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

[Posted: 9:30 AM EST] | PDF

Today’s Comment begins with a range of U.S.-related developments, including news that Monday’s summit between Presidents Biden and Xi opened the possibility of negotiations for a nuclear arms control deal with the U.S. and China.  We next turn to several international developments before wrapping up with the latest news on the coronavirus pandemic.

United States-China:  National Security Advisor Sullivan announced that Presidents Biden and Xi agreed in their virtual summit on Monday to explore the possibility of a nuclear arms control deal between the U.S. and China.  The White House offered no further details, and any such deal would likely take years to negotiate, especially since Russia would almost certainly have to be included in the talks.  Nevertheless, any commitment to launch such discussions is a step toward cooperation that could help manage the growing geopolitical rivalry between the U.S. and China.  On balance, it’s probably a positive for investors in risk assets.

U.S. Monetary Policy:  President Biden hinted to reporters that his decision on reappointing Federal Reserve Chair Powell to another term would come around the end of the week.  Powell still appears likely to get another nod, which would likely be taken well by the financial markets.  However, there is still an outside chance Biden will tap the more liberal Fed governor, Lael Brainard.  In that case, the announcement would likely spur sharp volatility, at least in debt markets.

U.S. Fiscal Policy:  As a reminder that the U.S. still could face a debt crisis in the coming weeks unless the nation’s borrowing limit is raised, Treasury Secretary Yellen warned in a letter to Congressional leaders that the government may run out of money to pay its obligations by December 15.  Without a doubt, the next negotiations to raise the limit will involve the usual brinksmanship on the part of both Democrats and Republicans.  Any resulting standoff could be disturbing to the financial markets.

European Union – Financial System:  In its latest semiannual financial stability report, the European Central Bank warned that increased “exuberance” in housing markets, junk bonds, and crypto assets have created vulnerabilities that will be exposed if higher-than-expected inflation leads to a sharp rise in interest rates.  Echoing what we and many other analysts have noted, the report states that rising inflation and falling real interest rates have prompted investors to take greater risks in their search for yield, leaving parts of the property, debt, and crypto asset markets more susceptible to corrections.

European Union – Trade Policy:  In a further sign that environmental protection concerns are becoming more entrenched in trade policy, the EU said it drafted an anti-deforestation law that will ban the import of six products that are often associated with land-clearing in less developed countries: beef, soy, palm oil, coffee, cacao, and timber.

• The six products alone account for approximately 19% of all EU commodity imports.
• The regulation would force companies to prove that products they sold into the EU did not contribute to legal and illegal deforestation or forest degradation.

India:  Amid a wave of dangerous air pollution, the Indian government has closed six of the 11 coal-fired electricity plants within a 300-kilometer radius of New Delhi.  The Commission for Air Quality Management also closed schools and colleges until further notice, banned private construction work, and restricted the entry of trucks into the city until November 21.  Based on the experience in China, where authorities also recently closed many power plans to cut pollution, there is some risk that the Indian move will disrupt economic activity, at least around the capital city.

Iran:  Diplomatic reporting indicates Iran has resumed producing equipment for advanced uranium centrifuges at a site in the city of Karaj that the UN atomic-energy agency has been unable to monitor or gain access to for months.  The renewed work has raised concerns that Iran could start secretly diverting centrifuge parts if Tehran chooses to build a covert nuclear-weapons program, although they say there is no evidence at this point that it has done so.

COVID-19:  Official data show confirmed cases have risen to 254,589,111 worldwide, with 5,118,866 deaths.  In the United States, confirmed cases rose to 47,312,411, with 765,919 deaths.  Vaccine doses delivered in the U.S. now total 556,077,145, while the number of people who have received at least their first shot totals 227,691,941.  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, 68.6% of the U.S. population has now received at least one dose of a vaccine, and 58.9% of the population is fully vaccinated.
• Before Japan started administering shots, it had one of the lowest rates of vaccine confidence in the world.  Now, the country — which started doling out immunizations months after the U.S. — has the highest inoculation rate among the G7 nations, without mandates of any kind!
  • Japan had now fully inoculated 75.5% of its population of 126 million people.
  • That pushed the country just ahead of Canada, with 75.3% of its population fully vaccinated.
• Pfizer (PFE, $49.60) has asked U.S. health regulators to authorize its oral protease inhibitor drug (which differs from its vaccine) for high-risk COVID-19 patients.  That puts the pill, Paxlovid, on course to be available for people to take at home by the end of the year.  The pill has been shown to be an easy-to-use treatment to keep people out of the hospital in the early course of the disease.

 Economic and Financial Market Impacts

• Nurses are winning enormous salary increases across the country, reflecting not only the tight labor market as pandemic lockdowns ease but also the need to compensate nurses for heavy COVID-19 caseloads in some areas.  According to healthcare consultants Premier, Inc., the average annual salary for registered nurses, not including bonus pay and overtime, grew about 4% in the first nine months of the year to $81,376.
• The tight, post-pandemic labor market also helped fuel widespread increases in state and local governments’ minimum wage.  While there’s still plenty of debate on whether or not those minimum wage hikes have an effect on hiring, a new study shows that higher minimum wages tend to result in better service.

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