US services sector extended its recovery. The Institute for Supply Management’s services sector purchasing managers’ index surged to an all-time high of 63.7 in March, its tenth straight monthly increase, as COVID-19 restrictions were eased in many parts of the country. The blowout number followed a similar reading from the manufacturing sector of the economy. These figures comport with last Friday’s robust 916K job increase and suggest the US economy has a good deal of momentum heading into the summer months as the pace of coronavirus vaccinations quickens to an average of 3 million doses per day.

Our take: The services sector was hit the hardest during the pandemic; easing lockdowns are clearly driving its rebound. Rapid growth in services consumption by consumers, which makes up two thirds of consumer spending, paves the road for blowout economic growth this year. Keep an eye on this data point in the months ahead, as it will play a leading role in the near-term recovery.

Buried in the services report is the ISM employment index, which jumped to 57.2 from 52.7, confirming that most jobs affected by the pandemic are coming back. This rapid recovery begs the question: How long should extraordinary economic stabilizers – such as augmented unemployment benefits or aid to specific sectors – remain in place? Given the breadth and speed of the recovery, we doubt beyond September.

Fed meeting minutes affirm its vow to avoid hasty exit. The minutes of the March meeting of the Federal Open Market Committee released last week highlighted an economic outlook that had brightened considerably since January but remained far from the Fed’s labor and inflation goals. Policymakers on the committee seem to believe that the current inflation pressures – driven by a rapid economic recovery – are generally seen as temporary and that they expect prices to edge downward in 2022. The committee felt that rising Treasury yields were not a concern unless the move became disorderly or persistent.

Our take: The minutes offered little evidence that the Fed is budging from its set trajectories for either interest rates or asset purchases.  There were few hints in the minutes regarding the preconditions that would prompt the Fed to begin tapering asset purchases, let alone start hiking rates or reducing the balance sheet. As such, we expect the Fed to develop and communicate a clearer framework for reducing asset purchases around midyear, but actual tapering won’t begin until 2022 at soonest. Why? Jobs, plain and simple.

While the threat of inflation is fun to debate, the Fed’s #1 concern right now is job creation. No doubt, the latest reading on the jobs market is certainly encouraging, but we’re still about nine million jobs shy of where we were when the pandemic began. Until the jobs gap is closed, the Fed will remain extremely accommodative. For the near term, this means that the recent stall in the rise of long-term rates may be just a pause. We’re expecting that we’ll see the 10-year Treasury yield close to 2.00% before the year’s out as the economy continues to post strong recovery numbers, investors increasingly take on greater risk, and the Fed continues to sit on its hands.

Biden signaled flexibility on US corporate tax rate. After receiving pushback from business executives and lawmakers in his own party on raising the US corporate tax rate to 28% from 21%, President Biden signaled that he is willing to be flexible on the top-line figure. Many analysts expect the statutory rate to land somewhere around 25%. Biden is also said to be open to delaying tax hikes to garner support from Senate Republicans for his infrastructure proposal. GOP lawmakers have indicated that the $2.25 trillion plan spends too little on infrastructure and too much on longtime Democratic policy priorities. However, a favorable ruling from the Senate parliamentarian this week may make it easier for Democrats to pass more spending bills without any Republican buy-in.