Too Soon to Worry About Fiscal and Monetary Policy

The stock market will navigate through two policy-related events over the next week and a half -- /1/ potential resolution of the negotiations regarding President Biden's infrastructure proposal and /2/ the June 15-16 FOMC Meeting.  The potential market negatives surrounding the two are probably further ahead. 

The Administration already has moved closer to the Republican proposal regarding the amount of so-called infrastructure spending.  But, the two sides differ markedly on how to fund the spending.  The problem for the markets -- both stocks and Treasuries -- is whether and when to move in ways to offset the economic boost from the spending.  In other words, tighter financial market conditions will likely be needed to crowd out private spending if higher taxes do not restrain consumption or business investment sufficiently to free up resources for the increased spending on road and bridge repair, etc.   With the spending expected to be used over 8 years, and given the typical lag between passing the legislation and starting construction, the need to crowd out private spending would not seem to be imminent.  Moreover, if tax hikes are significant, the immediate economic impact could be negative.

The stock market appeared to ease its fear of near-term Fed tapering after Friday's May Employment Report.  And, there was good reason to do so.  Most of the +559k m/m increase in Nonfarm Payrolls was one-off, tied to the re-opening of the economy.  Job gains elsewhere were modest.  While the Unemployment Rate fell to 5.8% from 6.1%, it remains 2+% points above the pre-pandemic lows.  The Teen-Age Unemployment Rate was the only one of the various sub-measures that fell below that earlier low.  The 0.5% m/m increase in Average Hourly Earnings was high, but less than the 0.7% in April.  And, it is conceivable it reflected adjustments to the re-openings after having been held down during the pandemic.  So, the Fed can wait to see if wage inflation settles down later this year.   The Statement is likely to indicate no change in the amount of bond purchases. 

With the Fed taking a wait and see attitude, this week's release of May CPI could have an asymmetric impact on the markets.  Consensus looks for +0.4% m/m for both Total and Core.  A below-consensus print should be a positive for both stocks and Treasuries.  But, an above-consensus print may very well be ignored.