EIC’s Outlook on the US New Stimulus and its Implication on Economic and Financial Conditions

Author:  Economic Intelligence Center (EIC)



Last week, the US House of Representatives passed the additional stimulus package worth USD 1.9 trillion, and the draft bill is now pending approval from the Senate. EIC views that the Democrats could finally roll out this massive relief bill within the first quarter this year via a Budget Reconciliation, but they might need to pull out some elements (such as minimum wage hikes) and cut down some spending plans (such as financial aids to local governments). In the end, the stimulus size approved by the Senate would be around USD 1.5-1.9 trillion.

In our view, this additional relief plan will help bolster the US economic rebound this year while risks of overheating economy or surging inflation remain low in the short term, given that the current US labor market has not yet returned to its pre-pandemic level and that most of the additional measures are one-off. Nonetheless, even though short-term inflation risks are somewhat manageable, there remain risks that inflation might overshoot in the medium term due to fundamental changes. These are risks that should not be overlooked as they may induce fluctuation in financial markets.

The new stimulus bill has fuelled both inflation expectation and market anticipation that Fed might scale back its monetary easing earlier than expected. These could result in rising long-term US treasury yields and become an upward pressure on the weakening US dollar. Therefore, EIC has revised our forecast on the 10-year Thai government bond yields up to 1.9-2.0% (from 1.5-1.6%) by the end of 2021 and maintained our Thai baht forecast within a range of 29.5-30.5 THB/USD.