by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with news that Democrats have agreed that their “soft” infrastructure plan will total some $3.5 trillion in spending, though details still need to be worked out, and the proposal will face tough sledding in Congress.  Next, we discuss Federal Reserve Chair Powell’s testimony before Congress this afternoon.  We then turn to various international news items, and we close with the latest developments related to the coronavirus pandemic.  Finally, we note that today is Bastille Day.  Vive la France!

U.S. Fiscal Policy:  Senate Majority Leader Schumer (D, NY) said Democrats on the Senate Budget Committee have agreed to spend roughly $3.5 trillion on a broad climate, education, and anti-poverty plan.  That is down from the $6 trillion that the committee’s chair, Senator Bernie Sanders (I, VT) had demanded, but it will still face resistance from many Democrats, and its future remains uncertain.  In addition, we note that the deal only set the total spending figure of $3.5 trillion.  The committee will need to flesh out the actual policy provisions of the plan.

• The “soft” infrastructure plan would have to be passed separately from the approximately $1 trillion “hard” infrastructure package, which until now has had just enough bipartisan support to pass. Yesterday, however, Senate Republicans began to show signs they were getting cold feet over that plan, in large part regarding concerns that revenue increases in the package might not be enough to pay for it.
• In addition, some economists argue that hard infrastructure benefits often aren’t as much as commonly perceived.
• In any case, there is still a decent chance that additional fiscal stimulus will hit the U.S. economy sometime in the coming months. The actual economic and financial impact would play out over time.  For example, revenue-raising tax hikes would likely hit earlier than much of the spending, potentially producing a near-term drag on the economy before the stimulus truly kicks in.  Yet, the likelihood of new net stimulus will probably buoy expectations for continued economic growth and continued inflation risks.

U.S. Monetary Policy:  At 12:00 pm ET today, Fed Chair Powell will appear before the House Financial Services Committee to present the central bank’s twice-yearly report on monetary policy.  As with many investors, we will focus on whether Powell still believes that the current bout of inflation will be transitory and whether he continues to resist any idea of tightening monetary policy early.  We think Powell has lost control over several traditionalist, capital-friendly members of the policymaking board who are more concerned about inflation and want to hike interest rates earlier rather than later, so we’ll be looking for any clues as to the current personnel and policymaking dynamics at the Fed.  Powell will also testify before the Senate Banking Committee on Thursday.

European Union:  The European Commission today will unveil 13 policies designed to address climate change by ensuring the continent meets its goal of reducing average greenhouse gas emissions by 55% in 2030 and net-zero by 2050, compared to 1990 levels.  The “Fit for 55” program risks a backlash from poorer EU countries and some industries which argue that the pace of change and increased regulations will become a financial burden. The measures will also be examined closely by the bloc’s trading partners as their companies face penalties on exports of carbon-intensive products such as steel and cement.

• The centerpiece of the plan is to expand the Emissions Trading Scheme, a system that makes companies pay for the cost of polluting. Brussels wants to take it further to include emissions from the car industry and from heating buildings to quicken the pace of decarbonization. It would also impose new import taxes based on products’ carbon footprint.
• Depending on how quickly and stringently the policies are implemented, they could result in a net drag on European economic growth and financial assets.

China:  Calculations by the Financial Times show global investors have boosted their holdings of Chinese stocks and bonds by approximately 40% over just the last year; they now hold approximately $800 billion of the securities.  In part, the increase is driven by the inclusion of more Chinese securities in global stock and bond indexes, which forces index-driven funds to boost their exposure to them.  The increase is also driven by optimism over how quickly the Chinese government was able to get control over the country’s coronavirus pandemic and boost economic growth.

• All the same, we’ve been warning that piling into Chinese stocks and bonds carries some amount of risk at a time of rising U.S.-China geopolitical tensions related to issues like Xinjiang, Hong Kong, and Taiwan. More to the point, both the U.S. and the Chinese governments are actively taking steps that have the effect of gradually decoupling the two countries economically and financially.  For example, the U.S. government has clamped down on U.S. investors putting funds into Chinese companies connected with the People’s Liberation Army, and the Chinese government has begun to discourage Chinese firms from listing in the U.S. over auditing and data security concerns.
• Given the aggressive actions taken by the two governments so far, we cannot discount the possibility of a sudden, unexpected regulatory decision by either side that might require or encourage the unwinding of cross-border holdings. For example, sharpening regulatory moves might force index firms to ratchet down their Chinese exposure.  In any case, investors could get caught in the crossfire despite the positive performance some Chinese stocks have provided to date.

China-Pakistan:  An explosion killed at least nine Chinese nationals and at least four Pakistanis who were traveling in a bus in northern Pakistan.  The cause of the blast couldn’t immediately be determined, but Chinese building sites, symbols, and citizens have all been attacked by local insurgents in Pakistan. The incident represents the largest loss of Chinese lives in recent years in Pakistan, where China is carrying out a multibillion-dollar infrastructure building program.

Global Oil Market:  OPEC has reached a compromise with the United Arab Emirates that will allow it to boost its production as part of a wider agreement with Russia-led producers to boost global oil supplies to meet resurgent, post-pandemic demand.  Details on the compromise are still sketchy, but if it allows the OPEC+ group to proceed with something like their earlier plan to increase production by 400,000 barrels per day each month through late 2022, it could help cap surging oil prices and eventually help bring down inflation.

COVID-19:  Official data show confirmed cases have risen to 187,941,030 worldwide, with 4,051,232 deaths.  In the United States, confirmed cases rose to 33,916,927, with 607,786 deaths.  Vaccine doses delivered in the U.S. now total 387,241,530, while the number of people who have received at least their first shot totals 184,543,821.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 55.6% of the U.S. population has now received at least one dose of a vaccine, and 48.1% of the population is fully vaccinated.
• Despite the progress on vaccinations to date, the U.S. is now averaging more than 23,000 new cases a day, double the seven-day average of around 11,300 cases three weeks ago. On 17 of the past 18 days, the seven-day case average was higher than the 14-day average, also suggesting infections have been rising nationally.  According to the CDC, virtually all the new cases and deaths are among those who still haven’t been vaccinated.
• To encourage more young people to get vaccinated, the White House is enlisting social influencers like pop star Olivia Rodrigo to make pro-vaccination videos.
• As if the U.S. vaccination shortfalls aren’t bad enough, more developing countries are losing faith in the less effective Chinese vaccines they have been relying on.  Thailand is the latest such country, saying it will offer Western vaccines as booster shots to its health workers who have already received Chinese shots.  Similar moves have been undertaken by Indonesia and Bahrain.
  • If the Delta mutation continues to drive new infection waves in countries that have mostly relied on Chinese vaccines, the diplomatic goodwill China achieved by donating the shots will likely reverse.
  • On the other hand, many emerging markets heavily depend on exports to China or on Chinese capital, so they may be reluctant to take steps that would make China look bad.
• In China, several local governments are planning to bar unvaccinated residents from accessing public venues like schools, nursing homes, and hospitals without a valid exemption.  As in other countries that have offered benefits to the vaccinated or imposed restrictions on the unvaccinated, the moves are generating pushback and debate over personal health freedoms.

 Economic and Financial Market Impacts

• In India, inflation is surging because of supply disruptions from its recurring waves of infection and rising global demand as developed countries recover.  Retail prices are currently up about 6.3% year-over-year, exceeding the central bank’s target of 6.0%.  The increased prices are reportedly undermining support for Prime Minister Modi, although it is still too early to know whether the dissatisfaction might eventually lead to unrest or political instability.

Foreign Policy Response

• The Reserve Bank of New Zealand said it would halt pandemic-related bond purchases this month.  That will make the central bank one of the first in the developed world to step back from the monetary stimulus provided to fight the crisis. The surprise decision has pushed the local currency sharply higher against the U.S. dollar today, as economists forecast the bank would raise interest rates as early as August to prevent the economy from overheating.

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