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 recent remarks made by FOMC members. This is followed by U.S. economic and policy news a China-related story. International news is next, and we end with our pandemic coverage.

More Hikes? The Federal Reserve appears to be getting more hawkish by the week. Philadelphia Fed President Patrick Harker and San Francisco Fed President Mary Daly both signaled support for interest rate hikes starting in March. While Harker, a voting member, stated he would support “at least three” rate hikes, Daly, a non-voting member, has not been open about the number of increases she supports. Meanwhile, St. Louis Fed President James Bullard told the WSJ he expects to support as many four rate hikes to combat rising inflation.

In addition to the rate hikes, more members of the Fed have expressed a willingness to return inflation to its 2% target. During her testimony before the Senate Committee, Federal Reserve Governor Lael Brainard, who we view as a dove, mentioned a desire to get inflation back to its pre-pandemic norm. However, this may be easier said than done. In 2021, inflation was driven primarily by motor and energy prices. Although both product groups saw a jump in price due to stronger demand, they were constrained by a reduction in output. Retail inventories for motor vehicles are still well below their pre-pandemic levels, while the lack of investment in fossil fuels has reduced production capacity for commodities worldwide. Moreover, supply chain disruptions due to continued outbreaks of COVID-19 continue to be an issue. So, it may take a while for inflation to return to 2% even with Fed action. The hawkish comments from the Fed have made us less optimistic that it will back away from raising rates more than once this year.

Economics and policy: 

• The U.S. budget deficit narrowed to its lowest level in two years in December. The deficit shrank to $21.3 billion as the rise in income and corporate profits boosted tax receipts.
• Congress expects to move forward with a bill designed to help the country’s competitiveness with China. The legislation would authorize funding to bolster research and development as well as aid to the domestic semiconductor industry. Although the bill has bipartisan support, it has a narrow pathway to success. There is resistance on both sides of the aisle due to concerns that the bill may be too harsh on China.
• Senator Joe Manchin (D-WV) has expressed an openness to supporting the Build Back Better Act. Manchin, whose vote is critical to getting the bill passed, stated he would like the tax credit given to nuclear plants under the bill to expand from six years to 10 years. Extending the credit would mean the bill would have to cut costs elsewhere in order for it to meet its $2 trillion price tag.

China:

• Chinese banks have become more selective about financing real estate projects from local governments. The reluctance appears to be related to banks wanting to limit their risk exposure to the real estate sector amidst a decline in property values.

International news:  

• The head of the International Energy Agency, Fatih Birol, implied that the gas crisis in Europe was deliberately caused by Russia. Birol stated Russia was holding back a third of the gas that it could send to Europe and depleted its storage facilities to give the impression of tightened supply. Additionally, Birol theorized that the gas shortage was related to Russia’s ongoing tension with Ukraine. In December, Russia sent troops along the Ukraine border in what is perceived as an act of intimidation.
  • Moscow and Washington are set for additional talks. So far, discussions appear to be at a standstill after Moscow and NATO allies refused to accept each other’s demands. Moscow wants guarantees that Eastern European countries will not join NATO, while Washington would like a withdrawal of troops from along the Ukraine border.
  • In the Senate, Republicans are looking to impose more sanctions on Russia over the Gazprom Nord Stream 2 gas pipeline. A vote in favor of the bill could hinder efforts of the Biden administration to come to an agreement with Moscow over the Ukraine border issue.

• U.K. Prime Minister Boris Johnson has apologized for attending a party during the first pandemic lockdown. The Prime Minister has come under pressure to resign following the release of the story.

• Taiwan Semiconductor Manufacturing Company (TSMC, $132.23) plans to spend at least $40 billion to upgrade and expand its production capacity beyond its borders. The firm is looking to establish new fabs in Japan and the U.S.
• Borrowers in Europe have rushed to debt markets in anticipation of higher rates in the future. There was $107 billion in bonds sales in the lead up to Christmas, a new record.

COVID-19:  The number of reported cases is 317,289,446, with 5,515,204 fatalities.  In the U.S., there are 63,203,866 confirmed cases with 844,562 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 644,652,095 doses of the vaccine have been distributed, with 522,482,674 doses injected.  The number receiving at least one dose is 247,695,845, the number of second doses is 208,182,657, and the number of the third dose, the highest level of immunity, is 77,101,175. The FT has a page on global vaccine distribution.

• An Omicron outbreak has been detected in another major port city in China. On Thursday, Chinese officials reported there were cases in Dalian. So far, the city is undergoing mass testing but could go into lockdown if it is discovered the virus is spreading. Dalian would be the second port city to be lockdown due to cases of COVID-19, the first being Tianjin.  The spread of COVID-19 in China has already led to growing port congestion and could add to global supply chain pressures.

• AstraZeneca Plc (AZN, $58.40) has data supporting the use of its vaccine as a booster. The new research suggests that the vaccine generated antibodies against Omicron. Last year, the vaccine was sidelined by the U.S. and Europe due to a rare side effect that caused blood clots.
• The Biden Administration is set to distribute free COVID-19 tests for schools across the country. The effort is designed to keep schools open after a rise in cases has forced some schools to close due to a staff shortage.
• France expects to lift travel restrictions on the U.K. by the end of the week. The report comes after data that suggests that Omicron may have peaked in the U.K.

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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 a discussion of Federal Reserve Chair Powell’s testimony yesterday before the Senate Banking Committee, in which he doubled down on his recent hawkishness regarding inflation.  We next turn to various international developments that have the potential to affect the financial markets today and in the near term.  We wrap up with the latest news regarding the coronavirus pandemic.

U.S. Monetary Policy:  In his Senate confirmation hearing for a second term yesterday, Fed Chair Powell stood by his recent pivot toward being an inflation hawk, calling high inflation a “severe threat” to a full economic recovery from the pandemic and vowing to tighten monetary policy as needed to vanquish it.

• Powell said he was optimistic that supply chain bottlenecks would ease this year and help bring down inflation as the Fed takes its foot off the gas pedal. However, he also insisted that if inflation stayed elevated, the Fed would be ready to step on the brakes. “If we have to raise interest rates more over time, we will,” he said.
• He said nothing against expectations, firming in interest-rate futures markets over the past week, that the central bank would begin hiking interest rates in March.
• Finally, beyond the Fed’s already-announced plan to taper its bond purchases down to zero by March, he also said the central bank could begin allowing outright reductions in its $8.8 trillion portfolio of bonds and other assets later this year. It would be another tool for tightening financial conditions.
• Overall, Powell (along with others on the policy committee) seems to have shifted from patience to panic regarding inflation, even though “base effects” alone are likely to pull down the year-over-year price changes in the next few months. If Powell and his fellow policymakers make good on their plans to hike interest rates and run down the Fed’s balance sheet, we continue to believe they would be running the risk of tightening monetary policy too much and producing a slowdown in the economy and more volatile financial markets.

United States-NATO-Russia:  Following up on Monday’s U.S.-Russia talks, officials from all the NATO countries are meeting today with Russian Deputy Foreign Minister Ryabkov in an effort to de-escalate tensions in Eastern Europe and stave off a potential Russian invasion of Ukraine.

• Going into the meeting, it appears that the two sides will stand by their diametrically opposed positions, with Russia demanding security guarantees such as a prohibition against Ukraine joining NATO and the U.S. and its allies insisting that each country has the right to apply to the alliance if it wants to.
• In addition, reports suggest the NATO countries will also use the meeting to complain about Russian cyberattacks and electoral interference.

European Union:  As national leaders begin negotiating to ease the EU’s strict fiscal deficit and debt limits, EU Budget Commissioner Johannes Hahn said he would oppose carving out climate spending and other strategic expenditures from the EU’s public debt calculations, insisting that member states must focus on reducing their indebtedness.

• In his own words, Hahn said, “I am not supporting any ideas [to] exclude certain kinds of debts, qualifying them as good ones, sustainable ones, green ones, etc. At the end of the day, debt is debt.”
• Hahn, an Austrian, is expressing a common view among a group of mostly northern European countries. In contrast, the governments of France, Italy, and other, mostly southern, European countries are arguing for easier borrowing to support “strategic” initiatives such as climate-stabilization investments.
• While looser deficit and debt rules could help spark investment and bolster economic growth in the EU, at least for a time, the trade-off could be even higher debt levels that would eventually weigh on economic activity, European debt, and the Euro.

Japan:  As commodity and transportation costs soar due to the COVID-19 pandemic and a weakening yen makes fuel and imports costly, more Japanese companies are raising prices.  The price hikes, usually by market leaders with specialty products, are still modest. However, the trend does offer a tantalizing hope that Japan could finally emerge from the deflation that has defined it for decades.

Kazakhstan: The riots and protests of the last week are calming down, and President Tokayev, for the first time, blamed former President Nazarbayev for the unrest.  In a scathing speech to parliament, Tokayev detailed how Nazarbayev’s policies worsened income inequality for years until public anger boiled over.

• Tokayev vowed to launch economic reforms to reduce income inequality, but the more important aspect of his speech is simply his attack on the former president, who had built up an extreme cult of personality around himself during his tenure.
• Tokayev’s attack on Nazarbayev confirms our view that even if Tokayev didn’t instigate the unrest on purpose to discredit Nazarbayev, he certainly took advantage of the situation to push the former president out of his powerful position on the national security council, albeit with the help of Russian troops.
• The result is that Tokayev has solidified his position at the head of the government and forced Nazarbayev into full retirement, but the price he paid by inviting in Russian troops is that he now will be under much stronger influence from the Kremlin.

Ethiopia-Tigray:  After a string of victories against rebel Tigrayan forces over the last several weeks, the Ethiopian government has offered an olive branch by releasing several opposition leaders from prison and expressing its willingness to launch talks toward reconciliation.  The development offers some hope that the country’s civil war might end, but a dialogue and a peace process are not guaranteed.

COVID-19:  Official data show confirmed cases have risen to 313,959,367 worldwide, with 5,507,140 deaths.  In the U.S., confirmed cases rose to 62,313,787, with 842,322 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 have received at least their first shot totals 247,321,023.  The data show that 74.5% of the U.S. population has now received at least one dose of a vaccine, and 62.6% of the population is fully vaccinated.

Virology

• With the more easily transmissible but less dangerous Omicron mutation spreading fast, the number of COVID-19 hospitalizations is rapidly becoming the most important metric for the pandemic.  Unfortunately, the U.S. seven-day average of people hospitalized with confirmed or suspected COVID-19 reached 140,576 yesterday, surpassing the previous high recorded during the surge last winter.  The latest data from the Department of Health and Human Resources show that 79.2% of U.S. hospital beds are currently occupied, with COVID-19 cases alone occupying 21.3% of the available beds.
  • The tally suggests that a new onslaught of patients is arriving at many hospitals and putting added stress on the healthcare system.
  • We still think U.S. leaders will shy away from the costly and highly unpopular mass lockdowns imposed earlier in the pandemic.  However, as hospitals come under increasing stress, there is a chance that officials will impose some less intrusive measures that could nonetheless be a headwind for the economy.
• To help keep classrooms open during the Omicron surge, the Biden administration plans to distribute five million free rapid COVID-19 tests each month to schools around the country.  The tests for schools are in addition to the 500 million tests the administration plans to begin distributing to the public for free in the coming weeks.
• In Europe, the Omicron mutation is spreading so fast that WHO Regional Director Hans Kluge has warned that more than half of the Continent’s population could be infected within the next two months.
• In the U.K., Prime Minister Johnson is facing public outrage over reports that he attended a “bring your own booze” garden party at Downing Street in May 2020, against his own government’s social distancing rules at the time.  Parliament members say the outrage is strong enough that Johnson could soon face a vote of no confidence.
• In China, the government continues to adhere to its zero-tolerance policy regarding COVID-19, leading to a growing list of big cities being locked down and forcing the closure of many major manufacturing and shipping facilities.  If the shutdowns last long enough, they could spark a new round of supply disruptions that would dent economic growth worldwide and potentially keep inflation pressures high.
  • In one extreme example of the government’s zero-tolerance strategy, a Chinese court has sentenced three port workers to between 39 and 57 months for violating COVID-19 containment measures in 2020.
  • The charges against the three workers ranged from not wearing masks to foregoing protective clothing when handling cargo.

 Economic and Financial Market Impacts

• In its latest economic forecasts, the World Bank said global economic growth would fall from 5.5% in 2021 to 4.1% in 2022. According to the forecasts, the slowdown would mostly reflect the effects of the Omicron variant, supply chain disruptions, labor shortages, and the winding down of government economic support around the world.
• New data from the Census Bureau shows that unvaccinated workers, particularly low-wage earners, were much more likely to miss a full week of work because they had COVID-19 symptoms or were caring for someone with symptoms — even before Omicron. Missing work for these folks typically means missing substantial pay, since only 33% of low-income workers get paid sick leave.  The chart below is from labor economist Aaron Sojourner of the University of Minnesota, and Julia Raifman, a health policy researcher at Boston University.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

We open today’s Comment with a preview of Federal Reserve Chair Powell’s testimony before Congress today.  We also cover other U.S. news, including the U.S.-Russia meeting yesterday over Eastern European security issues.  We next review several international items that could affect the financial markets today.  We close with the latest developments related to the coronavirus pandemic.

U.S. Monetary Policy:  Federal Reserve Chair Powell today faces a Senate confirmation hearing for his second term leading the central bank.  Although his confirmation isn’t in doubt, Powell will probably face a grilling over the Fed’s recent shift toward tighter monetary policy to fight inflation after insisting just months ago that the current fast price rises would be transitory.

• In his written introductory comments released yesterday, Powell justified the abrupt shift on grounds that, “We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account.”
• The coronavirus pandemic that prompted today’s ultra-loose monetary policy was truly novel, but Powell’s “this time is different” statement sounds more than a bit like cover for the monetary officials’ apparent panic over inflation.  That panic raises the prospect of a policy mistake in which the Fed tightens policy too sharply and causes a slowdown in the economy or undermines its own credibility by having to walk back its inflation concerns after just a few months.
• Despite the sharp runup in bond yields and some modest steepening of the yield curve over the last two weeks, the bond market still seems to be pricing in just such a monetary policy mistake or, at the very least, a modest amount of policy tightening that quickly succeeds in capping inflation, albeit at the expense of slower economic growth.
  • Bolstering expectations for a rate hike as early as March, Atlanta FRB President Bostic said he is “totally open” to the central bank raising the benchmark fed funds rate at its March policy meeting, adding he expects the Fed will likely raise its interest rate target three times over the course of the year.
  • Despite the risk that tighter monetary policy could spark a slowdown in the economy, the prospect of near-term rate hikes continues to bolster bank equities.

U.S. Energy Industry:  Citing environment protection goals, the Interior Department yesterday said it plans to block oil and gas leasing on about 11 million acres on Alaska’s North Slope, reversing an effort by the Trump administration to expand oil exploration in Alaska.  The move will likely boost concerns that environmental restrictions on the oil and gas industry and efforts to favor green energy will crimp overall energy supplies and boost energy prices for years into the future.

• Separately, market intelligence firm Kpler said China doubled down on imports of Iranian and Venezuelan crude in 2021, taking the most U.S.-sanctioned oil in three years as refiners brushed off the risk of penalties to scoop up supplies at low prices.
• According to Kpler, crude processors in China bought 324 million barrels from Iran and Venezuela in 2021, about 53% more than the year before. That’s the most since 2018, when China took 352 million barrels from the two nations.

United States-Russia:  At their meeting in Geneva yesterday to soothe tensions over Ukraine, U.S. and Russian officials apparently failed to narrow their differences, although they later signaled there would be more U.S.-Russia talks in the future.  On Wednesday, the Russian delegation will meet in Brussels with all NATO members, and on Thursday, they will meet in Vienna with the Organization for Security and Cooperation in Europe, which includes Ukraine.

• As we discussed in our Comment yesterday, Putin’s key demands include a commitment from NATO that it will not admit Ukraine or other new Eastern European members into the defense alliance, and it rolls back its military infrastructure and deployments in the former Soviet states.
• The U.S. and its European allies have rejected Putin’s demands out of hand, but reports over the weekend said the Biden administration is prepared to discuss reciprocal limits on intermediate-range missiles in Europe, as well as mutual restrictions on the scope of military exercises on the continent.
• If no agreement is reached and Russia does invade Ukraine, the U.S. has threatened massive economic sanctions, including possibly cutting Russia off from the SWIFT system of international dollar payments.  U.S. officials have also discussed more targeted measures, including erecting export barriers to block international sales to Russia of products with a certain percentage of American content, as well as preventing Moscow from getting access to cutting-edge microchips used in everything from aircraft to consumer electronics.  Those options would likely impose steep costs on the Russian economy and financial assets.

 Kazakhstan:  President Tokayev today said the Russian “peacekeeping” troops that entered the country at his request to help quell antigovernment protests would depart within ten days. Tolkayev asserted that the situation in the country is already calming down, and press reports say businesses and people are getting back to normal in Almaty, the largest city.

• Even if the situation is calming, the political dimension is still evolving.  After forcing the prime minister and his government to resign as the protests erupted last week, Tolkayev said he would bring back former Finance Minister Alikhan Smailov to be prime minister over a new government.
• Tolkayev has also used the unrest to sideline Kazakhstan’s previous president, Nursultan Nazarbayev, who built up a cult of personality and strenuously guarded the country’s independence in the nearly 30 years he was in power.  Since stepping down in 2019, Nazarbayev had retained significant power as head of the nation’s security council.
  • It’s unclear whether Tolkayev instigated the unrest to justify pushing out Nazarbayev or whether he merely took advantage of the protests.  In any case, the protests allowed Tolkayev to push Nazarbayev off the security council and into full retirement.
  • By calling in Russian troops to support him, Tolkayev has also shown that he is willing to trade off much of Kazakhstan’s independence in return for Russian protection.  That will strengthen Russian influence over the former Soviet republics in the region and help build the sphere of influence Russian President Putin is trying to establish.

Argentina:  In a meeting with state governors last week, Finance Minister Guzmán admitted the government is still at loggerheads with the IMF over the terms of a debt restructuring, just weeks ahead of a March debt payment the country can’t make.  The key sticking point is the government’s refusal to balance its budget as rapidly as the IMF wants.

Venezuela:  Opposition candidate Sergio Garrido has dealt an embarrassing blow to President Maduro’s ruling Socialist Party by winning an election in the state where former President Chávez was born and nurtured his “Bolivarian revolution.”  The result vindicates those within the opposition who argue that they should take part in elections, even if they are skewed towards the Socialists.

COVID-19:  Official data show confirmed cases have risen to 310,645,175 worldwide, with 5,497,215 deaths.  In the U.S., confirmed cases rose to 61,558,507, with 839,500 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 have received at least their first shot totals 247,051,363.  The data show that 74.4% of the U.S. population has now received at least one dose of a vaccine, and 62.6% of the population is fully vaccinated.

Virology

• Much of the Biden administration’s vaccination mandate for larger employers went into effect yesterday.  The Supreme Court could halt the rule, but as of now, all employers with more than 100 employees must have a procedure in place to ensure employees are vaccinated and keep track of workers’ vaccination status.
  • Employers must also track whether their workers are infected and keep those who test positive away from work. Workers who aren’t vaccinated must wear a mask while indoors.
  • In December, the Labor Department gave employers an extra month to require that unvaccinated employees take weekly COVID-19 tests. That part of the policy goes into effect on February 9.
• In Chicago, city officials and the teacher’s union have resolved a walkout by educators over COVID-19 protocols. According to Mayor Lightfoot, the key to the agreement was setting a metric for how many infections would be needed to trigger a move to online instruction at individual schools.  With the deal, Chicago students will be back in the classroom on Wednesday.
• In Japan, the government said it would extend its near-total ban on foreigners entering the country until at least the end of February, citing the risk of the Omicron variant.
• In Mexico, President Andrés Manuel López Obrador yesterday announced he has contracted COVID-19 a second time, making him one of the first major world leaders to contract the virus twice.  Earlier in the day, he had held a two-hour press conference without a mask, despite saying he had cold-like symptoms and a cough.  During the press conference, he talked about the importance of people assuming they were sick with COVID-19 if they had cold-like symptoms.

 Economic and Financial Market Impacts

• Faced with the new wave of fast-spreading Omicron infections, a wide range of companies is once again postponing the date when they expect their workers to return to the office.  Although Omicron is expected to have a much less negative impact on the economy than earlier waves with their mass lockdowns, delayed back-to-office dates will cause further pain in certain areas, especially downtowns or office parks with many restaurants and other businesses geared toward serving office employees.

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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 geopolitical news and a focus on Russia’s aggressive stance toward the countries surrounding it.  Notably, we discuss today’s U.S.-Russian security talks seeking to de-escalate the situation in Ukraine.  We next turn to other international news and a couple of notes related to U.S. monetary and regulatory policy.  We close with the latest developments related to the coronavirus pandemic.

United States-Russia:  U.S. and Russian officials today formally begin a round of high-level talks designed to de-escalate the situation on the Russia-Ukraine border, where President Putin has positioned over 100,000 troops as a way to pressure the U.S. and its allies into providing security guarantees for Russia.  On Wednesday, Russian officials will sit down in Brussels to meet with officials from NATO. The following day, officials from the Organization for Security and Cooperation in Europe, which includes Russia and a host of regional countries, will gather in Vienna to begin a broad conversation on European security.

• Putin’s key demands include a commitment from NATO that it will not admit Ukraine or other new Eastern European members into the defense alliance, and it rolls back its military infrastructure and deployments in the former Soviet states. Ahead of today’s meeting with U.S officials, Russia’s Deputy Foreign Minister Sergei Ryabkov took an uncompromising stance on the Russian demands and expressed pessimism about striking an agreement.
• While the U.S. and its European allies have rejected Putin’s demands out of hand, reporting over the weekend said the Biden administration is prepared to discuss reciprocal limits on intermediate-range missiles in Europe as well as reciprocal restrictions on the scope of military exercises on the continent.
• If no agreement is reached and Russia invades Ukraine, the U.S. has threatened massive economic sanctions, including possibly cutting Russia off from the SWIFT system of international dollar payments. U.S. officials have also discussed more targeted measures, including erecting export barriers to block international sales to Russia of products with a certain percentage of American content, as well as preventing Moscow from getting access to cutting-edge microchips used in everything from aircraft to consumer electronics.  Those options would likely impose steep costs on the Russian economy and financial assets.

Russia-Kazakhstan:  Not only is Putin trying to make Russia safe for authoritarianism, but he is also doing the same for the other authoritarians ruling former Soviet states in the region.  In a statement today on Russia’s deployment of troops to Kazakhstan to help put down popular protests there, he vowed Russia will protect its allies from “color revolutions” sparked by unnamed outside actors.  Putin’s commitment will help solidify Russia’s influence over the many post-Soviet states led by authoritarians, such as Belarus and Kazakhstan.

• Press reports indicate at least 164 people have been killed in the Kazakh protests so far, including three children.
• Kazakh authorities say they have arrested almost 8,000 of the 20,000 “terrorists” they claim are behind the protests.

China:  Illustrating the economic impact of China’s recent crackdown on high-flying technology companies, the chief executive of New Oriental Education & Technology Group (EDU, $1.86), one of the country’s top online tutoring firms, said the crackdown cost his firm $3.1 billion and forced it to lay off 60,000—more than half its workforce.  He also said the new regulations cut his firm’s operating income by 80%.

U.S. Monetary Policy:  Richmond FRB President Barkin said he supports the central bank’s hawkish outlook for monetary policy and is open to raising interest rates when its bond-buying stimulus effort winds down in March.  Barkin isn’t a voting member of the policy committee this year, but his views likely reflect the body’s growing impatience to address inflation by tightening policy.

U.S. Financial Regulation:  Concerned about the influence and risks arising from “unicorns” and other fast-growing private companies, the SEC has begun work on a plan to require more private firms to routinely disclose information about their finances and operations. It is also considering tightening the qualifications that investors must meet to access private markets and increasing the amount of information that some nonpublic companies must file with the agency.

Climate Change:  New data from Copernicus, the European Earth monitoring program, showed that global average temperatures in 2021 were 1.1-1.2 degrees Celsius above the pre-industrial average (1850-1900), making it slightly cooler than 2019 and 2020 but still much warmer than preceding decades.  According to the data, the last seven years have been the hottest on record, with 2021 being the fifth warmest.

• Even though climate issues have become hopelessly politicized, it’s important to keep track of the data because the temperature figures will probably drive efforts to develop and implement climate stabilization policies.
• Climate fluctuations and policies to moderate them will likely result in substantial economic and financial opportunities as well as risks. For example, last summer’s disastrous floods in Europe are expected to boost sales of property catastrophe insurance on the continent.

COVID-19:  Official data show confirmed cases have risen to 307,422,417 worldwide, with 5,490,247 deaths.  In the U.S., confirmed cases rose to 60,090,637, with 837,664 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 have received at least their first shot totals 246,812,939.  The data show that 74.3% of the U.S. population has now received at least one dose of a vaccine, and 62.5% of the population is fully vaccinated.

• As the highly transmissible Omicron mutation continues to spread quickly, the U.S.’s official seven-day average for newly reported cases topped 700,000 for the first time.  However, the official total likely reflects only a fraction of the true number, due in part to Omicron’s rapid spread and the difficulty many Americans have had getting tested.
  • Fortunately, it still appears that Omicron is significantly less virulent than earlier variations of the coronavirus, so hospitalizations have not risen in tandem with new cases so far.
  • While healthcare systems are under strain, the situation isn’t yet as bad as in some earlier waves of the pandemic.
  • That could allow government officials to continue taking relatively muted steps to counteract the new mutation.  If so, the economic and financial impact of Omicron could remain limited.
• The “Great Sickout” is now spreading to hospitals themselves.  Rising numbers of nurses and other critical healthcare workers are calling in sick across the U.S. due to COVID-19, forcing hospitals to cut capacity, just as the Omicron variant sends them more patients.
• With Omicron spreading across the world faster than any previous variant, cases of reinfection among people who caught COVID-19 earlier in the pandemic are rising.
  • Almost all reinfections so far are people who originally caught another strain of the virus. No evidence has yet been found of anyone being infected twice by Omicron itself, including from South Africa, where this latest variant of concern has been circulating longest—for at least two months.
  • However, health officials worry that Omicron’s increased transmissibility and ability to evade immunity protection will lead to cases of reinfection with the same variant. They are also concerned about co-infection—simultaneous infection with Omicron and another variant—in this phase of the pandemic.
• In China, the first discovery of community-transmitted cases of the Omicron variant has prompted officials to strengthen travel controls, close schools, and institute a series of local lockdowns in Tianjin.  The city with a population of approximately 14 million is only about 70 miles southeast of Beijing, where the Winter Olympic Games are scheduled to start in less than a month.
  • The clampdown in Tianjin comes as imported cases of the Omicron mutation have already caused a crisis in Xi’an.  That city has been under lockdown since December 22.
  • Authorities in Xi’an have been criticized after residents in the city with 13 million people were left without access to medical resources and food.
• Novartis (NVS, $89.31) said it would seek expedited approval for its antiviral drug against COVID-19 after strong results from an early-stage trial showed it could help to treat the disease.  In the trial, the drug cut the risk of emergency room visits, hospitalization, or death by 78% compared with a placebo.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! We begin today’s report with news from the Fed followed by China-related stories, including the latest on the real estate situation. Next is an update on the protests in Kazakhstan and various other international news. We conclude with our pandemic coverage.

Economics and policy:

• Federal Reserve Vice Chair Richard Clarida admitted he failed to disclose fully the financial trades he made in 2020. Clarida, whose term expires at the end of the month, attributed the lack of disclosure to an “inadvertent error.” The new disclosures showed Clarida sold his stock fund as the market plummeted and then repurchased the fund a day before Fed Chair Powell announced the Fed would act to protect financial markets. Initially, the Fed described Clarida’s decision to purchase the stock fund as a portfolio rebalancing; however, the additional disclosure suggests he may have repurchased the stock fund based on insider information. The new disclosure will likely put the Federal Reserve under additional scrutiny as policymakers look to restrict Fed officials’ ability to benefit from the decisions it makes.
• Treasury yields on long-duration bonds continue to rise as fears of an economic setback due to Omicron subside and the Fed signals tighter monetary policy. The 30-year Treasury yield has risen to its highest level since October, while the 10-year Treasury yield rose more than 20 bps just this week. Although some of the sell-off in treasuries may be related to traders returning to work this week, there is some fear that the rise in rates could remain elevated for longer than previous peaks in the cycle. In October, when rates were last this high, concerns that the Fed would raise rates were waved off as being a far-out event, thus allowing rates to fall over time. However, the recent Fed minutes indicate that the central bank may be more aggressive in tightening policy than investors originally anticipated. The weak payroll numbers have likely added to those concerns. The rise in bond yields pushed mortgage rates higher than at any time in 2021, and if rates continue on that path, it could lead to a reduction in residential investment spending in 2022, thus slowing GDP growth. If tightening leads to financial instability, we expect the Fed could dampen expectations.
  • Rising rates have had a detrimental impact on tech stocks. They are down 50% from their 52-week high and are close to hitting a record. The sharp drop in tech stocks has drawn parallels to the dotcom crash.
• Adverse weather conditions in the eastern United States, from Tennessee to New York, could contribute to a surge in energy prices. The White House is expected to provide low-income households with additional funding from the American Recovery Plan to help offset the rise in costs.

China:

• Contagion from China’s real estate crisis may have spread into investment-grade companies. On Friday, Chinese property developer Shimao Group Holdings (0831 HK, HKD, 4.7) failed to make a debt payment leading to a selloff of its bonds. The Shanghai Stock exchange suspended trading of several of the company’s bonds due to this rapid selling. The missed payments highlight the pressure Chinese real estate companies are facing following defaults from Kaisa Property Holdings (HKG 1638, HKD, 0.81) and Evergrande (EGRNF, USD, 0.21). The real estate crisis has led to a decline in housing prices and investor confidence.
• The recent spread of the Omicron variant may slow economic growth in China. The country is expected to reimpose more COVID-related restrictions as it looks to contain the spread of the virus. Restrictions will likely lead to a slowdown in consumption.
• A rise in COVID cases led to a suspension of trucking services in several parts of East China’s Zhejiang province. The slowdown in the transportation of goods could hurt suppliers that rely on parts from China to boost their inventory.

International news: 

• Kazakhstan President Kassym-Jomart Tokayev has ordered authorities to shoot without warning, as the government attempts to end violent protests in the country’s major cities. The move by the president signals a steep escalation by the government as it tries to contain protests due to the rise in fuel prices. Afterward, the president claimed that order has been restored to most of the country, but military operations would remain in effect until forces are able to completely remove violent protesters.

There is speculation that the outbreak in Kazakhstan may have altered Russian President Vladimir Putin’s desire to invade Ukraine. He is getting a firsthand look at the level of instability within Eastern Europe. Although it may not deter him from invading, it could sway him to reconsider the scale of such an invasion if it were to take place.

• Nigerian manufacturers have asked the government to reverse a tax on sugary drinks that is due to go into effect this month. The country has struggled to generate government revenue following the drop in the price of oil in 2020. Although oil prices rebounded in 2021, the country’s weak infrastructure has made it difficult for it to deliver cargo out of its ports.

COVID-19:  The number of reported cases is 297,997,595 with 5,467,568 fatalities.  In the U.S., there are 57,762,144 confirmed cases with 832,148 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors. The CDC reports that 618,076,045 doses of the vaccine have been distributed, with 513,839,973 doses injected. The number receiving at least one dose is 245,278,020, the number of second doses is 206,797,799, and the number of the third dose, the highest level of immunity, is 72,262,703. The FT has a page on global vaccine distribution.

• A U.K. study showed there is not enough conclusive evidence that masks in schools prevent the spread of COVID.
• Moderna (MRNA, USD, 215.23) CEO Stéphane Bancel has stated there may be a need for a fourth shot of the coronavirus vaccine in the Fall. However, he added that he would not know for sure until additional data is released in the coming weeks.

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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 U.S. economic and policy news followed by China-related stories. International news is next, and we end with our pandemic coverage.

Economics and policy:

• The Federal Reserve released its meeting minutes on Wednesday. Overall, the report confirmed the Fed’s expected shift to more hawkish monetary policy. The minutes showed that the central bank expects to wind down its balance sheet expansion faster than projected, which would pave the way for a quicker than anticipated rate hike this year. Additionally, the minutes suggested the Fed is open to reducing its balance sheet after the first rate hike.

Financial markets, particularly tech stocks, did not respond well to the minutes. There was a selloff in equities and bonds following the report. At this time, we remain optimistic that the Fed will not follow through on its three planned rate increases for the year, but we acknowledge that the current mix of voting Fed members does make these events more likely. President Biden could reduce the likelihood of further rate hikes by filling the three vacant seats on the Fed board. However, he has been reluctant to nominate officials for these positions due to concerns that his picks may not get confirmed in the evenly split and heavily partisan Senate.  On Wednesday, it was reported that Biden is looking at former Federal Reserve Governor Sarah Bloom Raskin for vice chair for supervision. Raskin is a popular choice among progressives due to her views on climate change, and her previous confirmation increases the likelihood that she will be confirmed again if nominated.

• The Consumer Financial Protection Bureau is focusing its attention on the buy now, pay later industry. The federal agency is concerned that the industry could be encouraging consumers to overspend while skirting around credit and lending regulations. Although there are no restrictions being proposed, there does seem to be a growing push among Democrats for transparency and possibly new rules regarding how these companies operate.

China:

• Taiwan has pledged to establish a $200 million fund in Lithuania to invest in areas such as semiconductors, lasers, biotechnologies, and research. The venture comes after Lithuania drew the ire of China by allowing Taiwan to open a representative office under its own name. The U.S. has vowed to support Lithuania as it deals with economic fallout associated with retaliation from Beijing following this decision. Now that the office opened, Lithuania faces unofficial trade hurdles and a downgrade of diplomatic relations with China.

International news: 

• The Kazakhstan government resigned on Wednesday as the protest over rising fuel prices has stirred civil unrest across the country. After protests turned violent, Kazakhstan President Kassym-Jomart Tokayev pleaded for support from a Russian-led military alliance. Following his plea, the President’s house was set ablaze, and several protesters were killed after they attempted to storm the administrative building in the country’s largest city of Almaty.  The mounting unrest in Kazakhstan highlights the growing risk of instability in response to rising fuel prices.
• An expected colder-than-normal winter in South and Southeast Asia countries has forced governments to start actively securing natural gas. Indonesia, a major exporter, has encouraged its domestic gas producers to prioritize local customers, while countries such as Thailand and Bangladesh have purchased cargoes of liquefied natural gas on-the-spot market. The surge in demand will likely further cause natural gas prices to rise globally.
• Oil prices continue to climb as it is unclear whether OPEC+ countries will be able to ramp up oil production to meet growing demand. Despite OPEC members and Russia agreeing to boost production in February, there are concerns that countries within the group will not be able to increase their output. In Libya, attacks by militias have cut the country’s daily production from 1.06 million barrels per day to 700 million barrels. Meanwhile, Nigeria has struggled to ship out crude oil from its Forcados and Bonny terminals.
• S. and German diplomats gave a joint statement warning Russia of massive economic consequences if it were to invade Ukraine. Russian and U.S. officials are expected to meet Monday in Geneva for high-level security talks. Although Germany and the U.S. appeared to be a united front, there are members within the EU that feel European countries have been sidelined in discussions regarding Ukraine. Josep Borrell, head of the EU’s foreign and security arm, warned the U.S. and Russia from agreeing to a Yalta-type agreement. Borrell was alluding to the post-war agreement in which the U.S., Russia, and the U.K. came together to discuss how to divide Europe following the end of WWII. Europe fears the U.S. and Russia could come to an agreement that would create boundaries where the two sides will not meddle in each other’s affairs. This could include where the U.S. stations its military.
• The head of Israeli military intelligence has expressed support for the Iran nuclear deal.

COVID-19:  The number of reported cases is 297,997,595 with 5,467,568 fatalities.  In the U.S., there are 57,762,144 confirmed cases with 832,148 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 618,076,045 doses of the vaccine have been distributed with 513,839,973 doses injected.  The number receiving at least one dose is 245,278,020, the number of second doses is 206,797,799, and the number of the third dose, the highest level of immunity, is 72,262,703. The FT has a page on global vaccine distribution.

• Chicago schools were forced to close as teachers did not feel comfortable with the city’s protocols regarding COVID.
• There have been protests throughout Germany in response to COVID restrictions.

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