US: Funding Measures Include Raising The Corporate Tax Rate To 28%

Markets

Minutes of the previous FOMC meeting showed that participants think that it would likely be some time until substantial further progress toward the committee’s maximum-employment and price-stability goals would be realised and that, consistent with the committee’s outcome-based guidance, asset purchases would continue at least at the current pace ($120bn/month) until then. They strengthen the central bank’s current laissez-faire approach. Risks to the eco outlook remain tilted to the downside because of the uncertain course of the pandemic, while risks to the inflation outlook are broadly balanced. FOMC members concluded that financial conditions remain highly accommodative despite the rise in longer term yields, which reflect the improved economic outlook, some firming in inflation expectations and expectations for increased Treasury debt issuance. The release of the Minutes didn’t hamper the intraday comeback of US yields and the dollar going into the closing bell. We raise attention to one more part of the Minutes where Fed Chair Powell noted that it might be appropriate to adjust the interest rate on excessive reserves (IOER), the amount the Fed pays on its facility for overnight reverse repo’s or both to stem recent downward pressure. Such move could even occur in between regularly scheduled meetings. The continued expansion of the Fed’s balance sheet triggered a modest softening of the effective Fed funds rate (0.07% currently) while pulling rates on US bills or repo rates to or even below zero. In a first move to support the very short end of the US curve, the Fed increased the daily counterparty limit on its overnight reverse repo facility to $80bn/day from $30bn/day.

Today’s eco calendar remains extremely thin with only Minutes of the ECB meeting and weekly US jobless claims. The ECB in March split ways with the Fed on how to handle rising longer-term bond yields. The European Central Bank decided to frontload emergency bond purchases (PEPP). Dutch governor Knot yesterday indicated that the central bank in Q3 could already switch course again. Minutes could confirm that flexibility. In absence of strong drivers, we are keen to see how much more short-term potential the euro has. EUR/USD’s rebound already faced difficulties in the 1.19-zone as the greenback strengthened its back. EUR/GBP’s momentum triggered a test of first resistance at EUR/GBP 0.8646 but a break higher didn’t occur. Core bond yields erased an early dip to end near unchanged both in Europe and the US. Both moves on FI and FX markets for now show that reflationary dynamics only allow for small corrections. Italian underperformance on bond markets remained related to the €5bn sale of a new 50-yr BTP where they offered some price concession.

News Headlines

The Polish central bank yesterday kept rates steady at 0.10% and will continue to buy government securities. The policy remains easy to support an economy that is facing renewed headwinds from tightening restrictions in Poland and abroad. Inflation rose and will remain elevated in coming months. However, its drivers are seen as temporary. The NBP remains committed to intervene in the FX market to strengthen the impact of monetary policy but struck a more neutral tone with respect to the zloty’s current level. The zloty rallied to EUR/PLN 4.57 (from 4.59) though the bulk of the move came in the run-up to the meeting and in lockstep with a broader CE FX bull run.

Germany’s Merkel is planning a law that would allow the federal government to impose restrictions on areas struck hard by the pandemic, newspaper Bild reported. The move comes after seeing what she described last month as “broken commitments” from the 16 state leaders to take measures in curbing the Covid spread.

US president Biden is open to negotiations on his 8-year $2tn infrastructure bill and the way to fund it, he said yesterday. The proposed $2.5tn increase in corporate taxes over the next 15 years is facing a backlash from businesses, Republicans and moderate Democrats. Funding measures include raising the corporate tax rate to 28%.