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Written by: Edward Moya | OANDA
Opening Day is here and baseball fans will happily be returning to stadiums, albeit mostly at partial capacity. America’s pastime is hopeful for full ballparks in 2021 and that type of optimism is being reflected across all pre-pandemic activities. The stimulus check impact on retail trading is waning and that could be because many Americans are looking to go big on attending sporting events, traveling across the country, vacationing, visiting family and friends, and revamping wardrobes before going out to restaurants/pubs and returning to the office.
US Data
The opening act to the Friday nonfarm payroll report saw investors shrug off a disappointing jobless claims report and focus on the ISM manufacturing index’s sharpest acceleration in over 37 years. The declining trend in jobless claims took an unexpected break. Weekly jobless claims rose to 719,000, worse than consensus estimate of 675,000 and downwardly revised prior reading of 658.000. Last week’s big jobless claim drop might be attributed to the changing of the seasonal calculations over the past year. The accuracy of jobless claims will get scrutinized as the Google searches for “file for unemployment” plunge.
The bright economic data release of the day was the ISM manufacturing report. US manufacturing surged to 64.7, the highest levels in 37 years. The new orders and employment components suggest the economy is on the right track. The employment subindex rose to 59.6, the highest level since February 2018.
Tomorrow’s nonfarm payroll report has a wide range of estimates from 232,000 to 1-million jobs created in March, with a consensus estimate of 650,000. A print above a million should not come as a surprise considering how quickly hospitality and leisure jobs are coming back.
The S&P 500 index finally rallied above the 4,000 level for the first time as investors embraced the US growth outlook following President Biden’s infrastructure plan. European indexes are outperforming as the COVID situation appears to be turning a corner in Europe as France sees the virus peak nearing. With the US rapidly delivering COVID vaccines, herd immunity seems to be nearing and that means a floodgate of supply should be available for Europe in a couple of months.
Infrastructure Dissection,
Maybe Wall Street is just spoiled with the near $5 trillion that got pumped into the economy throughout the COVID-19 crisis, but Biden’s $2.25 trillion does not seem a lot when you spread it across eight years. Lawmakers can agree upon investing in transportation infrastructure, cyber defenses, domestic manufacturing, and 5-G cellular networks, but the proposed tax increases will make this plan eventually go down to budget reconciliation.
International treatment of corporations is changing and if the Biden administration’s plan passes in its current form, multi-nationals will feel some pain. Republicans do not support the tax portion of the plan that will raise the corporate rate from 21% to 28% and set a 21% tax on global earnings.
Negotiations will go on for months and expectations are for a revised proposal to work its way through the House in the summer. Before we start planning for something to get done in the fall, the Biden administration still has to deliver the tax hike proposals in the coming weeks. Best case scenario is that the core components of “Build Back Better” get passed through budget reconciliation at the end of the year.
FX
Biden’s infrastructure pitch will eventually make the big winners at the end of the year be Mexican and Canadian currencies. For now FX is all about the direction of the Treasury yields dictating the dollar's trend. The bond market rally appears to be tentatively dragging the dollar lower today. A lackluster jobless claim report didn’t move the needle as the consensus remains that the US economy will run hot very soon, keeping the dollar supported until the outlook improves for Europe.
Oil
Crude prices went on an OPEC+ rollercoaster ride. Oil prices seem poised for a modest gain as OPEC+ members seemed like they were leaning towards agreeing upon a one- or two-month rollover. Most oil price gains were reversed after the debate shifted towards the proposal for gradual hikes.
The OPEC+ decision for a gradual output increase surprised some energy traders. Expectations were for no increase in May but a stronger raise in June. Given the improving crude demand outlook in Europe, oil prices did not completely fall off a cliff given the staggered output increase across May through July. OPEC+ agreed on consecutive 350,000 bpd increases in May and June, lastly with a 400,000 bpd raise in July.
Brent crude hovered near session lows awaiting the Saudi decision on what they will do with their voluntary cut.
The Saudi plan to slowly end their voluntary cuts was well received. Saudi Arabia is expected to ease cuts by 250,000 in May, 350,000 in June and 400,000 in July.
The COVID hit to investment in new production is lasting and making supply inelastic. Stable oil prices appear to be the trade with higher prices anticipated once Europe’s demand outlook improves. As wells start to run dry in the coming months, oil prices will eventually surge higher once demand overtakes supply.
Gold
Gold has a bottom in place. The S&P 500 index broke past the 4,000 level, a massive resistance level and gold prices are higher today. The brightening economic outlook has been mostly priced in and the next handful months of infrastructure negotiations suggest a steady rising Treasury yield environment which should still be supportive for gold prices. The inflation debate is a global story, but when the weaker dollar trade returns, this will likely coincide with a string of surging pricing pressures in the US. The consensus on Wall Street is still that inflation won’t materialize, but the risks are growing that it could.
Gold has rebounded almost $50 from yesterday’s low as Treasury yields continue to drop, down from 1.78% to 1.68% over the past couple of days.
Bitcoin
Bitcoin is little changed as Wall Street investment banks are closer to following through on their pledge to allow their institutional funds exposure to Bitcoin in the form of cash-settled futures or Grayscale’s Bitcoin trust. Goldman Sachs and Morgan Stanley are the main drivers behind the latest rally in Bitcoin.
The long weekend will prove interesting for Bitcoin as traders will wait to see if fresh record highs are made once again during an illiquid time. Many institutional traders investments don’t have direct access to Bitcoin and are unable to take advantage of the moves on Saturday or early Sunday.
Related: Asset Managers Cite Inflation as the Number One Market Risk, Displacing COVID-19