by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! The overnight news was relatively tame, but we are following several stories. Today’s report begins with recent developments regarding the Ukraine situation. Up next, we discuss U.S. economic and policy news with an update on President Biden’s pick to fill the vacant seats on the FOMC. International news follows, and we conclude with our pandemic coverage.

Ukraine update: The White House has announced that it will taper down its rhetoric regarding the Russia-Ukraine conflict. At the insistence of Ukraine, the Biden administration stated it would stop describing a Russian invasion as being imminent. The change in rhetoric comes after Ukraine President Volodymyr Zelensky complained that calling an invasion imminent was causing unnecessary panic and having a negative impact on his country’s economy. That being said, the administration is still looking into ways to deter Russia from sending its troops into Ukraine.  The White House announced on Wednesday that it would cut Russia off from receiving semiconductors if its troops enter Ukraine.  Although unprecedented, the government could use regulation to restrict U.S. companies and pressure foreign companies that rely on U.S. equipment from selling chips to Russia. If the U.S. were to follow through on this threat, it would have a severe impact on the Russian economy.  Additionally, the U.S. has decided to enhance its presence in Europe. On Wednesday, the Pentagon announced that 2,000 more troops were deployed to Eastern Europe to bolster NATO defenses.

In light of growing pressure from the West, Russian President Vladimir Putin is trying to form closer ties with China. He will meet with Chinese President Xi Jinping on Thursday to discuss ways China could help Russia counter U.S. sanctions. Recently, China has become more outspoken in its support for Russia’s position concerning Ukraine. Last week, Chinese Foreign Minister Wang Yi stated that Russia’s security concerns were legitimate. China’s strong demand for commodities and its vast market will be critical for Russia if it plans to wean itself from its dependence on the U.S. However, it will likely come at a steep cost.  In exchange for helping Russia, China will probably demand a substantial discount for Russian commodities. China, which also has ambitions to expand its reach into Eastern Europe, could also use Russia’s dependency as leverage in future disputes. Thus, forming closer ties with China may not be that attractive of an option for Putin.

At the moment, we suspect that the primary path to de-escalation will be through peace talks. Last week, French President Emmanuel Macron and Vladimir Putin met to discuss reviving the Minsk-2 agreement. Originally brokered in 2015, the agreement gave Russia more influence in  Ukraine in exchange for peace. In the absence of an outright commitment from the U.S. to not allow Ukraine to join NATO, Russia could look to have a greater say in Ukraine government as a consolation prize. Reports suggest Ukraine may be receptive to increased Russian influence if it prevents an invasion. The revival of talks between Ukraine and Russia could possibly be the reason both sides have been keen to talk down the possibility of an imminent attack, with Russia going as far as implying the U.S. is the only aggressor in this conflict. We are still far away from a resolution, but conditions increasingly favor a peaceful outcome. If we are correct, it would be favorable to risk assets and bearish to commodity prices.

Economics and policy:

• The Biden administration has moved to limit the security risks posed by foreign-owned apps such as TikTok. The Commerce Department announced a rule change that could force foreign apps to submit to third-party auditing, source-code examination, and monitoring of the logs that show user data. Violations of security rules could lead to an app being banned from use in the U.S.
• President Biden’s pick to serve on the Federal Reserve Board, Lisa Cook, has met resistance to her confirmation. Cook’s research has been criticized for being too focused on race. Additionally, her misgiving regarding the Paycheck Protection Program being too small and biased toward large companies has received some blowback from politicians. In related news, Sarah Bloom Raskin, who has served on the Federal Reserve Board previously, is also expected to face scrutiny regarding her positions related to climate change, crypto, and bank mergers. The President’s three picks to fill the vacant seats on the Federal Reserve Board will have their Senate hearings today.
• The Pentagon announced that U.S. troops killed Islamic State leader Abu Ibrahim al-Hashimi al-Qurayshi in a raid.

International news: 

• Mexican President Andres Manuel Lopez Obrador announced his desire to form a state lithium company. On Wednesday, he told reporters in Mexico City that lithium is a strategic material that belongs to the people, signaling that private investment wasn’t welcome. As the demand for electric vehicles has increased in recent years, lithium has emerged as a possible competitor to oil. Thus, it is likely that lithium-producing companies will become more critical to the global economy as the world moves to cut down on carbon emissions.
• OPEC and its allies have agreed to increase production by an additional 400,000 barrels a day at its latest meeting. Despite the agreement to increase production, certain countries within the group have struggled to fulfill their respective supply pledge. Countries such as Nigeria and Libya have struggled to ramp up production due to the lack of investment and militia unrest.
• The U.K. is planning to resume free-trade talks with the U.S. after the midterm elections.
• The NATO chief raised concerns about a Russian military buildup along the Belarus border with Ukraine. The troop movements come amidst joint military exercises with Belarus and Russia. Moscow has held that having troops along the Ukraine border is consistent with military training and not a prelude to an invasion; however, NATO is not convinced. We suspect the buildup could be related to the U.S. decision to send additional troops into Eastern Europe. Therefore, we still believe that conflict in Ukraine remains a possibility.

COVID-19:  The number of reported cases is 385,424,523, with 5,702,683 fatalities.  In the U.S., there are 75,681,309 confirmed cases with 894,316 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 668,308,025 doses of the vaccine have been distributed with 540,630,198 doses injected.  The number receiving at least one dose is 250,378,993, the number of second doses is 212,130,684, and the number of the third dose, the highest level of immunity, is 88,614,084. The FT has a page on global vaccine distribution.

• Germany will allow up to 10,000 people to attend large outdoor events as long as the spectators wear masks and have proof of vaccinations.
• The World Health Organization has expressed optimism regarding the pandemic in Europe. The organizations stated the region is entering a “plausible endgame” as COVID deaths start to slow down.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with the latest developments in the Russia-Ukraine crisis.  There is late-breaking news of the first troop deployments from the U.S. to NATO countries in Eastern Europe.  We follow that with other U.S. and U.S.-related news that could impact financial markets today.  Next up is the international roundup, and we close with our usual pandemic coverage.

Russia-Ukraine-NATO:  In a news conference yesterday, Russian President Putin said last week’s written U.S. and NATO responses to his demand for security guarantees were inadequate. The Spanish newspaper El Pais said the U.S.’s response included an offer to hold talks with Russia on a reciprocal agreement over the deployment of ground-launched missiles or combat forces in Ukraine.  Still, despite Putin’s negative take on the U.S. and NATO documents, he expressed a willingness to continue talks on the matter.  Meanwhile, British Prime Minister Johnson and Polish Prime Minister Morawiecki met in Kyiv with Ukrainian President Zelensky and pledged to send additional weapons and military equipment to help stave off any potential Russian invasion.  Indeed, reports say a new diplomatic initiative is under consideration between Ukraine, Poland, and Britain. All three countries are in talks to sign a trilateral document in the near term.

• In a sign of continuing worries that Russian troops could invade Ukraine from Belarus or Russia itself, the State Department ordered the families of U.S. government employees in Belarus to leave the country.  On top of that, President Biden is directing the Pentagon to deploy more than 3,000 American troops to bolster the defense of European allies.
  • As announced this morning, roughly 2,000 troops from Fort Bragg, N.C., will be sent to Poland and Germany this week.  In addition, about 1,000 troops that are part of a Germany-based infantry Stryker squadron will be sent to Romania.
  • The Pentagon expects to make other moves of forces inside Europe and has ordered several thousand more troops to be on standby to deploy, beyond the 8,500 troops given similar orders last week.
• In yet another sign that the risk of invasion is real, President Zelensky said he has called up additional troops that would boost the size of the Ukrainian army in case it has to fight against Russia.
• Meanwhile, even as there are few signs of panic within Ukraine and much of the economy works normally, some investment activity is already being curtailed, and the value of the currency has dropped some 4% so far this year.

U.S. Labor Market:  After seeing two of its coffee outlets in Buffalo, New York, unionized in December, Starbucks (SBUX, $98.76) now faces unionization drives at dozens of other locations in 19 states.  On Monday alone, workers at 16 more branches filed for union elections with federal labor authorities.

• Part of the success of the union drive at the company is the organizers’ novel strategy targeting individual stores with amenable employees rather than mass organizing efforts.
• All the same, the broadening organization push at Starbucks and this week’s planned re-vote on unionization at an Alabama facility of Amazon (AMZN, $3,023.87) show how today’s labor shortage has shifted the balance of economic power toward workers and away from companies.
• Increased labor power will likely lead to faster wage growth, increased benefits, and more costly work rules over time, which will potentially bolster inflation and weigh on corporate profits if companies can’t pass the higher costs on to their customers.

U.S. Winter Storm:  More than 15 states in a band from New Mexico to Vermont are under winter-weather warnings today as a dangerous snowstorm barrels across central and northeastern parts of the U.S., causing flight cancellations and school closures.

• Heavy snow is expected from the Rocky Mountains to New England, and significant ice buildups are likely on the storm’s southern edge from Texas to central Pennsylvania.
• Parts of Colorado are expected to be hit worst, with high-altitude areas bracing for up to two feet of snow. Swaths of Missouri, Illinois, and Ohio could receive 12 to 18 inches of snow through Thursday.

United States-United Arab Emirates:  The U.S. is sending advanced jet fighters and a guided-missile destroyer to the UAE to help it counter an escalating threat from Yemen’s Houthi rebels after the Iran-backed group recently launched a series of missiles and drones at the Persian Gulf nation.

European Union:  Competition Commissioner Vestager today will outline a new strategy aimed at keeping the EU at the forefront of setting international standards for the technology industry and countering China’s growing influence.

• U.S. and EU officials have grown concerned that China has become successful at lobbying key technology standards-setting bodies, such as the International Telecommunication Union and the International Electrotechnical Commission, in ways that could provide an edge to its local champions.
• As part of the EU’s plans, European officials will work alongside U.S. authorities on a new monitoring system for emerging standards, a method to have a unified position on tech rulemaking. They also plan to use joint resources to ensure start-ups are aware of coming standards while relying on experts to foresee coming technological developments.

United Kingdom:  Prime Minister Johnson’s political position continues to erode after new revelations of social events held at Downing Street and attended by Johnson violating pandemic social-distancing rules.  On top of that, another senior member of parliament in the Conservative Party said he would submit a letter of no confidence in the prime minister and suggested Johnson call a no-confidence vote himself.

Peru:  Following Monday’s resignation of Prime Minister Mirtha Vásquez for what she called a dysfunctional cabinet and indecisive presidential leadership, embattled leftwing President Castillo yesterday announced the third cabinet of his six months in power.

• If approved by the opposition-controlled Congress, Castillo’s new prime minister will be Héctor Valer, a lawyer who has flitted between political parties and was elected to congress for the first time last year. He has no ministerial experience.
• The new finance minister will be Oscar Graham, an economist with years of experience at the finance ministry and the central bank.  Graham appears to be experienced and moderate enough to be warmly embraced, but the broader government’s leftist policy stances will likely keep investors on edge.

Guinea-Bissau:  Reports suggest the government has put down an attempted coup.  If successful, the coup would have been West Africa’s fourth in the last 18 months.

COVID-19:  Official data show confirmed cases have risen to  382,416,296 worldwide, with 5,691,006 deaths.  In the U.S., confirmed cases rose 75,353,925, with 890,928 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click he23qwre.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 211,954,555, equal to 63.8% of the total population.

Virology

• The seven-day average of U.S. hospital patients with a confirmed or suspected coronavirus infection continues to fall, reaching 136,753 yesterday.
• In France, falling Omicron cases have prompted the government to ease numerous social distancing restrictions.  Among the changes, workers will now be allowed to return to their offices full time, and mask mandates will be removed at ski lifts, markets, and other outdoor venues.
• Pfizer (PFE, $53.07) and partner BioNTech (BNTX, $179.60) yesterday formally asked the FDA to authorize the use of their COVID-19 vaccine in children under 5 years old, the last age group without access to the shots.
  • The companies submitted the request even though clinical tests show the two-shot regime was much less effective in preventing symptomatic cases of COVID-19 in children than in adults.
  • If the request is approved, the injection could be available for children aged 6 months to 5 years old in March.
• In Australia, the rapid spread of the Omicron mutation has forced officials to backtrack on plans to reopen the domestic border of Western Australia this week.  The border has now been closed for two years to ensure the province’s important iron ore mines can keep operating.  The border will remain closed indefinitely.

 Economic and Financial Market Impacts

• New analysis shows that the pandemic surge in demand for physical goods has finally begun to retreat, and consumers are spending more on services again.  If that trend continues, as seems likely, it could prompt a rebound in profits and stock values for service firms ranging from restaurants to cruise lines.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

We open today’s Comment with an update on the Russia-Ukraine crisis, where we see a glimmer of hope that war will be avoided (although anything can still happen).  We next turn to a wide range of mostly policy-related U.S. developments.  After that, we review several foreign news items that have the potential to affect the financial markets today.  We end with the latest on the coronavirus pandemic.

Russia-Ukraine-NATO:  At yesterday’s UN Security Council meeting on the Russia-Ukraine crisis, the U.S. and Russia accused each other of stoking tensions in the region.  Beyond the UN, a series of foreign leaders—including the British, Dutch, Polish, and Turkish leaders—will visit Ukraine this week to try to deter Russia from attacking and look for a diplomatic solution to the standoff.  Separately, Russian President Putin and French President Macron spoke on Monday for the second time in recent days, discussing the situation around Ukraine and Russia’s security concerns.  Perhaps most consequential, the U.S. State Department said it had received a Russian communication regarding its written response last week to Moscow’s security demands.  However, the department declined to provide any details.

• U.S. Secretary of State Blinken and Russian Foreign Minister Lavrov are due to talk by telephone on Tuesday, after which details of the Russian communication might be released.
• Anything can still happen, but given the way that Russia’s saber-rattling has galvanized a strong U.S.-NATO response, and given that a big majority of the UN Security Council voted to continue with yesterday’s debate, it looks like there’s a decent chance that Putin will back down and scuttle any plans he had for an invasion.  Besides, even within Russia, Putin is facing at least some resistance to the idea of an invasion.  If Putin backs down, it would likely be a significant positive for global financial markets.

U.S. Monetary Policy:  On Thursday, the Senate will hold a confirmation hearing on President Biden’s nomination of Lisa Cook for a seat on the Fed’s Board of Governors.  The professor of economics and international relations at Michigan State University has often focused her research on identifying policies that promote broad economic opportunity, particularly for racial minorities and women.

• Based on her research and press interviews, analysts believe Cook would likely weigh monetary-policy decisions with an eye to their effects on economically disadvantaged Americans and economic inequality.
• If confirmed, Cook would be the first Black woman to serve on the board.

U.S. Labor Market Regulation:  Two key senators tomorrow will introduce a bill that would require worker representatives to be granted a seat on some corporate boards.  If you’re still thinking in terms of “Democrats=Pro-Worker” and “Republican=Pro-Business,” you may be surprised to learn that the bill is being sponsored by two Republican senators, Marco Rubio and Jim Banks.  The initiative nicely illustrates how the populist/elitist political cleavage continues to gain importance versus the left/right division.

U.S. Environmental Regulation:  The EPA yesterday moved to restore a federal determination that allowed it is “appropriate and necessary” to regulate mercury, lead, and other toxic metals from coal-fired and oil-fired power plants.  The determination, first made during the Obama administration, was withdrawn by the Trump administration in 2020.

United Kingdom:  Yesterday, civil servant Sue Gray issued her report on the major pandemic scandal threatening Prime Minister Johnson’s hold on power, revealing 16 social events that took place in Downing Street offices over the past two years when ordinary Britons were ordered to avoid or reduce socializing.  As bad as the rule-breaking parties were, the real danger for Johnson is that London’s metropolitan police are also investigating two gatherings in his residence that may have been illegal.

Australia:  In another sign of tightening monetary policy around the globe, the Reserve Bank of Australia today said it would cease its weekly government bond purchases of about A$4 billion, equivalent to about US$2.8 billion. The decision was paired with new economic forecasts showing the unemployment rate is likely to fall below 4.0% later this year, which would be its lowest level since the 1970s.

India:  To boost economic growth, Finance Minister Sitharaman said the government’s budget for the fiscal year starting in April would hike public investment to 7.5 trillion rupees (roughly $100 billion).  That represents an increase of 35% from this year and about double the country’s pre-pandemic figure.  The spending boost would be partially funded by debt.

Argentina:  Máximo Kirchner, head of the ruling Peronist bloc in the lower house of Congress, said he would resign in protest against the government’s debt restructuring deal with the IMF.  The open split within the ruling coalition raises questions about whether the relatively pragmatic President Fernández and his government can succeed in passing and implementing the outline deal they announced last Friday, which includes only modest deficit-reduction targets.

Peru:  In yet another crisis for leftwing President Castillo and his turbulent government, Prime Minister Vásquez resigned yesterday after less than four months in the job.  In her resignation letter, Vásquez said it was no longer possible to find a consensus within the cabinet. In a clear swipe at the president, she also hit out at “the executive” for his “doubts and indecision.”

• The government’s leftwing ideology was already unsettling for Peruvian business owners and foreign investors in the resource-rich country, but Castillo has also been criticized for flip-flopping on policy and for making statements he has later had to retract or qualify. In opinion polls, his approval rating has plummeted from a peak of about 40% in September to about 25% now.
• Castillo will now look for his third prime minister in just six months at the helm of the government.  He has also hinted at a broader cabinet reshuffling, which could add to the sense of chaos in Peru and further worry investors.

COVID-19:  Official data show confirmed cases have risen to  378,888,710 worldwide, with 5,675,902 deaths.  In the U.S., confirmed cases rose 74,943,050, with 886,691 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 211,818,885, equal to 63.8% of the total population.

Virology

• The seven-day average of U.S. hospital patients with a confirmed or suspected coronavirus infection fell to 140,450 yesterday, marking the 11^th straight day of declines, taking further pressure off the nation’s healthcare system and providing more evidence that the fast-spreading Omicron mutation is in retreat.
• The FDA gave its full approval to use the vaccine from Moderna (MRNA, $69.33) on adults aged 18 years and older.  The vaccine, branded Spikevax, is now the second to receive full FDA authorization following the shot from Pfizer (PFE, $2.69) and BioNTech (BNTX, $72.08).

 Economic and Financial Market Impacts

• U.S. employers pulled back on demand for workers last month amid signs the economy was starting to cool in response to the fast-spreading Omicron mutation.
  • According to data from the job site Indeed.com, the U.S. had 10.8 million job openings on January 21, a decrease of more than a million from its estimate for the end of December.
  • The data will likely buttress expectations for a soft number when the Labor Department releases its estimate of January nonfarm payrolls on Friday.
• As people deal with yet another wave of the virus, accelerating inflation, and now weaker labor demand, consumer optimism has fallen sharply.  For example, the University of Michigan’s January Consumer Sentiment Index fell to a ten-year low of just 67.2 (see chart below).  Declining confidence has the potential to weigh on consumer spending, economic growth, and corporate profitability just as government fiscal and monetary policy tighten.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with the latest developments in the Russia-Ukraine crisis, which will be discussed today at the United National Security Council meeting.  We next turn to U.S. news, including a preview of this week’s confirmation hearing for economist Philip Jefferson to join the Federal Reserve’s Board of Governors.  We next cover a range of international news that has the potential to affect the financial markets today.  We close with the latest on the coronavirus pandemic.

Russia-Ukraine-NATO:  While Russia continues to threaten Ukraine with more than 100,000 troops poised along its borders, the UN Security Council will meet today in an effort to diffuse the situation.  Meanwhile, U.S. senators are nearing the completion of a bill that would provide for major sanctions in the event of an attack.   If it passes Congress and is signed into law, the bill will target large Russian banks, hit Russians’ savings and pensions, and limit the market for Russia’s sovereign debt, among other elements.  Ukraine’s ambassador to the U.S. insisted that Kiev and Washington are on the same page regarding the threat from Russia, despite press reports that some Ukrainian officials worry the U.S. is overstating the likelihood of an invasion.

• U.S. officials continue to highlight their threat to impose economic sanctions against Russia and key Russian officials in the event of an invasion.  They maintain assurances that the U.S. will not be sending troops to fight on Ukrainian soil.  However, there is more of a military threat here than meets the eye.  Importantly, the Biden administration has also stressed that if Russia invades Ukraine, the U.S. and NATO will boost their military infrastructure and deployments in Eastern Europe, close to Russian borders, and bolster their military aid to Ukraine as well.  In this sense, it’s not entirely accurate to say that the U.S. and NATO have vowed to limit their response to economic sanctions.
• As if to reinforce the idea that the U.S. and NATO would respond by increasing their military presence in Eastern Europe, British Prime Minister Johnson said over the weekend that the U.K. was prepared to massively boost its troop presence on the Continent “next week” if needed to deter Russia.  More broadly, Russia’s threatening stance could prompt many European nations to finally increase their defense spending and strengthen their military forces over the longer term.
• If the U.S. and NATO really do boost their military presence in Eastern Europe, it would mark a significant strategic mistake for Russian President Putin.  It may be why some Russian officials have recently taken a relatively conciliatory stance to last week’s U.S. and NATO responses to Russian security demands.  An invasion or other serious attack on Ukraine still doesn’t seem to be set in stone.  Naturally, if tensions cool, it would likely give a boost to global risk markets and help cool some commodity markets that have risen due to the potential for war, such as the market for wheat.

U.S. Monetary Policy:  On Thursday, the Senate will hold a confirmation hearing on President Biden’s nomination of Philip Jefferson for a seat on the Fed’s board of governors.  Although the economist has focused his research on how economic policy affects social groups differently, a number of current and former colleagues are making the argument that he is apolitical and would be open to hiking interest rates in order to rein in inflation.

• As a reminder, the Fed’s policy tightening plans include not only higher interest rates but also an eventual reduction in its bond-buying.  Some observers are getting concerned that reduced Fed purchases of mortgage-backed securities will come just as banks start unloading their holdings to meet increased loan demand.
• The result could push mortgage interest rates even higher.  Given that consumption spending is now much more dependent on the “wealth effect” than in previous decades, higher mortgage rates leading to softer home prices could weigh on consumer spending, corporate profitability, and stock values.

U.S. Storm Impacts:  Damage from the weekend’s winter storm in the Northeast didn’t appear to be extensive for a storm of such magnitude, in part because people were generally off the roads during the height of the storm on Saturday. In addition, the snow was light and fluffy, which limited damage to power lines and trees.

Italy:  The country’s parliament voted to re-elect President Sergio Mattarella as head of state, rather than promoting Prime Minister Mario Draghi to the position.  That means Draghi will continue to head Italy’s broad unity government until early 2023, giving the country a welcome period of political stability that is likely to be positive for the Italian economy and financial markets.

Portugal:  The ruling Socialist Party won yesterday’s parliamentary election with an absolute majority after voters penalized the far-left parties that triggered the snap poll.  With only a few votes still to be counted, the Socialists should win at least 117 seats in the 230-seat parliament, promising a period of stable policy.  Prime Minister Costa has signaled he will continue to focus on reining in the country’s budget deficit.

Yemen-United Arab Emirates:  The UAE said it shot down a missile fired at it by Iran-backed Houthi rebels in Yemen, marking the third such attack in recent weeks.  The attack happened as Israeli President Herzog was in Dubai for the Expo 2020 world’s fair.  According to the UAE’s defense ministry, the missile was destroyed over an unpopulated area and caused no casualties.

Digital Currencies:  Following up on the IMF’s warning last week that El Salvador should stop recognizing bitcoin as legal tender, the head of the organization’s monetary and capital markets department warned that the use of cryptocurrencies in place of traditional currencies poses “immediate and acute risks” for many emerging markets.  In particular, the official highlighted the destabilizing effect of the currencies’ huge price swings and their use to yank capital out of weak economies.

• The IMF’s stance on digital currencies supports our view that they face significant regulatory risk, especially as they present challenges to national sovereignty.  Over time, central bank digital currencies are more likely to survive and develop.  At least in Japan, however, there is still some pushback against the idea of CBDCs.
• Separately, the world’s first exchange-traded fund dedicated to decentralized finance networks is due to launch in Brazil on February 17.  The Hashdex DeFi Index ETF will allow investors to track a basket of projects betting on decentralized trading and lending networks whose standards are automated and often decided by consensus.

COVID-19:  Official data show confirmed cases have risen to  375,281,990 worldwide, with 5,665,683 deaths.  In the U.S., confirmed cases rose to 74,333,528, with 884,265 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 211,695,131 , equal to 63.8% of the total population.

Virology

• The seven-day average of U.S. hospital patients with confirmed or suspected COVID-19 infections fell to 146,769 over the weekend, about 8% lower than the peak on January 20.  The data suggest stress on the healthcare system from the fast-spreading Omicron mutation is now easing rapidly.
  • Despite the decline in hospitalizations, deaths continue to rise, with the seven-day average of new COVID-19 deaths now standing at an 11-month high of almost 2,400 per day.
  • Even though Omicron is much less virulent than earlier mutations, the sheer number of infections with the variant is boosting total deaths.

 Economic and Financial Market Impacts

• In China, where the government’s strict zero-COVID policy has prompted lockdowns against Omicron outbreaks around the country, the official January PMI for the manufacturing sector fell to 50.1 from 50.3 in December.  The January Caixin PMI for manufacturing, more heavily weighted toward the private sector, fell all the way to 49.1, marking its lowest reading since February 2020.  Meanwhile, the official nonmanufacturing PMI, which includes both services and construction activity, fell to 51.1 in January from December’s 52.7.
  • All three indexes are designed so that readings over 50 will point to expanding activity.
  • Taken together, the figures suggest the government’s strict response to the Omicron outbreaks is proving to be a big headwind for the economy.  That is likely to weigh on overall global economic activity and financial markets in the coming months.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with an update on the Ukraine situation, where tensions may be easing.  We then look at U.S. economic and policy news and China-related stories. International news is next, and we conclude with our pandemic coverage.

After weeks of rising tensions between NATO and Moscow, the two sides appear to be ready to move toward de-escalation. Ukraine and Russian officials are now in talks about implementing the Minsk-2 accords again. The original agreement between Kyiv and Moscow gave Russia more of a say in Ukraine’s future; however, the deal had remained dormant. The two sides have agreed to continue the discussion in two weeks, which, if fruitful, could relieve fears of war and give Putin a way to save face. Despite being somewhat dismissive of the NATO letter on Thursday, Foreign Minister Sergei Lavrov said Moscow sees “rational elements on secondary issues” in U.S. responses to its demands.

To prepare for a worst-case scenario, President Biden reassured Ukrainian President Volodymyr Zelensky that the U.S. and its allies are willing to respond decisively if Russia invades. The U.S., EU, and the U.K. are preparing to impose sanctions on new Russian gas projects if Moscow decides to send troops into Ukraine. Given its heavy reliance on Russian gas, the EU was initially reluctant to make such a threat without assurances from the U.S. that it would help find alternative ways for Europe to meet its energy needs. Recently, the U.S. has been in talks with Qatar and other major energy producers to reroute gas to Europe in case it is cut off from Russian gas. Although no formal deal has been announced, it appears the talks have been positive enough that Europe feels confident the U.S. can follow through with this commitment.

From our perspective, we believe Putin may have realized that he overplayed his hand and may be looking for a pathway out. We suspect he viewed the growing unrest and division in the U.S. and Europe over COVID-19 as an opportunity to push its own interests. However, it appears his over-assertiveness may have driven the two sides closer together. Although we believe there remains an elevated likelihood of conflict, recent developments suggest the situation is improving.

Economics and policy:

• Democrats are making another push to get the social spending and climate bill passed before the midterm elections. The party is considering lowering income caps and means-testing the Child Care tax credit to win Senator Joe Manchin’s (D-WV) elusive vote.
• The U.S. housing market gained almost $10 trillion during the pandemic, according to data gathered by Zillow (ZG, $45.99).
• The China anti-competitiveness bill is meeting partisan opposition in the Senate. The bill dubbed the America Competes Act is designed to help improve supply chains and promote the domestic production of critical goods such as semiconductors. Opposers to the bill have argued that it does not adequately address the threat posed by China and contains provisions that promote wasteful spending. The bill is likely to have some bipartisan support if brought to the Senate floor, but there are concerns it will fall short of the 60 votes needed to overcome a filibuster.
• Nearly 45 million people in the Northeast and Mid-Atlantic are going to be impacted by winter storms over the weekend. The storms have the potential for hurricane-force winds and heavy snow, and they could potentially lead to power outages and a sharp rise in energy prices.

China:

• Chinese regulators plan to ramp up the pace of its antitrust crackdown as it looks to create a level playing field for small and medium-sized companies. These smaller companies make up the majority of the country’s economy and will be vital as the country moves away from relying on residential investment for GDP growth.
• China will jail forty-seven steel company officials for violating the country’s air pollution standards. The officials are accused of using fake data to get around environmental regulations. Over the last decade, China has intensified its crackdown on pollution as it looks to clean up the air.
• Officials from the China National Space Administration announced that China and Russia have agreed to build a research station on the moon. The alliance could set the stage for a new space race.

 International news: 

• Argentina and the IMF reached an agreement on Friday regarding when the country will balance its primary budget. The deal states that the government will be required to balance this budget by 2025. The new arrangement allows the two sides to continue discussions about renegotiating Argentina’s $40 billion of debt. Additionally, Argentina plans to make a $700 million payment on Friday and another $365 million payment on Tuesday. The pact between the Argentine government and the IMF has sparked outrage throughout the country. Protesters have filled the streets of Buenos Aires over concerns that a deal with the IMF could lead to more austerity. The opposition party has refused to attend IMF talks as it suspects that the issue could help them in next year’s general election.
• The ECB is projected to be more than a year and a half away from raising rates, according to respondents to a Bloomberg survey. Those surveyed stated they believe that the central bank could end its bond-buying program in March 2023 and could start raising rates the following September. The respondents also said inflation in the euro area, which is 5%, will probably fall throughout the year, easing the pressure on officials to act.

COVID-19:  The number of reported cases is 366,589,668, with 5,638,962 fatalities.  In the U.S., there are 73,428,433 confirmed cases with 878,467 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 663,451,855 doses of the vaccine have been distributed, with 536,370,947 doses injected.  The number receiving at least one dose is 249,267,851, the number of second doses is 211,162,083, and the number of the third dose, the highest level of immunity, is 86,484,618. The FT has a page on global vaccine distribution.

• The U.S. is pushing China to change some of its quarantine and testing requirements for American diplomats. The increase in restrictions has resulted in a request for some officials at the U.S. embassy in Beijing to leave China.
• A sub-variant of Omicron has been detected in Colorado. The new variant can spread faster than the original, but there is no evidence that it leads to more severe outcomes.
• About 1,700 dockworkers at West Coast ports tested positive for COVID-19 in January. The number of infections in January surpasses the total number of cases in all 2021.
• More than 300 scientists and public health officials have urged the U.K. government to waive IP rights on vaccines to aid efforts to combat the pandemic.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with a discussion about the Federal Reserve meeting on Wednesday. Next, we discuss U.S. economics and policy news with an update on the Ukraine situation. We then turn to China-related stories. International news follows, and we end with our pandemic coverage.

The Federal Reserve signaled that it expects to begin raising rates soon and start shrinking its balance sheets soon after.  During a press conference, Chair Jerome Powell stated he believes the labor market and the economy are strong enough to withstand a series of rate hikes. When pressed about whether there could be a rate hike after every meeting, Powell did not rule out the possibility. Based on his comments, interest rates on the two-year deferred Eurodollar futures contracts rose to 2.00%, signaling the possibility of the Fed raising rates four times this year and next. The hawkish tone by the Fed led to a sell-off in equities and Treasuries.

Source: Bloomberg

The chart above shows the spread between the 10-year and 2-year Treasuries. Following Powell’s press conference, the spread narrowed 8 bps to its flattest level since 2020. The yield curve flattening likely signals growing pessimism about GDP growth expectations as the Fed attempts to contain inflation.

Economics and policy:

• Supreme Court Justice Stephen Breyer is planning to retire. The vacancy will give President Biden a chance to select his first Supreme Justice since taking office. The circuit judge of the United States Court of Appeals for the District of Columbia, Kentaji Brown Jackson, appears to be the frontrunner to fill the seat. She was confirmed to the appeals court last year by a 53-to-44 vote, thus making her ascension to the Supreme Court even more likely.
• The U.S. and NATO delivered Russia a written response to its demands that NATO withdraws its troops from Eastern Europe and ban Ukraine from joining the military alliance. In response to the letter, Moscow stated it does not feel its concerns were fully addressed. That being said, it also said that Moscow was still open to further discussions on the matter. In the letter, NATO stated it was willing to be more transparent about its military exercises and would consider not deploying intermediate-range missiles or troops in Ukraine in exchange for a drawdown of troops along the Ukraine border. The stand-off between the two sides has increased concerns of conflict in Europe and pushed up commodity prices, most notably Palladium.
  • In a virtual summit, Beijing showed its support for Russia in its escalating conflict with Ukraine by stating Moscow “had reasonable security concerns.” Although Beijing’s support does not come as a surprise, it shows that China appears to have a vested interest in the outcome. Beijing may have used the event as a blueprint for getting the West to withdraw its support from Taiwan.

China:

• On Wednesday, the WTO ruled in favor of China in its dispute with the U.S. The ruling authorizes China to impose $645 billion in tariffs on U.S. goods and services.
• China is considering a proposal to sell off most of the assets owned by Evergrande (EGRNF, USD, 0.22). In the proposal, the company would get rid of all its assets except for its separately listed property management and electric vehicles unit. A state-owned bad debt manager, Cinda Asset Management (1359 HK, HKD, 1.40), would take over the assets with the proceeds of the sale going to repay creditors.
• The EU filed a complaint against China to the WTO on Wednesday. The group alleged China has been discriminating against Lithuania and other exporters from member states in an attempt to pressure countries to disassociate from Taiwan. Earlier this year, Lithuania opened diplomatic ties with Taiwan and allowed the region to open an office in its capital city of Vilnius. Following this decision, Beijing has prevented Lithuanian exports from entering China and has told other exporters to remove any inputs from its goods that come from Lithuania. Although China has denied imposing a ban on Lithuanian goods, Lithuanian exports to China fell in December 90% from the prior year.

International news: 

• The European Central Bank issued a warning to financial institutions with exposure to Russia. The central bank warned it is prepared to impose international sanctions on Moscow if it invades Ukraine. The central bank has also asked the institutions to explain how they would handle different sanctions scenarios. For example, if Russia is removed from the SWIFT international payments system, how would these institutions deal with Russian transactions? The warning comes as the ECB looks to tie up loose ends if it is forced to punish Russia if an invasion of Ukraine occurs.
• The Argentine government has asked China to expand its currency swaps in yuan ahead of its payments due to the International Monetary Fund.
• Mexican President Andres Manuel Lopez Obrador’s decision to have the state take over the country’s electricity sector has potentially scared away green investors. The country needs an additional $10 billion to meet its clean energy goal by 2024. However, the pace of investment has slowed dramatically while investors await the outcome of the power control bill, which is currently being debated in Congress.
• Inflation in New Zealand rose to its fastest pace in more than 31 years. The latest reports showed that inflation rose 5.9% from the prior year, up from the previous quarter reading of 4.9%. The increase in inflation suggests the Reserve Bank of New Zealand will raise rates for the third time in five months at its February 23 meeting.

COVID-19:  The number of reported cases is 362,947,159, with 5,628,271 fatalities.  In the U.S., there are 72,910,879 confirmed cases with 876,066 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 662,359,855 doses of the vaccine have been distributed, with 537,171,553 doses injected.  The number receiving at least one dose is 251,518,114, the number of second doses is 210,850,212, and the number of the third dose, the highest level of immunity, is 85,218,657. The FT has a page on global vaccine distribution.

• Hong Kong plans to cut its 21-day quarantine to 14 days starting February 4. It will also extend a ban on flights from eight different countries.
• A study has shown that six months after the Moderna (MRNA, $154.26) shot was administered, antibody levels fell.

COVID-19 cases in Germany surpassed 200,000 for the first time. The rise in cases has led to staff shortages.

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