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

[Posted: 9:30 AM EDT] | PDF

We begin today’s Comment with the latest news on Afghanistan, where the Taliban are already fighting opposition militias in what could be the beginning of a civil war.  Next, we review the latest expectations for the nation’s energy supplies following Hurricane Ida.  We then cover a range of mostly U.S. developments that could impact the financial markets in the near term.  We end with the latest news on the coronavirus pandemic, where the recent wave in Asia is clearly having a negative impact on manufacturing.

Afghanistan:  As widely expected, Taliban forces are already fighting opposition militias in areas of the country ruled by their opponents, especially in central and northern Afghanistan.  Taliban officials said they had taken control of the Shotul district in Panjshir, making gains in the sole Afghan province that the militant group hasn’t captured.  Sporadic clashes also continued in the Wardak and Daikundi provinces, which are home to large groups of Hazaras, a primarily Shiite minority, who have formed armed militias.

• The British government said its special envoy to Afghanistan, Sir Simon Gass, is negotiating with senior Taliban leaders in Qatar to secure a safe exit for stranded Britons and Afghans who worked for the British in Afghanistan over the last two decades.
• As part of its “Operation Warm Welcome” plans announced yesterday, the Home Office said people arriving in the U.K. under its Afghan relocation and assistance policy would receive indefinite leave to remain, a visa status that has no time limit.
• We suspect many other NATO countries will ramp up similar relocation and assistance programs for Afghans.  A major political risk for those governments is that they could spark a new wave of protests and pushback by those opposed to immigration.

Hurricane Ida-U.S. Energy Industry:  As officials continue to review the damage caused by Hurricane Ida along the Gulf Coast, it appears that electricity supply disruptions will be the biggest impediment to getting the energy infrastructure back up and running.  It could take two to three weeks for some refineries west of New Orleans to recover as power is restored, while others southeast of the city could take about a month because of a higher potential for flooding.

• Nevertheless, many observers expect the impact on oil and fuel markets will likely remain muted.
• Gasoline inventories are ample ahead of Labor Day weekend, the start of a seasonal drop in fuel demand.

U.S. Social Security Trust Fund:  In their annual report, the trustees of the Social Security Trust Fund said that the impact of the coronavirus pandemic last year was less than feared and that the fund would be depleted only one year earlier than previously expected, in 2034, unless Congress takes action to shore it up.

• Because of the post-pandemic jump in inflation, the trustees said the cost-of-living adjustment (COLA) applied to benefits in 2022 will be close to 6%.
• If the COLA does come in near that level when it is announced in the coming weeks, it will mark the biggest inflation increase in benefits since 2008.

U.S. Housing Market:  As early as today, the Biden administration will unveil a series of steps aimed at addressing the country’s shortage of entry-level homes and rental properties.  The moves, which are administrative in nature and would not require Congressional action, should increase the supply of entry-level homes and rental properties by boosting their financing and easing construction over the coming years.

• Based on drafts of the plan, it would:
  • Allow Fannie Mae and Freddie Mac to invest more of their resources into rental housing by boosting an existing regulatory cap on their investments in apartment projects supported by the Low-Income Housing Tax Credit.
  • Expand an existing competitive grant program for Community Development Financial Institutions to encourage affordable housing production.
  • Increase the financing available for manufactured homes, which are built in factories rather than on a lot. They typically cost much less than homes built on sites and are often occupied by lower-income residents.
  • Give first-time home buyers and philanthropies a chance to buy distressed properties insured by the Federal Housing Administration, aiming to give them a leg up against investors that have snapped up many such properties in recent years.
• Put together, these administrative changes could probably help promote more construction of starter homes and apartments, but we suspect that making a major dent in the housing shortage would require significantly easing zoning and land use regulations at the local level, especially in major metropolitan areas.  To remove homeowners’ incentive to fight new supply, it might also be necessary to dramatically change the U.S. mortgage finance system and its prevalence of easily refinanced, fixed-rate mortgage loans.

U.S. Cryptocurrency Regulation:  SEC Chairman Gensler warned that cryptocurrency trading platforms are putting their own survival at risk unless they heed his call to work within the nation’s regulatory framework.  Asserting that he remained “technology-neutral,” Gensler argued that crypto assets are no different from any others when it comes to the need for investor protection, guarding against illicit activity, and maintaining financial stability.

Global Supply Chains:  One of Asia’s biggest shipping companies is facing the threat of a strike that could further disrupt global supply chains already battling surging costs and shortages of containers and computer chips.  South Korea-based HMM will hold talks today with the company’s labor union about raising wages after sailors and dockworkers voted in favor of a strike last month, demanding sharp pay rises as the group’s profits soared.

COVID-19:  Official data show confirmed cases have risen to 217,848,001 worldwide, with 4,522,230 deaths.  In the United States, confirmed cases rose to 39,200,751, with 640,121 deaths.  Vaccine doses delivered in the U.S. now total 441,332,155, while the number of people who have received at least their first shot totals 205,026,070.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 61.8% of the U.S. population has now received at least one dose of a vaccine, and 52.4% of the population is fully vaccinated.
• The EU said it hit its target of fully vaccinating 70% of adult residents by the end of summer, showing how the bloc’s vaccination campaign gathered momentum after a slow start earlier in the year.  However, there are big differences in inoculation rates between different countries, leaving parts of Europe at risk of fresh outbreaks.
• Despite the EU’s recommendation yesterday to stop nonessential visits from U.S. residents, Spain and Greece said they would remain open to American visitors at least for the coming weeks. Other countries, including France and Italy, said they have no immediate plans to tighten their rules for travel from the U.S.
  • Europe’s leading tourism nations, in most cases, allow U.S. tourists to enter without quarantine if they can show proof of vaccination against COVID-19, recovery from the virus, or a negative test result taken shortly before departure.
  • The decision to keep welcoming U.S. visitors reflects these countries’ dependence on tourism receipts.  It also illustrates the growing reluctance around the world to locking down economic activity again.  In that sense, the pushback is probably a good sign for economic growth and financial markets.

 Economic and Financial Market Impacts

• Rebounding infections, back-to-school shopping, and government stimulus payments are prompting consumers to stockpile toilet paper again, producing a new round of shortages in some areas.
  • According to market-research firm IRA, paper products (a category that includes paper towels and toilet paper) were 86% in stock as of August 29.
  • That’s a lower in-stock rate than consumer products on average, but nowhere near the height of last year’s toilet paper shortage when paper products were just 40% in stock.
• In China, more evidence emerged that the latest infection outbreaks and the government’s strong efforts to contain them are already weighing on economic activity.  The August Caixin manufacturing PMI plunged to 49.2, versus the government’s official manufacturing PMI of 50.1, released yesterday.  Like most major PMIs, these are designed so that readings below 50 indicate contracting activity.  Both gauges are now at their lowest levels since early 2020, which will likely prompt the government to launch fiscal, monetary, and/or regulatory stimulus measures in the coming months.
• Other PMIs in Asia also suggested the latest wave of the pandemic is weighing on factory activity, with some PMIs dropping even further than China’s.

Foreign Policy Responses

• In the EU, new data shows the ECB’s targeted longer-term refinancing operations, or TLTROs, have been instrumental in boosting bank lending and supporting bank profits after the interest rates on their loans were cut to as low as minus 1% early in the pandemic.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with the latest news on the U.S. pullout from Afghanistan and the damage from Hurricane Ida on the Gulf of Mexico.  We next review the latest sign that China has fully embraced President Xi’s new “Common Prosperity” program to rein in the rich and powerful and redistribute resources to lower-income citizens.  We close with a review of other foreign and U.S. news and the latest developments related to the coronavirus pandemic.

Afghanistan:  The last U.S. troops flew out of Afghanistan yesterday, just one minute before the August 31 deadline established by President Biden and almost 20 years since they first arrived in the wake of the 9/11 terrorist attacks in 2001.  Despite what U.S. military officials described as “very pragmatic and businesslike” cooperation from the Taliban throughout the evacuation, it appears that 200 or so U.S. citizens and thousands of Afghans who had helped the U.S. effort were unable to be evacuated.  The U.S. and other Western countries have indicated they will now pursue diplomatic efforts to secure the exit of their citizens and allied Afghans.  It will be an important test of whether or not the Taliban have moderated their governing approach after being out of power for the last two decades.

• Regardless of how messy the exit was, President Biden could, in the long run, get credit for extricating the U.S. from Afghanistan after Presidents Trump and Obama failed.  In the near term, however, the unartful and casualty-plagued evacuation will likely undermine much of Biden’s domestic and international agenda.
• In the coming weeks, our Weekly Geopolitical Reports will take a close look at the implications of the U.S. exit from Afghanistan, especially for major regional powers such as China, Russia, and Iran.

Hurricane Ida:  Government and industry officials continue to assess the damage Hurricane Ida caused in Louisiana, with some warning that 400,000 residents in the suburbs south and west of New Orleans could be without electricity for three weeks.  They could also be without water and sewer services for up to five days.

• Meanwhile, energy companies continue to assess the damage to their refineries, pipelines, petrochemical plants, and offshore oil platforms along the central Gulf of Mexico.  It may take a couple more days to get a clear picture of that damage and any impact on the energy markets.
• The hurricane’s damage will also have a significant impact on the insurance and reinsurance industries.  The costs will be especially painful given the low level of interest rates these days, which has weighed on insurers’ investment returns.

China:  At a central leadership meeting yesterday, President Xi called on officials to do more to “guide and supervise” society in general and the economy in particular.  He stressed that Beijing’s campaign to “prevent the irrational expansion of capital” and address “barbarous growth” in China’s technology sector is beginning to bear fruit and would help promote his “Common Prosperity” program to redistribute resources toward lower-income citizens.

• As further evidence that Beijing’s clampdown on big, fast-growing technology companies is part of the broader Common Prosperity program, an influential nationalist blogger has published a tirade calling on the government to intensify and expand its program to target areas such as the high cost of housing, education, and healthcare.
  • The tirade has been shared by China’s largest state and party-controlled media outlets, including the Xinhua News Agency, the People’s Daily newspaper, and the CCTV television network, indicating a broad degree of state support.
  • Here’s one choice quote from the article: “The capital market will no longer become a paradise for capitalists to get rich overnight . . . the cultural market will no longer be a paradise for sissy stars, and news and public opinion will no longer be in a position worshipping western culture.”
• Despite some officials’ efforts to calm investors in recent days, it still appears to us that President Xi’s economic and social policy (“Xiconomics?”) has turned decisively toward greater government regulation, income redistribution, and party control over society.  These increased regulatory risks will likely continue to weigh on Chinese assets over time.

Russia:  As the September 19 parliamentary elections approach, police continue to ramp up their persecution of opposition activists, especially those allied with jailed lawyer Alexei Navalny and his “Smart Voting” system that encourages voters to cast their ballot strategically in order to defeat President Putin’s party.

Global Retail Employment:  Although we tend to think of automation being a greater risk to manufacturing and industrial workers, it can even displace jobs in an industry like retail.  In some places, QR codes (those funny-looking matrixes you scan with your phone) are being used to inform potential buyers about a product instead of relying on a salesperson.  If that change becomes more widespread, it could reduce the need for retailers to hire sales staff.

COVID-19:  Official data show confirmed cases have risen to 217,257,194 worldwide, with 4,513,251 deaths.  In the United States, confirmed cases rose to 39,058,704, with 638,844 deaths.  Vaccine doses delivered in the U.S. now total 440,026,945, while the number of people who have received at least their first shot totals 204,742,648.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 61.7% of the U.S. population has now received at least one dose of a vaccine, and 52.4% of the population is fully vaccinated.
• The U.S. Education Department said it has opened civil rights investigations into five states that banned school mask mandates to examine whether such policies place students with disabilities at heightened risk of severe illness through contracting COVID-19.  The states under investigation are Utah, Oklahoma, Iowa, Tennessee, and South Carolina.
• The EU recommended that its member countries halt nonessential travel from the U.S. because of the country’s growing case count and lagging vaccination rates.
  • The decision came amid the growing spread of the Delta variant in the U.S., where vaccination rates have also now fallen behind the average rates of shots in EU countries.
  • The EU travel list, reviewed every two weeks, isn’t binding on member states, but it has generally set the pattern for who can visit the bloc.
• In Japan, researchers have confirmed the first case of a new submutation of the Delta variant, marking just the eighth case of this submutation worldwide.  The researchers believe the new submutation may leave patients with a higher risk of secondary infection, as well as a greater risk of developing severe symptoms and dying.

Economic and Financial Market Impacts

• In China, the services sector suffered an unexpectedly severe blow in August as a wave of coronavirus infections sparked new lockdowns across the country.  The official August Purchasing Managers Index for the services sector plummeted all the way to 47.5 from 53.3 in July.  Like most such indexes, China’s official PMI is designed to show readings below 50 will point to contracting activity.
  • China is one of the few major countries willing to impose mass lockdowns again, so the impact of the news on investors may be limited.
  • All the same, the steep drop in activity could highlight the economic risks as the Delta variant spreads rapidly around the world, especially among unvaccinated people.  If services continue to slow in response, risk markets in the U.S. and other countries could start to weaken.
• As investors begin to worry more about an economic slowdown sparked by the Delta variant or a stock-market pullback sparked by tighter monetary policy or excessive valuations, many are ramping up their purchases of buy-write funds as a hedge.  That comes on top of other signs of greater investor caution, such as the recent outperformance of utility and healthcare stocks.
• As home prices continue to rocket upward in response to the pandemic and the policies put in place to combat it, rental prices for single-family homes are rising rapidly as well.  According to real estate data firm Yardi Matrix, asking rents for houses rose nearly 13% for the year to date through July, the highest annual increase in at least the past five years.

Foreign Policy Responses

• In South Korea, the government has proposed a 2022 budget that would hike spending by 8.3% compared with 2021 and boost public debt to 50.2% of GDP, up from less than 40.0% just a few years ago.  The proposed fiscal stimulus is designed to buoy the economy as South Korea deals with yet another wave of infections sparked by the Delta variant.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday, the last one of August.  U.S. equity futures are modestly higher this morning after Friday’s rally.  Our coverage begins with Hurricane Ida.  We then discuss Chair Powell’s Jackson Hole speech, followed by Afghanistan news.  Our category coverage begins with China as Beijing continues its broad crackdown.  Economics and policy come next, with legislation and supply chains being the primary concerns.  Our international roundup follows, and we close with pandemic coverage.

Ida:  Ida moved onshore over the weekend, battering Louisiana, leaving nearly a million customers without power.  New Orleans was hit especially hard.  Much of the oil and gas production in the Gulf of Mexico has been halted.  The storm, which landed on the 16^th anniversary of Katrina, was a strong one, actually reversing the flow of the Mississippi temporarily.  Oil and gas wells in the Gulf will begin returning to production, likely by mid-week.  It may take a week or so for refineries to assess the damage and restart production.  Currently, about 9% of U.S. refining capacity has been shut in.  Although product inventories are adequate, which suggests this event probably won’t lead to significant price hikes, that is only true if refining returns quickly.  If damage is severe, we may see a hike in gasoline and diesel prices that lasts a few weeks.  We note that oil prices are lower this morning.

Powell:  Powell’s speech at the virtual Jackson Hole summit hit all the right notes.  He acknowledged that inflation hit the Fed’s target and employment was close to the “substantial progress” threshold.  It looks like tapering will commence before year’s end.  He was successful in separating tapering from rate hikes, and that led to a “usual suspects” rally in financial markets.  Equities, commodities, bonds, and gold rallied while the dollar slumped.  Powell made his case that inflation should not become persistent and still offered policy support to the economy.  Although reducing the balance sheet will have some impact on financial markets, separating tapering from rate hikes is important.

Ben Bernanke reportedly said that “QE works in practice but doesn’t seem to work in theory.”  We tend to agree.  It appears that balance sheet expansion does quell financial stress, but tying QE to actual changes in the economy is difficult.  We think its greatest power is as a signaling device.  By engaging in balance sheet expansion, the Fed signals it is running policy accommodation.  Bernanke’s failure was that by tapering, the markets believed actual rate hikes were coming next.  Powell, at least so far, has the markets believing that rate hikes won’t occur quickly, and thus, the negative impact of tapering is dampened.  Obviously, the initial market reaction doesn’t mean the die is cast; having a lead early doesn’t guarantee victory.[1]  However, if the market action seen on Friday persists, it would look to us that Powell is a lock for renomination.

Afghanistan:  Tomorrow is the exit day for American troops.

• The administration has shared the names of Afghan allies, green card holders, and American citizens with the Taliban. The idea is that sharing this information will expedite the remaining evacuees.  The obvious downside is that it provides a list to terrorists who can use it to capture/kidnap/kill people on the list.  Providing the list suggests the U.S. feels it cannot find or protect these people without the cooperation of the Taliban.  Although it is likely the U.S. secured cooperation with the leadership of the Taliban, the group is loosely knit, and the chance of this list getting into the hands of someone wanting to use it for nefarious reasons is elevated.  If the list leads to a bad outcome, the risk of blowback is high.
• The U.S. launched a drone strike on a suspected suicide bomber in Kabul, this time a car bomb. Terrorists launched rockets aimed at the Kabul airport; these were neutralized by American anti-missile systems.
• History shows that refugee inflows are not universally popular. Criticism of Afghan resettlement in the U.S. will be no exception.
• At the U.N., France and the U.K. are planning to propose the creation of a Kabul safe zone at the airport. The goal is to allow those who wish to leave a safe exit.  Ninety nations have shown support for the proposal.  Although skepticism is high, the Taliban leadership has indicated it will support safe passage.  This proposal comes as the last of NATO troops prepare to leave tomorrow.

China:  Beijing is becoming increasingly restrictive, hitting celebrities and big tech alike.

• The CPC has been steadily expanding its reach into economic relationships. Now it is moving to the social lives of the Chinese as well.  The party has silenced a number of celebrities, removing them from social media.  The narrative is that these individuals are corrupting the youth of China by encouraging improper behavior.  We suspect it has more to do with being an influence outside the CPC, something increasingly restricted in Xi’s China.
• On the technology front:
  • Last week, we noted the concept of “tertiary distribution,” which seems to be that the wealthy are willingly give up some of their largess to help society. This idea appears to be gathering momentum.  One of the goals of totalitarianism is to get people to do things “willingly” instead of through direct coercion.  Current “donors” really don’t know how much is “enough,” meaning the pressure to donate more will be difficult to resist.  This press of redistribution is a threat to the luxury industry.
  • A concern surrounding social media and other related technologies is that they tend to operate using algorithms. The primary goal is to police the sites without direct human intervention; it’s cheaper to automate the process.  In addition, the process is characterized as fair because a machine, not a person, is making the decision.  However, humans write the code, and their biases are embedded in the process.  The government is creating new rules to manage these algorithms.
  • The courts are telling the tech companies that the “996”’ culture of work[2] is only legal with extra compensation.
• The crackdown on corruption continues. The latest to be arrested is Dong Hong, a former aide to Wang Qishan.  Dong was a member of the Central Commission for Discipline Inspection, the chief anti-corruption element of the bureaucracy.  He is accused of taking more than $70 million in bribes over two decades as a public servant.
• Evergrande, the troubled property developer (EGRNF, USD, 0.57), continues to sell assets in an attempt to stave off bankruptcy. The company has $300 billion in debt to various creditors and is trying to sell assets to reduce its exposure.  However, as the company tries to sell assets, valuations are falling as buyers seek discounts.  Beijing’s crackdown on excessive borrowing in this sector is starting to affect the broader financial system.
  • China’s security regulator is planning a broader crackdown on some investment products.
• A Chicago Council on Global Affairs poll shows that half of Americans favor defending Taiwan if the island is invaded. Another poll shows South Koreans dislike China more than they dislike Japan (which is remarkable).
• We recently remarked that China and Israel have been increasing their economic ties. Israel does have a strong security industry, and China has apparently been an avid buyer of the software and hardware produced by Israel.
• For the first time under this president, the Pentagon is holding talks with the Chinese military.
• Beijing has forced steelmakers to curtail production for environmental reasons. There is uncertainty over how long this policy will remain in place.  In the past, the leadership tended to “blink” as economic growth declined.  The production drop has tanked iron ore prices.

Economics and policy:  The debt ceiling, money market regulation, and corporate taxes lead our coverage.

• We continue to watch the path of legislation. Of growing concern is the debt ceiling, where the Democrats are planning separate legislation to raise the limit, while the GOP says it won’t support it without spending cuts.  The Democrats could wrap the increase into the budget but want GOP participation to prevent the issue from being used in the midterm campaigns.  The risk is that we have another government shutdown.
• Although there has been a great focus on China’s crackdown on big tech, Washington isn’t sitting idle. The major U.S. firms are facing a myriad of regulatory threats.
• Money markets remain a major area of concern for regulators. They were part of the last two financial crises and essentially failed in 2008.  Since then, regulators have been trying to devise regulations that will make them safe and yet profitable enough to remain in business.  We remain skeptical that this can be accomplished; the best outcome would be for these funds to no longer be seen as cash equivalents, and thus, “break the buck” on occasion.  The industry likely fears that this outcome would reduce their assets.
• Part of the current budget proposal has a series of changes to corporate taxes. One of them attempts to equalize taxes across the G-30 by setting a minimum tax rate.  Moderates in the House are worried that the measures may be too extreme and will put American businesses at a disadvantage.  If these concerns are addressed, it may reduce the revenue raised in the budget and either trigger larger deficits or require higher revenue raises in other areas.
• Evictions are likely to start as the Supreme Court disallowed the most recent eviction extension. Sadly, billions of dollars have not been distributed by state and local governments, which would have averted this outcome.
• In our recent research, we noted that the youngest and oldest workers have been the slowest to return to work. The oldest probably aren’t going back, as they have moved into retirement.  The youngest almost certainly will, but it may be a while as this group is reportedly reassessing career paths, and some are opting for new directions.
• It’s not that there aren’t ample supplies of aluminum in the world; it sits in Asia, and the need is in the Western hemisphere and Europe. The problem is that shipping capacity to move the metal is lacking, sending aluminum prices soaring.
• The SEC is reviewing the game aspects of stock trading apps.
• Although the broader data doesn’t confirm the anecdotes, there is evidence that there is a growing level of unfinished inventory as manufacturers await parts to complete products. We also hear reports that homebuilders are putting in used appliances to complete homes with the promise of replacing them when the new products arrive (word to the wise—get it in writing!).
• The global supply chain continues to face disruptions. The latest area of concern is Vietnam.  A jump in COVID-19 cases has led to lockdowns which are closing garment factories.  It is evidently disrupting clothing supply chains.  Something similar is being seen in semiconductors.  Malaysia is where chips are tested, and a surge in cases is leading to backlogs.
• Shipping woes have led desperate companies to opt for air freight, the most expensive of all shipping. Usually, air freight is deployed for high value to weight items, such as semiconductors.  However, in the rush to get materials, firms are turning to this option.  The industry says it is running at 90% of capacity.  Airlines are refitting passenger aircraft for freight.  Normally, air freight costs about five times that of ground transportation; it’s currently running 12 times higher.  All this activity is driving costs higher.
• One barrier to effective medical system reform is the lack of transparent pricing. A recent report in the NYT highlights the difficulty in deciphering the reason price differences exist for the same procedure.  One issue is clear; medical systems are clearly trying to avoid price transparency.
• Late last week, the White House doubled its forecast for inflation but does expect it to fall rapidly as 2022 wears on.
• Although cryptocurrencies are followed mostly for their price action, in reality, their real promise is to reduce costs and improve efficiency in payment systems and money transfer. Currently, crypto providers who want access to the Fed’s payment system must partner with a bank.  The crypto firms want to go directly to the Fed.  Banks are not pleased.  Crypto is a serious threat to the bank’s money management business, and getting access to the Fed system would increase the threat.
• Canadian home prices have been soaring. With elections looming, the political parties are getting behind a novel concept—build more housing to dampen prices.  Although this response seems rather obvious, in practice, it’s hard to do.  Why?  Because current homeowners will see their asset values stagnate with the increased supply, and they resist zoning changes to build more homes.  This is the classic NIMBY problem.  It will be interesting to see if politicians face a backlash for this policy proposal.

International roundup:  Elections in Europe dominate the news, and North Korea won’t be ignored.

• The leading candidates for the next chancellor held a debate over the weekend. The general consensus is that none of the candidates did particularly well, although the SDP’s Scholz was generally thought to be the winner.  Currently, the SDP and CDU/CSU are tied in the polling averages.
• The Czech Republic will hold elections in early October, and it is looking like the Pirate Party could garner enough votes to enter government in a coalition. The party, which began as a free internet party, has become known for its opposition to corruption.
• We warned earlier this year that North Korea was likely to cause problems; Pyongyang usually tests a new administration. There are reports the DPRK has restarted its nuclear reactor at Yongbyon, which is a violation of U.N. resolutions.  Most likely, North Korea is viewing the turmoil facing the Biden administration and is moving to take advantage.
• Ukraine President Zelensky will visit the White House this week.
• India is considering legislation designed to reduce family size. China deployed similar policies in 1980 and is trying to reverse them now to little avail.  When a developing nation with a large population reduces births, it gets a sizeable demographic benefit; the dependency ratio falls until the population ages to retirement.  Then, as China is seeing now, the dependency ratio rises.  Such policies are always controversial, but in India, there is the idea that the Hindu government is using the policy to slow the rise of the Muslim population.

COVID-19:  The number of reported cases is 216,520,662, with 4,503,623 fatalities.  In the U.S., there are 38,793,329 confirmed cases with 637,539 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 440,028,085 doses of the vaccine have been distributed, with 368,863,734 doses injected.  The number receiving at least one dose is 204,435,968, while the number receiving second doses, which would grant the highest level of immunity, is 173,520,211.  For the population older than 18, 63.3% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

• As we have documented recently, China’s vaccines have proven to be less effective than those produced in the West. The U.S. is starting to provide vaccines in Southeast Asia, and nations are taking Washington up on the offer.  This outcome is a diplomatic win for the U.S.
  • Malaysia has indicated it will stop using the Sinovac (SVA, USD, 6.47) vaccine once the supply is depleted.
  • Chongqing Zhifei Biological Products (300122, CNY, 6.37) has developed a vaccine with an 82% efficacy rating.
• In the U.S., we are seeing a rise in vaccine administration in states with low inoculation numbers.
• Across several states, ICU capacity is under strain. In the South, in several states, around half of the beds are occupied by COVID-19 cases.
• As hospitals are filling with COVID-19 patients, ambulances are forced to wait to deliver their patients. Nurses are seeing spiraling signing bonuses as hospitals try to secure scarce nursing talent.
• The U.K. is beginning a series of challenge trials, which is a form of human experimentation. Thirty healthy unvaccinated people have volunteered to be exposed to the virus so researchers can monitor the development of the virus.  The U.K. has developed strains that are highly contagious specifically for these trials.  The participants will remain hospitalized so researchers can monitor the development of the disease.
• Israel is extending booster shots to everyone 12 years and older.
• The EU is reintroducing travel restrictions for U.S. visitors.
• When I was a missionary in Belize in the early 1980s[3] state radio would read off obituaries in the mid-afternoon. It was done as a service to the citizens.  Telephones were not universal, and newspapers were not widely distributed.  The most efficient way to inform loved ones that a family member or friend had died was via radio broadcast.  This procedure was not unique to Belize but was common in the region.  The French Caribbean islands apparently use a similar broadcast method, and due to COVID-19, the programs are now taking up to an hour a day to read the names of the dead.

 View PDF

---

[1] As exhibited by a recent Pirate win over the Cardinals.

[2] 9:00 am to 9:00 pm six days per week.

[3] Obviously, this is Bill speaking.

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

[Posted: 9:30 AM EDT] | PDF

Good morning! U.S. equity futures are signaling a higher open this morning. Our report begins with international news focusing on the two attacks at the Kabul airport on Thursday. We also cover U.S. economics and policy, including details about growing support for Fed tapering.  China news follows, and we end with our pandemic coverage.

International news: 

• Two explosions at the Kabul airport killed at least 90 Afghans and 13 U.S. servicemen. On Thursday, Islamic State claimed responsibility for the attack. The blast represents an escalation of tensions in the region and could further complicate President Biden’s efforts to withdraw troops by the August 31 deadline. In response to the attack, President Biden has directed the Pentagon to target ISIS leadership and facilities. The incident highlights growing fears that the Taliban will not be able to control the competing factions within the region after the U.S. has left. This could mean that Afghanistan will turn into another conflict zone in the Middle East. The attack has also put President Biden in a negative light as he has received flak for the hasty and chaotic exit from the region by the U.S. The controversy surrounding the Afghanistan withdrawal could hinder efforts from the Biden administration to pursue policy goals as it struggles to contain the political fallout. The president has already been forced to cancel and delay meetings, and Vice President Kamala Harris was forced to back out of the rally for Governor Newsom.
  • In response to the turmoil, House Minority Leader Kevin McCarthy (R-CA) has called for House members to return to vote on delaying the U.S. troop withdrawal. If successful, the vote could force members of Congress to go on record as to whether they backed the extension and could be used for political fodder in future election campaigns.
• The Brazil Supreme Court upheld the constitutionality of a law granting the central bank autonomy. The decision was likely favorable to investors who feared that President Bolsonaro would interfere with monetary policy. Bolsonaro has sought to rein in the central bank after its chief, Roberto Campos Neto, linked an increase in inflation expectations to political infighting.
• The European Central Bank’s revised forward guidance received a lukewarm reception on Thursday after a few members dissented. The dissidents were concerned that the new policy understates the risk of rising inflation and downplays the possibility of reversal. The ECB has stated that inflation will reach its 2% target prior to the bank’s projected horizon.
• Taiwan Semiconductor Manufacturing Co. (TSM, $118.10), the world’s largest contract chipmaker, is raising prices for its chips. The company announced that it will increase the price of its most advanced chips by 10% and its less advanced chips by 20%. The price change is expected to take place later this year or early next year.
• The Cuban government announced that it will recognize and regulate cryptocurrencies for payments on the island. The change appears to address the country’s need for remittances. The country has struggled to get dollars from abroad following stiffer embargo rules imposed by former President Trump. Crypto has been used to avoid sanctions imposed by the U.S.

Economics and policy:

• Louis Fed President James Bullard and Kansas City Fed President Esther George have come out in support of reducing the pace of the Fed’s monthly purchases of  $120 of asset purchases. The Fed officials stated they believe the economy has made sufficient progress in its employment and inflation goals. In addition, the two have expressed concern over unintentional consequences of maintaining accommodative policy. As more Fed officials speak openly about monetary tightening, Fed Chair Powell will likely find it difficult to justify maintaining the Fed’s current policy path.
• The Biden administration is considering renominating Fed Chair Powell to lead the Fed and nominating Lael Brainard as the Vice Chair for Supervision.
• The rise in COVID-19 cases may have led to an exodus of workers from the labor market. According to a study by the Federal Reserve Bank of Kansas City, almost 60% of respondents to its August Manufacturing Survey said there has been a drop in the number of applicants per job since May.
• The increase in Afghan evacuees has created a bottleneck at the Dulles International Airport as officials are struggling to vet the incoming refugees.
• The U.S. Supreme Court ended the federal moratorium on residential evictions on Thursday. In its decision, the court ruled that if the moratorium were extended, it would need to be authorized by Congress.
• Democrats are struggling to find a consensus on how to pay for President Biden’s spending agenda. Tax increases and the removal of subsidies are likely to create a divide between the progressives and moderates. Oil lobbyists have already seized the opportunity to push Democrats to keep the tax deduction that they receive in place.
• Following the release of a new set of data produced by the Census Bureau, states are now pushing to count prisoners serving time as living at their listed home address.

 China:

• U.S. special climate convoy John Kerry is expected to press Chinese leaders on their commitment to end the financing of coal-fired projects when he goes to China next week.
• Chinese regulators plan to crack down on online celebrity fan culture as part of its campaign to rein in online influence. The internet watchdog will prevent websites from publishing popularity lists and curb the sale of celebrity merchandise. Chinese film star Zhao Wei has already been targeted by regulators.
• China is expected to propose new rules that would ban companies with large amounts of consumer data from going public in the U.S.
• In an attempt to control prices, China stated that it would sell 150,000 tons of metal from its reserve on September 1. The metals will include aluminum, zinc, and copper.

COVID-19: The number of reported cases is 214,711,514 with 4,476,459 fatalities.  In the U.S., there are 38,387,116 confirmed cases with 633,591 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 434,582,185 doses of the vaccine have been distributed with 365,767,674 doses injected.  The number receiving at least one dose is 202,961,676, while the number of second doses, which would grant the highest level of immunity, is 172,171,009.  The FT has a page on global vaccine distribution.

• There have been at least 90,000 children in 19 states that have tested positive for COVID-19 or have come into contact with someone that has tested positive.
• Although the majority of fully vaccinated people in Britain have expressed a willingness to get the third booster shot, there is a noticeable faction that has expressed concern over the long-term effects of the vaccine.
• New Zealand has extended lockdown measures as the Delta variant continues to spread throughout the country.
• A peer-reviewed study published by the British Medical Journal claimed that people infected with COVID-19 suffered almost 200 times more excess incidents of blood clotting than those who received the first dose of the Oxford/AstraZeneca vaccine.
• Denmark has declared that COVID-19 is under control and will drop all remaining pandemic-related restrictions in September.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Risk assets are a bit weaker this morning.  The Jackson Hole meeting kicks off today.  Like last year, it will be virtual.  Tomorrow will be the big day when Chair Powell speaks.  We start our coverage with the latest from Afghanistan.  China news comes next as we continue to watch the policy adjustments from Beijing.  Economic and policy follow, and the international roundup precedes our coverage of the pandemic.

Afghanistan:  Here is what we are following:

• Western embassies are issuing alerts to their citizens at the Kabul airport waiting for flights; they may be targets for terror attacks. It appears the Islamic State affiliated terrorists are the source of the threat.  The group opposes the U.S. and apparently the Taliban as well.  It isn’t clear what those seeking exit are expected to do, but the warnings highlight the deteriorating security situation at the airport.
  • The U.S. believes around 1,500 Americans remain in Afghanistan, and only about 500 have contacted the American embassy. American forces are still searching for some Americans in the country.
  • Several European nations have finished their evacuations.
  • Initially, Russia didn’t intend to evacuate its nationals. However, the deteriorating security situation has prompted Moscow to send military personnel to extract Russians from Afghanistan.
  • The Taliban has blocked all the roads leading to the Kabul airport and is “acting aggressively” towards those trying to escape.
  • This map shows where refugees are being processed.
• Turkish troops, who have been defending the airport, are starting to leave the country. Initially, President Erdogan promised to keep around 500 soldiers at the airport, but talks with the Taliban to allow them to stay have apparently failed.  Their exit will add to the current level of disorder.
  • Turkey is warning the EU that it won’t take an influx of Afghan refugees.
• The Taliban leadership is trying to create a narrative of a “new Taliban” that is less socially rigid than its earlier iteration. In an interview, the group’s spokesman, Zabiullah Mujahid, attempted to reassure the West that retaliation and repression would be limited.  Although it is possible that the Taliban will be less restrictive, we suspect the West will want to see proof.
• There are worries that a collapse of the economy will lead to a refugee crisis. In the immediate term, the Taliban has been denied access to most of Afghanistan’s foreign reserves and official aid.  The Treasury has signaled that aid to groups providing goods and services to Afghans will not violate U.S. sanctions.
  • Iran has started to sell oil and products to Afghanistan; the Taliban is apparently using hard currency gained from opium sales to pay for these products.
• In the past, groups in northern Afghanistan have opposed the Taliban. The Taliban, likely anticipating that this region could be a hotbed for rebellion against its rule, has surrounded the region.  Although the Taliban will struggle to bring these groups under its control, it is also difficult to see how these groups can mount an effective resistance.  It will be challenging to bring in resources from outside Afghanistan, hampering these tribes from pushing back against Taliban rule.

China:  We are watching property taxes and income policy.

• An important area to watch in terms of Chinese economic policy is if the Xi government implements a property tax. For the most part, the national government has avoided property taxes because they would be profoundly unpopular.  Chinese households have few places to hold savings.  Banks, by design, usually offer deposit rates below inflation, foreign investment is restricted, and stock markets are volatile.  Faith in the value of property has led to widespread investment in apartments and houses.  In addition, there are rumors that CPC members are heavily invested in property, meaning that the tax would fall on the powerful.  If a property tax is implemented, it will signal a sea change.
  • Although the government hasn’t taken this step yet, there are signs it views high property prices as a problem. The move against tutors is related to an attempt to bring down property values in preferred school districts.  There are reports that the end of tutoring has brought down property values in these districts.
• When Beijing started cracking down on tech firms and their wealthy CEOs earlier this month, there were concerns we were seeing a wholesale drive to attack wealth accumulation. Recent speeches suggest the policy leaders are trying to modify the message.  The “common prosperity” policy is said to not be a “robin hood” policy of taking from the rich.  However, that doesn’t mean nothing has changed.  One term we see used now is “three allocations.”  The first allocation is what comes from the market.  The second allocation is how government policy modifies that outcome.  The third allocation is when the wealthy “voluntarily” give their wealth back for the social good.  Social control without direct coercion appears to be the goal.
  • We note investors are starting to “bottom fish” Chinese tech after the recent selloff.
• One hallmark of the Xi regime has been persistent anti-graft and anti-corruption activities. The CPC secretary of Hangzhou is being investigated.
• The U.S. is allowing Huawei (002502, CNY, 5.09) to buy U.S. semiconductor chips that will be used in auto components. Such chips are usually not the most sophisticated, which is likely why the sales were allowed.
• Chinese courts have ruled that cryptocurrency disputes are not protected by law, essentially saying that assets and transactions are effectively illegal.

Economics and policy:  The budget process grinds on.

• Sanders (I-VT) is sticking to his $3.5 billion budget pledge. We expect this number to come down, despite his insistence.
  • We are also seeing more work being done on a global corporate tax.
• The administration held a meeting on cybersecurity. This was the first high-profile meeting between tech executives and the president.  There are growing concerns that cracking down on the use of cryptocurrencies in ransomware could lead to “darker” payment methods.
• The distribution of rental assistance remains sluggish; the inability of state and local governments to distribute aid could trigger mass evictions.
• SEC head Gensler has hired Barbara Roper, a consumer advocate, as an advisor. This will be taken as a hostile signal by the financial services industry.

International roundup:  Israel comes to visit.

• Israel’s PM Bennett is scheduled to meet with President Biden today. Although it appears Bennett will try to strike a conciliatory tone, the substance of U.S./Israeli relations won’t change much.  Israel wants the U.S. to not return to the Iran nuclear deal and is making noise about using its military to prevent Iran from getting a nuclear weapon.  The U.S. is getting increasingly concerned about China’s deepening economic relationship with Israel.  We expect a friendly front to be made for the media, but tensions will remain elevated.
• The SDP has overtaken the CDU in recent German polls. Although we don’t expect the SDP to win outright, a shaky coalition government is looking more likely.
• El Salvador is about to kick off its program of using bitcoin as legal tender.

COVID-19:  The number of reported cases is 214,058,844, with 4,466,841 fatalities.  In the U.S., there are 38,225,849 confirmed cases with 632,283 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 430,118,615 doses of the vaccine have been distributed, with 364,842,701 doses injected.  The number receiving at least one dose is 202,500,853, while the number receiving second doses, which would grant the highest level of immunity, is 171,773,370.  For the population older than 18, 62.7% of the population has been vaccinated.  The FT has a page on global vaccine distribution.  The majority of states are seeing increasing cases of COVID-19.

• U.S. intelligence agencies have finished their report on the origins of the virus. Due to the lack of cooperation from China, the results are inconclusive.  Beijing continues to aggressively attempt to shape the narrative.
• The influx of cases is leading some states to ask for help. ICU utilization is running high, especially across the south.
• The U.S. is set to approve booster vaccines for those who received their first dose six months ago.
  • Studies suggest that a second shot of the Johnson & Johnson (JNJ, USD, 174.23) triggers a strong immune response.
• One of the reported risks from COVID-19 vaccines is myocarditis, inflammation of the heart. A recent study from Israel suggests that this condition is more common from infections of the virus itself relative to the vaccine.  In effect, there is a risk from the vaccine, but it appears to be less than being infected.

What is becoming increasingly evident is that COVID-19 isn’t going away.  Like the common cold and influenza, it looks like it won’t be eradicated.  Vaccination reduces the risk of infection but doesn’t prevent it outright.  Societies are going to have to figure out how to deal with this disease over the long run.  The good news is that as the virus circulates, its lethality will likely diminish over time.  Vaccines can help speed this process.  But we will probably have to move from doing everything possible to avoid infection broadly to selective protection.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with the latest on Afghanistan, where President Biden has rejected calls to extend the U.S. evacuation effort beyond his August 31 deadline.  We then review a range of U.S. domestic developments, followed by some key foreign news.  We close with the latest on the coronavirus pandemic.

Afghanistan:  In yesterday’s G7 virtual meeting, President Biden apparently pushed back hard against allies who argued to keep U.S. military forces in Afghanistan past his August 31 deadline, contending that the risk of attack on troops and evacuees would be too great.  Meanwhile, Taliban officials said they would stop Afghans from trying to enter the airport, purportedly to prevent continued chaos around the facility.  They said they would continue to allow foreigners with valid travel documents in, and U.S. officials said they were working with the Taliban to allow Afghans with valid travel documents to reach the airport.

• U.S. officials have reportedly sent messages to stranded Americans in Kabul, asking them to send their GPS coordinates and wait for a rescue team to come, according to people informed about the efforts.  Military teams from Germany, the U.K., and France were carrying out similar operations for their citizens who are trying to get out of Afghanistan, according to these sources.
• Two U.S. congressmen, Representatives Seth Moulton (D., Mass) and Peter Meijer (R., Mich.), flew into Kabul airport.  They wanted to get on-the-ground intelligence to relay to fellow elected officials and expected to press the Biden administration to extend the timeline for evacuating Americans and Afghans from the country.  The two ended up agreeing with the administration’s August 31 evacuation timeline after their trip.

U.S. Fiscal Policy:  The House yesterday narrowly passed a measure greenlighting the main contours of next year’s federal budget, including the Democrats’ $3.5 trillion antipoverty and climate proposals, and locking in a deadline of September 27 to vote on the $1.0 trillion “hard” infrastructure bill.  The measure represents a compromise between Democratic progressives, who wanted to approve both proposals simultaneously, and Democratic moderates, who wanted to pass the infrastructure bill first.  In reality, the approved measure will put pressure on House progressives to pass their detailed antipoverty and climate plan as quickly as possible in order to keep the moderates from abandoning it.  Nevertheless, some versions of the Democrats’ proposals are likely to be passed into law, but what gets passed may end up being significantly watered down from the current proposals.

U.S. National Security:  On her swing through Asia yesterday, Vice President Harris’s departure from Singapore to Vietnam was delayed for several hours in connection with an “anomalous health incident,” according to the State Department.  The government has used that term to describe the “Havana Syndrome” that appears to result from unknown attack vectors against U.S. diplomats.  The announcement immediately raised concerns that Harris herself may have been targeted, although the State Department later insisted she was fine.  In any case, if foreign interests targeted the vice president’s delegation, it would be a major escalation of the attacks and put greater pressure on the federal government to get to the bottom of the problem.

U.S. Cybersecurity:  President Biden today will host a summit of top U.S. business leaders to discuss ways to enhance cybersecurity.  Following the afternoon meeting, the companies are expected to announce a number of “concrete steps” and commitments to help fight cybercrime.

China:  Shares of Chinese internet retailer Pinduoduo (PDD, $99.12) jumped more than one-fifth after it said yesterday that it would donate $1.5 billion in future earnings to charity.  Commentators on Beijing’s new “common prosperity” policy have focused on its effort to rein in large, fast-growing companies that could become rival power centers and its more recent income redistribution slant.  Now, a third major plank of the program involves the government “encouraging” rich companies and individuals to “contribute” more to charity.  Given the way investors reacted to the Pinduoduo news, it appears they’re wagering that big charitable donations will help keep firms in Beijing’s good graces.

• As we’ve noted, the common prosperity program is a significant regulatory risk for Chinese companies.  However, there is also a budding labor shortage that companies are dealing with as young people shun factory jobs and more migrant workers stay home.
• Some migrant workers are worried about catching COVID-19 in cities or factories, despite China’s low caseload. Other young people are gravitating toward service-industry jobs that pay more or are less demanding.

Japan:  With Prime Minister Suga’s popularity plunging ahead of this autumn’s elections, Former Foreign Minister Fumio Kishida said he would run to replace Suga as the Liberal Democratic Party’s leader in September’s party elections.  Kishida will be at least the second LDP official who has announced an effort to depose Suga.

European Union-Russia:  In a sign of how Russia might use its energy exports for political purposes after the imminent completion of the Nord Stream 2 natural gas pipeline from Russia to Germany, Moscow is refusing to significantly boost its current gas exports through Ukraine, despite the fact that Europe’s gas supplies are at their lowest levels in years and prices are surging to record levels.  The refusal to boost flows through Ukraine deprives that pro-Western country of vast amounts of transit fees.

COVID-19:  Official data show confirmed cases have risen to 213,396,756 worldwide, with 4,456,252 deaths.  In the United States, confirmed cases rose to 38,077,814, with 630,840 deaths.  Vaccine doses delivered in the U.S. now total 428,529,385, while the number of people who have received at least their first shot totals 202,041,893.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 60.9% of the U.S. population has now received at least one dose of a vaccine, and 51.6% of the population is fully vaccinated.
• Johnson & Johnson (JNJ, $175.39) said researchers found antibody levels increased ninefold among people who received a second dose of its vaccine, compared with one month after they received a first dose.
  • The company didn’t specify exactly when or how many subjects received the second dose; information posted about the clinical trial in an online government database indicates it was administered six months after the first shot.
  • In any case, the study is expected to bolster the case for allowing booster shots with the J&J vaccine.
• In a sign of how corporate vaccine mandates are spreading following the full authorization of the shot from Pfizer (PFE, $48.38) and BioNTech (BNTX, $368.20), Goldman Sachs said it would require proof of vaccination from all staff and clients entering the bank’s offices starting September 7.  It will require any employees who were not fully vaccinated to work from home.
• In Japan, Prime Minister Suga has imposed states of emergency or similar policies on even more areas.  With emergency or quasi-emergency measures now applied in 33 of the country’s 47 prefectures, there are growing calls — including from the National Governors’ Association last week — for one or the other to be expanded nationwide as a fifth wave fueled by the Delta variant continues to spread.
• An official intelligence assessment by U.S. spy agencies on the origins of the pandemic didn’t reach a definitive conclusion regarding whether the new coronavirus jumped to humans naturally or via a lab leak, in part because of the lack of detailed information from China.  The report, delivered to the White House on Tuesday, highlights the challenge in understanding the source of the pandemic as China continues to withhold lab records, genomic samples, and other data.

 Economic and Financial Market Impacts

• With risk markets continuing to be buoyed by stimulative fiscal and monetary policies related to the pandemic, established companies are taking advantage of the hot market by raising billions of dollars in follow-on stock offerings.  In fact, follow-on stock issuances are proceeding at the fastest pace since 1996.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we begin with the latest developments in Afghanistan. There are disturbing reports that evacuees reaching U.S. facilities in places like Doha are facing horrible conditions.  We next review a range of other international and domestic news, including a discussion of how Chinese stocks are posting at least a short-term rebound after being pummeled by recent regulatory moves.  We wrap up with the latest on the coronavirus pandemic.

Afghanistan:  At a virtual G7 meeting today, foreign leaders, including British Prime Minister Johnson and French President Macron, are expected to urge President Biden to negotiate with the Taliban for an extension of the U.S.-led military withdrawal, even though the Islamist group has said it will not accept any delay.  The British have been especially vocal in warning that the risk of attacks against troops and other evacuees will only increase as the current August 31 deadline approaches.  If such attacks occur, the situation would become an even greater political debacle for Biden.

• The U.S. military yesterday reported its biggest day of airlifts out of Afghanistan by far, with 28 U.S. flights taking more than 10,000 people out of the country in a 24-hour period.
• Meanwhile, the U.K. has evacuated over 8,600 people since August 14, including around 2,000 in the past 24 hours. British Defense Secretary Wallace said that if the airport were to close, the U.K. would continue to process refugee applications from Afghans if they could get out of the country by other means.
• Meanwhile, new reports indicate that even when evacuees arrive at facilities such as the Al Udeid Air Base in Doha, the facilities are not prepared for them, leaving many in squalid, unsanitary conditions.

China:  Chinese technology stocks continued their Monday rally by jumping further today, based partly on strong results and positive comments from JD.com (JD, 65.73).  Addressing Beijing’s tough regulatory crackdown on big, fast-growing tech firms, JD retail chief Xu Lei said, “We believe that the regulatory goals are conducive to JD’s long-term business growth. So far, our business maintains steady growth whilst committing to better compliance policies.”  Other reports suggest Chinese officials may have made some conciliatory comments today in order to calm the markets.

• All the same, we see multiple reasons to think Beijing’s clampdown is real, long-lasting, and likely to be quite extensive over the broad Chinese economy.
• We continue to see growing regulatory risks not only for Chinese technology firms but for the even broader private sector.  Over time, the result will likely be slower economic growth, lower profitability, increased taxation for private firms and individuals, and less innovation.

U.S. Fiscal Policy:  Democratic leaders in the House last night postponed a procedural vote that would allow the bipartisan, $1 trillion “hard” infrastructure bill and the Democrats’ $3.5 trillion antipoverty and climate proposal to move forward together.  They now plan to hold that vote today, although it remains unclear how the leadership will resolve the standoff between progressives, who want the bills to pass simultaneously, and moderates, who want to prioritize the hard infrastructure program.

Mexico:  A Sunday night fire at a Pemex oil platform in the Gulf of Mexico has left five people dead and slashed the country’s oil output by almost a quarter.  According to the company, about 420,000 barrels of daily oil output remained offline on Monday, which could help put some additional upward pressure on global oil prices this week.

Commodity Markets:  While renewed optimism about Chinese growth prospects is boosting oil and industrial metals prices today, the extreme heat and drought in much of the U.S. are threatening crops and buoying agricultural prices.  Even though corn, wheat, and soybean prices remain lower than when they spiked in the spring, prolonged heat and dryness could well boost prices back toward those levels or even higher.

• North Dakota and Minnesota, in particular, are experiencing near-record lows in soil moisture, according to data from the National Oceanic and Atmospheric Administration.  As a result, many crops planted this spring are wilting. About 63% of the U.S. spring wheat crop is in poor or very poor condition, versus 6% at this time last year, according to Agriculture Department data.

COVID-19:  Official data show confirmed cases have risen to 212,686,320 worldwide, with 4,444,735 deaths.  In the United States, confirmed cases rose to 37,941,620, with 629,564 deaths.  Vaccine doses delivered in the U.S. now total 428,528,965, while the number of people who have received at least their first shot totals 201,718,587.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 60.8% of the U.S. population has now received at least one dose of a vaccine, and 51.5% of the population is fully vaccinated.
• The FDA yesterday gave full approval for the use of the vaccine from Pfizer (PFE, $49.93) and BioNTech (BNTX, $382.10).  Full approval was seen by public health officials as a key step to convince hesitant individuals to get the shot and to encourage employers to mandate it.  Indeed, the move was quickly followed by announcements from the Pentagon, the New York City school district, and others that they would begin requiring vaccinations.
  • The prospect of reduced personal hesitancy and increased employer mandates raised hopes for faster vaccination progress and reduced infections, helping to boost stock prices yesterday.
  • Moderna (MRNA, $411.89), whose two-dose shot uses similar technology as the Pfizer-BioNTech vaccine, said it is still completing rolling data submissions to support its application for full approval.  Johnson & Johnson (JNJ, $177.61), which gained emergency authorization for its shot in February, said it plans to file for full approval later this year.
• In Israel, lauded earlier this year for its mass vaccination campaign and success in fully inoculating at least 80% of its adults, the Delta variant continues to drive a new wave of infections and some “breakthrough” cases.  The experience underlines the fact that immunity from even the most effective vaccines wanes over time and will require booster shots.
• The U.K. announced it ordered an additional 35 million doses of the vaccine from Pfizer and BioNTech for delivery next year.  That brings the U.K.’s total order for the vaccine to 135 million doses, as it prepares to give boosters as people’s initial immunity fades.
• In Japan, the government plans to expand its state of emergency from Tokyo and 12 other areas to eight more prefectures as it looks to quell the country’s largest wave of infections.  The additional prefectures will come under the measure from this coming Friday through September 12.

 Economic and Financial Market Impacts

• Pandemic-driven port shutdowns continue to limit the movement of goods out of China.  In the latest development, delays in deliveries and goods shipments through China’s largest cargo airport are mounting.  New coronavirus infections have canceled flights and disrupted the customs-clearance process, resulting in higher air freight prices and more strain on recovering supply chains.  Even though operations are reportedly starting again at the port of Ningbo-Zhoushan, which was shut down on August 11 after discovering a single case of COVID-19, the new snarl could further prolong the supply shortages plaguing the global economy and pushing up inflation.
• In Malaysia, which plays a key role in semiconductor packaging and testing, the surge in new infections and the resulting business shutdowns threaten to aggravate shortages of semiconductors and other components that have hammered automakers for months.

 View PDF