While short term market volatilities cannot be ruled out, increased infrastructure spending may help to raise potential growth in the longer term.
It will be a busy fall in Washington, and investors are increasingly paying attention to the multiple ongoing legislation processes that are going to determine the U.S. fiscal outlook and could have a market impact.
A vote is tentatively planned for the infrastructure bill on or before September 27. Markets could be volatile in the next few weeks as various headlines around the negotiation of the infrastructure bill, the reconciliation bill, and the debt ceiling process evolve.
Up for discussion are two spending bills and the debt ceiling. The Bipartisan Infrastructure bill is expected to be voted on in the House by September 27.
In terms of size, it is a $1.2 trillion package containing more than $550 billion in additional spending over five years with. Given its relatively small size, the overall impact on growth and markets will likely be very modest.
Less clear is the fate of the reconciliation bill, which is a plan to spend an additional $3.5 trillion over the next 10 years. Although the House passed the outline of a $3.5 trillion budget plan on August 25, they now need to agree on and draft the details of the legislation, and it will have to be approved by both the House and Senate before becoming law.
This package is focused on “social infrastructure”, for example, elderly, disability and child care. The additional spending could be passed without any Republican support.
However, it also means that every Senate Democrat must support the bill and, in the House, every Democrat except for three has to vote for it. So from that perspective, many hurdles remain for the actual passing of this bill, and in our view it’s likely that it gets watered down to $2 trillion, if it passes.
The issue gets trickier once we start thinking about the potential interaction between the reconciliation bill and the bipartisan infrastructure bill. This is because more progressive parts of the Democratic party are withholding their support for the bipartisan bill unless the bigger reconciliation package also gets passed at the same time.
However, there are more moderate Democrats who oppose such a large spending increase. So this creates a small risk that the disagreements over the reconciliation bill could derail the infrastructure bill, making it likely that we face a binary outcome where either both pass by the end of this month or neither passes.
Finally, there is the debt ceiling to consider, which has to be raised later this year. The treasury has been relying on its cash savings but those will likely be exhausted by September or October.
A government shutdown will occur if the debt ceiling isn’t raised by then. As we’ve seen this movie several times before, we believe that in the end the debt ceiling will be raised, but if the infrastructure negotiation gets in the way, it could complicate the timing and result in some short term volatility. As you can see we could be in for a noisy couple of weeks and months.
Beyond short-term volatility, the market implications will ultimately depend on the amount of spending and tax changes. The growth and inflation impulse will likely be limited given that the spending will be spread over 10 years, but broader productivity gains are possible over the long term.
Given what we know now, we don’t think the potential tax hikes will be enough to wash out earnings growth we expect next year. On the rates side, momentum towards an agreement could be a catalyst for higher long term yields.
From an investment perspective, the infrastructure bill discussion is a factor that supports our view of a continuation of relatively healthy mid-cycle growth in the U.S..
If a larger bill than we expect is passed there could be some upside risks to mid-long end yield. Meanwhile, a very prolonged discussion could introduce market volatility, especially if it coincides with delays to raising the debt ceiling. It will be a busy fall in Washington, and investors are increasingly paying attention to the multiple ongoing legislation processes that are going to determine the U.S. fiscal outlook and could have a market impact.
A vote is tentatively planned for the infrastructure bill on or before September 27. Markets could be volatile in the next few weeks as various headlines around the negotiation of the infrastructure bill, the reconciliation bill, and the debt ceiling process evolve.
Up for discussion are two spending bills and the debt ceiling. The Bipartisan Infrastructure bill is expected to be voted on in the House by September 27.
In terms of size, it is a $1.2 trillion package containing more than $550 billion in additional spending over five years with. Given its relatively small size, the overall impact on growth and markets will likely be very modest.
Less clear is the fate of the reconciliation bill, which is a plan to spend an additional $3.5 trillion over the next 10 years. Although the House passed the outline of a $3.5 trillion budget plan on August 25, they now need to agree on and draft the details of the legislation, and it will have to be approved by both the House and Senate before becoming law.
This package is focused on “social infrastructure”, for example, elderly, disability and child care. The additional spending could be passed without any Republican support.
However, it also means that every Senate Democrat must support the bill and, in the House, every Democrat except for three has to vote for it. So from that perspective, many hurdles remain for the actual passing of this bill, and in our view it’s likely that it gets watered down to $2 trillion, if it passes.
The issue gets trickier once we start thinking about the potential interaction between the reconciliation bill and the bipartisan infrastructure bill. This is because more progressive parts of the Democratic party are withholding their support for the bipartisan bill unless the bigger reconciliation package also gets passed at the same time.
However, there are more moderate Democrats who oppose such a large spending increase. So this creates a small risk that the disagreements over the reconciliation bill could derail the infrastructure bill, making it likely that we face a binary outcome where either both pass by the end of this month or neither passes.
Finally, there is the debt ceiling to consider, which has to be raised later this year. The treasury has been relying on its cash savings but those will likely be exhausted by September or October.
A government shutdown will occur if the debt ceiling isn’t raised by then. As we’ve seen this movie several times before, we believe that in the end the debt ceiling will be raised, but if the infrastructure negotiation gets in the way, it could complicate the timing and result in some short term volatility. As you can see we could be in for a noisy couple of weeks and months.
Beyond short-term volatility, the market implications will ultimately depend on the amount of spending and tax changes. The growth and inflation impulse will likely be limited given that the spending will be spread over 10 years, but broader productivity gains are possible over the long term.
Given what we know now, we don’t think the potential tax hikes will be enough to wash out earnings growth we expect next year. On the rates side, momentum towards an agreement could be a catalyst for higher long term yields.
From an investment perspective, the infrastructure bill discussion is a factor that supports our view of a continuation of relatively healthy mid-cycle growth in the U.S..
If a larger bill than we expect is passed there could be some upside risks to mid-long end yield. Meanwhile, a very prolonged discussion could introduce market volatility, especially if it coincides with delays to raising the debt ceiling.
A vote is tentatively planned for the infrastructure bill on or before September 27. Markets could be volatile in the next few weeks as various headlines around the negotiation of the infrastructure bill, the reconciliation bill, and the debt ceiling process evolve.
Up for discussion are two spending bills and the debt ceiling. The Bipartisan Infrastructure bill is expected to be voted on in the House by September 27.
In terms of size, it is a $1.2 trillion package containing more than $550 billion in additional spending over five years with. Given its relatively small size, the overall impact on growth and markets will likely be very modest.
Less clear is the fate of the reconciliation bill, which is a plan to spend an additional $3.5 trillion over the next 10 years. Although the House passed the outline of a $3.5 trillion budget plan on August 25, they now need to agree on and draft the details of the legislation, and it will have to be approved by both the House and Senate before becoming law.
This package is focused on “social infrastructure”, for example, elderly, disability and child care. The additional spending could be passed without any Republican support.
However, it also means that every Senate Democrat must support the bill and, in the House, every Democrat except for three has to vote for it. So from that perspective, many hurdles remain for the actual passing of this bill, and in our view it’s likely that it gets watered down to $2 trillion, if it passes.
The issue gets trickier once we start thinking about the potential interaction between the reconciliation bill and the bipartisan infrastructure bill. This is because more progressive parts of the Democratic party are withholding their support for the bipartisan bill unless the bigger reconciliation package also gets passed at the same time.
However, there are more moderate Democrats who oppose such a large spending increase. So this creates a small risk that the disagreements over the reconciliation bill could derail the infrastructure bill, making it likely that we face a binary outcome where either both pass by the end of this month or neither passes.
Finally, there is the debt ceiling to consider, which has to be raised later this year. The treasury has been relying on its cash savings but those will likely be exhausted by September or October.
A government shutdown will occur if the debt ceiling isn’t raised by then. As we’ve seen this movie several times before, we believe that in the end the debt ceiling will be raised, but if the infrastructure negotiation gets in the way, it could complicate the timing and result in some short term volatility. As you can see we could be in for a noisy couple of weeks and months.
Beyond short-term volatility, the market implications will ultimately depend on the amount of spending and tax changes. The growth and inflation impulse will likely be limited given that the spending will be spread over 10 years, but broader productivity gains are possible over the long term.
Given what we know now, we don’t think the potential tax hikes will be enough to wash out earnings growth we expect next year. On the rates side, momentum towards an agreement could be a catalyst for higher long term yields.
From an investment perspective, the infrastructure bill discussion is a factor that supports our view of a continuation of relatively healthy mid-cycle growth in the U.S..
If a larger bill than we expect is passed there could be some upside risks to mid-long end yield. Meanwhile, a very prolonged discussion could introduce market volatility, especially if it coincides with delays to raising the debt ceiling. It will be a busy fall in Washington, and investors are increasingly paying attention to the multiple ongoing legislation processes that are going to determine the U.S. fiscal outlook and could have a market impact.
A vote is tentatively planned for the infrastructure bill on or before September 27. Markets could be volatile in the next few weeks as various headlines around the negotiation of the infrastructure bill, the reconciliation bill, and the debt ceiling process evolve.
Up for discussion are two spending bills and the debt ceiling. The Bipartisan Infrastructure bill is expected to be voted on in the House by September 27.
In terms of size, it is a $1.2 trillion package containing more than $550 billion in additional spending over five years with. Given its relatively small size, the overall impact on growth and markets will likely be very modest.
Less clear is the fate of the reconciliation bill, which is a plan to spend an additional $3.5 trillion over the next 10 years. Although the House passed the outline of a $3.5 trillion budget plan on August 25, they now need to agree on and draft the details of the legislation, and it will have to be approved by both the House and Senate before becoming law.
This package is focused on “social infrastructure”, for example, elderly, disability and child care. The additional spending could be passed without any Republican support.
However, it also means that every Senate Democrat must support the bill and, in the House, every Democrat except for three has to vote for it. So from that perspective, many hurdles remain for the actual passing of this bill, and in our view it’s likely that it gets watered down to $2 trillion, if it passes.
The issue gets trickier once we start thinking about the potential interaction between the reconciliation bill and the bipartisan infrastructure bill. This is because more progressive parts of the Democratic party are withholding their support for the bipartisan bill unless the bigger reconciliation package also gets passed at the same time.
However, there are more moderate Democrats who oppose such a large spending increase. So this creates a small risk that the disagreements over the reconciliation bill could derail the infrastructure bill, making it likely that we face a binary outcome where either both pass by the end of this month or neither passes.
Finally, there is the debt ceiling to consider, which has to be raised later this year. The treasury has been relying on its cash savings but those will likely be exhausted by September or October.
A government shutdown will occur if the debt ceiling isn’t raised by then. As we’ve seen this movie several times before, we believe that in the end the debt ceiling will be raised, but if the infrastructure negotiation gets in the way, it could complicate the timing and result in some short term volatility. As you can see we could be in for a noisy couple of weeks and months.
Beyond short-term volatility, the market implications will ultimately depend on the amount of spending and tax changes. The growth and inflation impulse will likely be limited given that the spending will be spread over 10 years, but broader productivity gains are possible over the long term.
Given what we know now, we don’t think the potential tax hikes will be enough to wash out earnings growth we expect next year. On the rates side, momentum towards an agreement could be a catalyst for higher long term yields.
From an investment perspective, the infrastructure bill discussion is a factor that supports our view of a continuation of relatively healthy mid-cycle growth in the U.S..
If a larger bill than we expect is passed there could be some upside risks to mid-long end yield. Meanwhile, a very prolonged discussion could introduce market volatility, especially if it coincides with delays to raising the debt ceiling.
Policymakers in Washington are about to embark on major discussions around fiscal policy. There are three key and interrelated issues to watch. First, the bipartisan infrastructure bill. Second, the Democratic Party agenda, along the lines of the ‘human infrastructure’ bill released earlier in the year. Third, the debt ceiling. As the news cycle picks up, we may be heading into a more volatile market environment in the next couple of weeks.
In our view, the bipartisan infrastructure bill, formally known as the Infrastructure Investment & Jobs Act, is the most likely to pass. This bill cleared the Senate on Aug 10 with strong bipartisan support. House Speaker Pelosi has committed to holding a vote in the House by September 27, which would allow it to reach President Biden’s desk by the end of September. This is a $1.2 trillion package with more than $550 billion in additional spending over five years. The deal makes large investments in public transit and water infrastructure, and significant investments dedicated to Amtrak, roads and bridges. There are billions of dollars in revenue raisers that offset the cost of the legislation, but no tax increases or other notable changes to the tax code. Given the size of new spending is relatively small, we think the overall market impact may be more limited.
More uncertain but potentially also more impactful on markets is the Democratic Party agenda. Earlier in the year, President Biden unveiled a series of spending proposals under the American Families Plan, which focused on “human infrastructure”. These proposals captured a clear Democrat agenda, and many – particularly from the progressive wing of the party – are keen to pass a large bill that can incorporate social welfare support, including elderly, disability and child care. Clean energy investment incentives will also be a key component. The House adopted the outline of a $3.5 trillion budget plan on August 25, which is largely a procedural step allowing Congress to start drafting the details of the budget reconciliation legislation that will have to be approved by both the House and Senate before becoming law. Many hurdles remain for the actual passing of an infrastructure bill, including divisions between moderate and progressive Democrats. The earlier vote clears the way for the committees to draft actual text of the legislation that could be passed through reconciliation, which means Democrats could advance the plans without any Republican support. However, it also means that every Senate Democrat must support the bill and, in the House, every Democrat except for three has to vote in favor. Prominent members of the moderate wing of the Democratic party have resisted a large bill, or too much deficit spending, but haven’t outright resisted a partisan bill in and of itself. So if such a bill passes, the price tag will likely come down to $2-2.5 trillion in spending (not the full $3.5 trillion).
The potential interaction between the two bills further complicates the problem. Given that the progressive wing of the party has threatened to withhold support for the bipartisan bill unless the partisan bill is also passed, there is a small downside risk that neither end up passing (or that the process just drags on for an extended period). Of course, if there is enough cooperation between the moderates and progressives, both bills can pass. There are of course two other possibilities – i.e., only one of the two bills pass. Broadly, the division within the Democratic Party creates more uncertainties around the process.
The potential market impact will be determined by the amount of spending and the size of the corporate tax hikes. For a $2 trillion bill, the growth and inflation impulse will likely be limited given that the spending will be spread over ten years, but broader productivity gains are possible over the long term. It will likely imply tax hikes to corporations and the highest income earners. We don’t think the potential tax hikes will be enough to wash out the earnings growth we expect next year. On the rates side, momentum towards an agreement could be a catalyst for higher long-term yields.
A potential complication is the debt ceiling. This is the total amount that the federal government is authorized to borrow. In August 2019, Congress voted to suspend the debt limit until July 31, 2021. It officially became operative again on August 1 and was adjusted to the current level of debt, which had risen to $28.5 trillion as of the end of June. Now, the Treasury is using temporary “emergency measures” to buy more time so the government can keep paying its obligations to bondholders, employees and Social Security recipients. But once the government exhausts those measures (Secretary Yellen confirmed on Sept 8 that the Treasury will exhaust its cash “in the month of October”), it will no longer be able to issue debt, and could run out of cash to pay existing obligations. That means Congress will need to find a solution that allows the government to keep borrowing, either by extending the suspension or raising the cap. We have seen this movie several times before, and know that eventually the debt ceiling will be raised. But a prolonged battle flirting with potential default is not going to be a constructive backdrop for risk assets.
Given there are so many moving parts, it is hard to say with a lot of confidence how exactly this will play out. Thus, volatility is probably the biggest takeaway, particularly if debt ceiling negotiations or tax increases end up surprising the markets. From a longer-term growth perspective, more infrastructure spending may help to raise potential growth, and momentum towards an agreement could be a catalyst for UST yields to move higher. Lastly, we continue to like real assets for their steady income and inflation-hedging ability.
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