US stocks made fresh record highs after the Fed’s preferred inflation gauge may have peaked at 3.4% and on improving expectations the economy will benefit from infrastructure spending in the fall. The key inflation indicator for the Fed hit the highest levels since the early 1990s as the reopening of the economy was combined with the base effects of when everything shutdown last year. The monthly PCE reading however declined and came in lower than economists’ forecasts. Today’s inflation data was another vote of confidence for the inflation is transitory camp.
Investors are paid close attention to drops in income and spending that were greater-than-expected as the stimulus payments effect waned. The US economy is on sound footing and could keep sending stocks higher as the reopening momentum accelerates and hiring improves.
Investors embraced the Biden administration’s tentative bipartisan infrastructure bill that still has an uncertain path forward. The goal is to get it done by August recess, but end of September or early October is probably more realistic. The $579 billion traditional infrastructure deal will deliver investments in road construction, fixing bridges, energy grid, and broadband internet, with no gas tax or undoing of the Trump tax cuts. The human infrastructure bill which still has a ton of debate won’t be tied to the bipartisan bill. Tax increases will eventually happen once the second bill gets negotiated.
The euro rallied after confidence data in Europe strongly improved as the gradual opening of the economy accelerated. The GfK’s forward looking confidence indicator rose to -0.3, the highest level since August. The recovery across Europe is still growing and that could remain the case as policymakers show signs to refrain from premature tightening.