Infrastructure plan bullish for USD

Hi Everyone,

Joe Biden revealed the details of his US $2.25 trillion infrastructure stimulus plan last Wednesday. The key areas of interest, as expected, are modernizing infrastructure and upgrading manufacturing, research and development, as well as addressing climate change. The second plan, expected later this month, would be targeted at childcare and healthcare programs. A number of sectors, among them semiconductors, jumped to all-time highs while the dollar established a new support level, trending still higher.

Biden’s proposal would include US $600 billion to infrastructure, combined with US $400 billion to broadband and manufacturing and US $600 billion to social coverage and housing. The bill will be financed over 8 years by increasing borrowing from global markets on top of the current outstanding public debt of 100% to GD.

This push will also be boosted by increasing corporate tax rate from current 21% to 28%. American corporate tax rate was cut from 35% in 2017 by President Trump. A number of key Republicans, including the Minority Leader Mitch McConnell, have expressed their skepticism towards the plan and ensuing tax increases on the premise that the economy has bounced back strongly. Most likely, the proposal in its current shape will not pass, albeit the main tenants might be approved as separate smaller bills.

Latest manufacturing PMI in the States exploded to 64.7 in March, exceeding the consensus expectation of 61.3. Also, non-farm payroll data published last week showed the economy added 916,000 jobs in March, while February numbers were also revised higher to 468,000. The US has added 1.58 million jobs during Q1, bringing unemployment rate to 6%. However, U-6 unemployment is still uncomfortably high at 10.7%.

Biden’s key focus on infrastructure, including building roads and bridges but also electric vehicle charging stations, is long overdue. The US has not had a large-scale infrastructure upgrade for decades, pushing the country down to the 13th place in the global infrastructure quality list. In addition to modernizing infrastructure, the US also must address the challenge posed by China for global dominance in technology and general leadership. The rivalry has been brewing for years but has been amplified recently with the onset of the pandemic. Countries, including the US and China, have been withdrawing from globalization by expatriating supply chains in order to protect food supply, technological advancement, national defense and their pharmaceuticals industry. Leaders of both the PRC and the United States have been rather outspoken about the ongoing competition and strategies to enhance their own positions. The situation has been amplified by a global shortage of semiconductors, causing disruptions in the manufacturing of anything from autos to refrigerators. The semiconductors industry has been identified by both leaders as a key industry for technological dominance, as well as for national security.

Semiconductors ETF SOXX jumped 4.33% last week to a new all-time-high at the back of Biden’s announcement. Also, Nasdaq-100 pierced 50-day simple moving average resistance, turning bullish. Other sectors that closed at all-time-highs were homebuilders, transportation and industrials. The US dollar gave up some of the gains at the back of the announcement but closed the week up 0.31%. The dollar, measured by DXY, continues in an upward trajectory, still in overbought territory with key resistance near 93.44 and support near 92.94. Momentum indicators support a strong bullish trend on daily and weekly charts.

Major indexes were all up with S&P 500 piercing another all-time-high, closing the week higher +1.14% at 4,019.88 points. Nasdaq-100 rose +2.70% to 13,329.50 while Russell 2000 gained +1.46% at 2,253.90. DXY shed -0.02%, while gold slipped -0.17%. Oil futures closed higher +0.79%.

Have a great trading week ahead!

In The Spotlight

*In USD thousands

• U.S. ISM Services PMI
The Purchasing Managers’ Index (PMI) measures the sentiment for business activity. This is survey based and considered as a leading indicator. Additionally, preliminary reading offers visibility on the economic activity for the ongoing month. Manufacturing PMI reported last week showed much higher than expected economic activity (64.7 vs 61.3). Higher than expected print is generally bullish for the currency, while lower than expected is bearis

• Chinese Consumer Price Index
CPI, or inflation, measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer prices have grown compared to the previous period. Higher than expected rate may be both positive or negative for CNY as the market does not like inflation expectations too far off from consensus. Generally, both high and negative inflation are bearish for currency, while positive and low inflation, in line with expectations, is bullish.

Market Sentiment

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