Financial markets’ volatility increased in the last two trading days of February. The U.S. equity indices declined while the dollar gained strength, in an opposite move compared to what we’ve seen during the pandemic.
However, over the weekend, news that the new fiscal stimulus bill has been approved by the House sparked optimism. As such, the markets bounced from the lows, with only the dollar remaining strong, especially against the euro.
The new stimulus will give $1,400 to each American making under $75,000/year. This money will come in the form of direct payments, and, on top of it, Americans will receive another $1,400 for each of their dependents.
Policymakers have become increasingly optimistic over this form of economic stimulus. Results from the “helicopter money” experiment so far, show that the Americans are not shy in spending the checks, so the economy will bounce faster than initially expected.
Strong Economic Momentum as Pointed by the ISM Manufacturing
Yesterday we saw the first important piece of economic data from the United States. The ISM Manufacturing is the first economic data of the month that truly has an impact on interpreting the economic evolution, and the release exceeded the 60 level. As a reminder, any print above 50 shows a sector that expands, while over 60 signals are even possible overheating.
Strong momentum was expected, considering the forecast of 58.1, but the actual number surprised. It indicates that the U.S. economy bounces stronger than expected, and the trend will likely continue. After all, the U.S. vaccination rate reached 2.5 million people daily. Because the results of the vaccination efforts in other parts of the world are clearly positive, the speed of vaccinations is a decisive factor of economic growth.
Coming back to stimulus, the pressure increases on the Fed. Stronger economic data, as seen lately, will pressure the Fed to restrain from further easing. Judging by the December Fed meeting, these were the plans anyways – to let the fiscal response maintain the easing financial conditions.
Yes, the long yields are rising, and financial conditions tightened, but that is just the natural response of solid economic activity. The Fed cannot, and will not, artificially keep easing conditions just for the sake of doing it so.
Moving forward, the new stimulus will likely have an impact on the second quarter. Let’s not forget that the money is not sent yet, and it will still take a while until reaching the consumers’ pockets. If the data for the rest of the first quarter keeps coming out stronger than expected, the markets will bet for more in the second quarter. Hence, equity indices should find a floor on any dip lower.