief is expected after the Senate passed its version of the American Rescue Plan. The size of the package is equal to roughly 9% of the U.S. economy, and comes after the $3.42 trillion in previous Covid-related government relief. About a quarter of the package will be allocated to areas directly impacted by Covid with the remainder mostly providing aid to the economy and other political priorities not related to the pandemic. The package now moves to the House where it will see a final vote then head to the President’s desk to be signed into law. The package is similar to President Biden’s proposal, but among other things excludes the minimum wage increase and reduces the federal unemployment benefit. Roughly $400 billion will be going to families in the form of direct payments to individuals ($1,400 per person, child, and dependent). Another $230 billion will go to support the federal unemployment program that includes $300/week in benefits through September, $100 billion for an extension of the child tax credit to $3,000 per child, and $47 billion in housing assistance. Testing and tracing and vaccine distribution will be given $63 billion. State and local governments will receive about $350 billion and funding for education will see $170 billion. In total, approximately $83 billion will be used in fighting Covid-19, $850 billion in support for individuals, and $670 billion in support for the public and private sector.
The rise in longer dated bond yields and steepening of the yield curve, where long term rates rise at a faster pace that shorter-term rates, have caused speculation the Federal Reserve will bring back “operation twist.” This is a Fed tool that was used twice in history, once in 1961 and again in 2011, where the Fed buys longer-term bonds in attempt to push down longer-term rates. In the last public appearance before the Fed’s next policy meeting, Chairman Powell spoke at the Wall Street Summit on Thursday where he downplayed the concern on higher rates while saying the Fed watches a broad array of financial indicators and the recent uptick in rates and the correction of the NASDAQ are not necessarily worrisome. Powell reiterated policy will not change until the labor market is back at full employment and admitted there could be an uptick in inflation in the months ahead but emphasized any increase is expected to be transitory. Investors have become increasingly worried inflation is heating up (driving interest rates higher) due to accommodative fiscal and monetary policy, improving economic activity, supply chain bottlenecks, and a flood of money due to government stimulus.
The rise in input costs is starting to be seen over the first couple months of the year according to managers in the manufacturing industry. The Institute for Supply Management’s manufacturing PMI was 60.8 for February, while Markit’s PMI was 58.6, supported by sharp increases in output and new orders. A level over 50 indicates expanding activity. The survey results show new orders, production, and employment all rose in the month with customer backlogs hitting one of the highest levels on record. The report noted unprecedented supply chain disruption with supplier shortages and transportation delays leading to “a substantial rise in input costs.” The price index category rose to 86, the highest level since 2008, leading to more concerns on inflation this year. The issue is whether the price increases will be transitory, as Fed Chair Powell is expecting.
Jerome Powell has consistently reiterated monetary policy will not change until the U.S. sees full employment, and February’s employment report showed progress to that goal. Total payrolls rose 379,000 in February, above the consensus estimate of 200,000 and within the expected range of – 50,000 to 500,000. The reported unemployment rate fell to 6.2% while the U-6 rate that includes discouraged workers remained at 11.1%. Wages are 5.3% higher compared to a year ago, mostly due to the higher paying job market doing better than the lower paying part of the market. Leisure & hospitality saw the most job gains with 355,000, however still down 3.5 million jobs from a year ago. Temporary help services added 53k jobs, health care +46k, and retail +41k. The number of permanent jobs lost was unchanged with 3.5 million, and 2.2 million higher than a year ago.
Brent crude oil rose nearly 8% last week and is approaching $70/barrel, a level it has not seen since October 2018, driven by a comeback in demand and the continued caps on production out of OPEC. The organization met last week to discuss the oil markets, and typically conclude the meeting with a decision on production quotas. In the latest meeting the OPEC and its allies decided not to remove pandemic-driven supply cuts that have been in place since last year and will keep current production rates steady through April. Going into the meeting many analysts expected OPEC to remove the production cuts as demand continues to improve thanks to the economic reopening and following the deep freeze in Texas which wiped 2.5 million barrels a day from the market. The energy sector has by far been the best performing sector so far this year, rising 40% through Friday thanks to the rise in crude oil prices.

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