US Stocks Rally On ~$1tn Infrastructure Bill

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US Stocks rally on ~$1tn infrastructure bill. 

US equities were stronger Thursday, S&P up 0.6% while US rates remained steady, with US10Y closing at 1.49%. The bounce in US stocks came as the US President announced a bipartisan agreement for a ~$1tn infrastructure bill. Still, the deal remains elusive on other features of the President's overall $4tn package.

I think there is a systematic element today as well, with VIX lower again and rates unchanged. Still, investor sentiment has improved this week post-Fed, and it will be interesting to see if rotation picks up now on the Infrastructure package.

New York NY Fed President John Williams underlined his position in the more dovish group at the Fed, tilted towards 'transitory' inflation. He says that although the economy is reopening faster than expected, the inflationary influences will not last for long. As demand and supply squeeze abate, price increases will slow. He said inflation is likely to drop back to 2% next year.

Foreign Exchange price action suggests the street has a low directional conviction and is still a tad Fed policy confused. But overall, the market has notably taken Fed communication in its stride over the last couple of days, even as Bostic joined Bullard in calling for a rate hike in late 2022. However, one could argue that last week's Fed pivot is not big enough to warrant a bullish dollar view against a broader external backdrop that remains dollar negative and a high bar to price even more for the Fed. I still think EURUSD +1.20000 before -1.1800 due to an optimistic view on European growth and as the US economic surge starts to ebb late summer. 

But keep in mind that further Fed repricing on an accelerated rate path could still happen if both the upcoming payrolls and inflation surprise higher. But the bar of an employment beat is not as low as the Bloomberg Whisper <WHIS GO> calls for a 723k increase in the June payrolls while Job Searching Website is seeing job search activities are still below the late April benchmark even for those states that ended unemployment benefits early.

Crude is steady, bouncing back from a mid-week bout of profit-taking supported by healthy implied global demand figures. The stall in the recent price rise likely reflects a growing risk that OPEC+ might increase supply to the market at its upcoming monthly meetings. Ultimately, this could be seen in a positive light for the market (the increase is due to better demand) on the road to normalization but might water down the $100/bbl expectation that seems to be growing despite the large volume of spare production capacity held back while underlying demand recovers from 2020.

Gold remains choppy as it continues to take its cues from the dollar and the Fed curve repricing. With much focus on the upcoming data, particular ADP Employment (June 30), ISM Manufacturing (July 1), and Nonfarm Payrolls (July 2). And after two consecutive weak releases, if the NFP prints are more robust than expected, the street could then better justify the hawkish Fed tilt, leaving gold prone to another sell-off as the US dollar takes another leg higher.