German And Dutch Elections, And FOMC, BOE, And BOJ Meetings

In summary, of the three G7 central banks that meet next week, the Bank of Japan is the most likely to adjust policy. The Fed and BOE are unlikely to take fresh measures or alter forward guidance, and that in itself is an important message. While both countries' governments are boosting fiscal stimulus, the central bankers expect the inflationary bump to be modest and transitory.

The high-frequency economic data poses headline risk but is unlikely to alter underlying views that the huge amount of stimulus the US is providing will create diverging economic outcomes. America's sixth fiscal package during the pandemic is larger than the GDP of all but the nine large economies after the US. The Federal Reserve shows no intention to deviate from its long-term asset purchase program of $1.44 trillion annual rates.

Peak divergence is likely to be seen this quarter or next. By midyear, the vaccine rollout is likely to accelerate in Europe and Japan. The European Union Recovery Fund is expected to begin distributions.

The US debt ceiling suspension ends in July, though Treasury Secretary Yellen, like several of her predecessors, can buy a few months through savvy cash management techniques. Before then, the US Treasury will have brought its cash balances down, which has been a critical factor driving some short-term rates below zero. The latest extension of federal unemployment compensation is also extended to early September and will spawn the chins wagging about a fiscal cliff.

The point is that this is not the time for linear projections for either inflation or the widening divergence in the US favor. The debt-driven growth will cause the current account deficit to yawn and fuel concern about the twin-deficits. As attention shifts from the stimulus bill to the infrastructure, a sense of a boundless America may both excite and scare investors.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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