By Michael Every of Rabobank
To Infrastructurality and Beyond!
“This is the deal.” Of sorts. The bipartisan group of 20 US senators haggling away at the initially $2 trillion 8-year infrastructure package have now coughed up one worth $579bn of new money over 5 years. The big difference, besides the much smaller number, is that all of it is to be spent on actual physical infrastructure rather than “human infrastructure.” (“I’m infrastructure, and so is my wife,” as I had noted previously.) The proposed focus is: $109bn for roads and bridges; $49bn for public transit; $66bn for passenger and freight rail; $15bn for electric vehicles/electric buses; $25bn for airports; $55bn for water; $65bn for broadband; $21bn for the environment; $73bn for power; and $100bn “other”. (“I’m other, and so is my wife.”)
So, stimulus here we come? Well, there are still huge potholes. The balance of power in Congress already does not make passage assured. Moreover, the infrastructure bill is only expected to move alongside the $1.8 trillion American Families Plan over 10 years, which may still pass using ‘reconciliation’. This is essentially a political compromise that welfare goes in one bill and physical things in another – but that either both pass or neither do. Indeed, House Speaker Pelosi has made that very clear, and President Biden has said he will only sign the bipartisan deal if it comes to him together with the reconciliation stimulus bill.
In short, we still don’t know if this will pass or not; but if it does then we get around $116bn a year in infrastructure plus $180bn in higher welfare spending, or nearly $300bn a year for five years (roughly 1.3% of US GDP), and then $180bn for a further five years. Moreover, next week is also expected to see movement in the House of Representatives on the “Ensuring American Global Leadership and Engagement Act," or Eagle Act, their version of the Senate’s own bill already passed 68-32. This would likely see further major federal spending of around $244bn on science, R&D, and direct manufacturing of key technologies.
That would all move the needle on US GDP growth – and on US inflation, presumably, and more so if that the money is spent on products Made in America, as promised – though note Chinese tech stocks are up today on the view this won’t happen. On the other hand, more Chinese firms in Xinjiang, including in polysilicon/solar, have just been added to the US import blacklist; and China is reportedly considering importing cotton to circumvent bans on its textiles based on allegations of how its own cotton crop is produced.
But could this also move US rates? More famous market voices are ignoring the Fed’s constant chatter on what they claim they will or won’t do ahead --how many times a day do we have to hear from the Fed?!-- and argue that the FOMC have painted themselves into a corner. The Fed can taper and normalize rates: and then good luck with market volatility, as already evidenced when the idea was merely floated to happen 2-1/2 years from now instead of 3-1/2; and good luck with the political volatility given some would probably ask why an institution now so publicly committed to equality would tighten monetary policy just as fiscal policy aimed at reducing inequality kicks in. Or the Fed can sit back and do nothing --except talk endlessly, of course-- and hope things work out well with inflation, and all the more so if fiscal policy goes to work. The implied ‘implied market volatility’ behind the current façade of lows in vol and highs in stocks, is truly worrying.
For just one example, although the BOE stuck to the same cautious, “transitory” meme as the Fed yesterday (see here for more from Stefan Koopman), Mexico showed it was not prepared to sit back and relax, surprising the markets with a 25bp hike to 4.25%, and around another 115bp to come is now priced in, with another hike perhaps as soon as August: that pushed up MXN by 2.4% on the day. Never mind all that though: US banks just passed Fed stress tests with flying colors, so they can immediately start doing stock buybacks again. All else is commentary.
Meanwhile, despite what recently happened on the Ukrainian border, and with Belarus, and in the Black Sea, where Moscow has promised to sink the next British ship that sails too close to Crimea, France and Germany are not backing off from their demand for “selective engagement” with Russia on: the environment; the Arctic; cross-border co-operation; energy; health; space; the fight against terrorism; and Iran, Syria, and Libya. And cheese and cars, no doubt. Naturally, this does not sit well with all in the EU, especially those who sit closer to Moscow.
As Politico reports it: “EU unity on Russia collapses over Franco-German outreach plan”, adding “Some diplomats blame discord and disarray on jealousy over Joe Biden’s summit in Geneva,” and a “sense that Berlin and Paris had grown annoyed at the mishandling of Russia relations by Brussels.” Okay, so now France and Germany can mishandle relations directly themselves: but what does this mean for the importance of the “new, geostrategic EU”? What does it mean for how the bloc can react as one to what it recognises as a worryingly new illiberal, Great-Power-politics world?
Poland’s PM stated: “Starting any direct dialogue on the highest political level is only possible in a situation where there’s an actual de-escalation and actual withdrawal from the aggressive politics. It’s an unequivocal situation for us.” Lithuania’s added: “To fall into a trap once or twice may be regarded as a misfortune, but to continue doing so decade after decade looks like historical myopia.” Yet France’s president retorted this “allows us to advance and start a dialogue to defend our interests as Europeans.” – without any *physical* defending of Europeans, one supposes(?)
At the same time, the EU also saw Dutch PM stating Hungary “must leave” if it won’t repeal a law banning the promotion of homosexuality in schools, adding: “My goal is to bring Hungary to its knees on this issue.” Technically, the European Commission could take legal action against Budapest and impose fines, but the EU Treaty Clause that could suspend Hungary’s voting rights within the EU would require a unanimous decision by all other member states – and unity appears the last thing being offered at the moment. How actual Huxit could be achieved, even given it is not a EUR member, is even less evident.
Yet what is clear is that the EU is bitterly divided in all kinds of ways, internally and externally. Even a little higher spending on infrastructure is unlikely to bridge all those gaps. Indeed, over the next few days, the Dutch will try to thrash the Czechs; France will aim to defeat the Swiss; Sweden wants to dump Ukraine; and England will clash with Germany. I think there is some Euro football happening too.