Stimulus to help the economy and vaccines to stop the virus are expected to be the main focus in markets in the week ahead.

Efforts to move along a fiscal package in Congress picked up momentum in the past week with Congressional leaders sounding conciliatory, and a bi-partisan group of senators pushing their own USD900 billion proposal.

It probably boils down to how much Senate Majority Leader, Mitch McConnell, is willing to deal. The market remains uncertain, but positive that there’ll be progress next week. The government is projected to run out of money on Friday, hence Congress has to come up with a funding scheme.

Some traders have said the two events could be tied, but Congress could also push through a spending resolution without including stimulus. Some programs will expire at the end of the month, if Congress does not provide funding, including unemployment benefits for millions of Americans.

The on again, off again stimulus talks have led to scepticism in the market, and sets it up for a move higher if there is anything officially announced. Market wouldn’t think it’s fully baked in, it would say the stimulus is a positive catalyst, unless it’s less than USD900 billion.

While stocks surged in the past week, bond yields also moved higher. Yields move opposite price, and bond yields have been rising on stimulus expectations. More spending means more debt, resulting in higher rates.

At this point, the market is anticipating at least several hundred billion dollars of incremental stimulus in 2020. As Washington had been a tailwind in late-Nov and early-Dec as fiscal progress occurred faster than anticipated, the whole topic is starting to become more neutral (and possibly a headwind to the extent Congress fails to deliver on investor assumptions).

Lawmakers had been at a stalemate over additional fiscal aid for months before last week, raising concern about the economic recovery from the coronavirus pandemic.

The clear message is that while the recovery in the labor market has lagged behind the recovery in overall GDP, both continue to regain ground lost during the lockdown recession of March and April. The disappointing print also gave stocks a boost by lifting expectations of a new fiscal stimulus package being passed before year-end.



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