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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with Treasury Secretary Yellen’s gaffe – or Freudian slip – on rising inflation and interest rates.  Even though she has tried to walk that statement down, it will likely play into suspicions that the Federal Reserve may not be able to hold off on tightening monetary policy for as long as it says.  Next, we review other key U.S. and foreign developments that will likely impact the financial markets today.  Finally, we review the latest news regarding the coronavirus pandemic.

U.S. Monetary Policy:  After suggesting that passage of the Biden administration’s spending plans might require the Fed to hike interest rates to keep the economy from overheating, Treasury Secretary Yellen late yesterday tried to walk back her comment by insisting that she was neither predicting nor recommending that the central bank should tighten monetary policy.  Rather, she asserted she didn’t foresee any lasting rise in inflation.  While it’s a surprise that a policymaker as seasoned as Yellen would make such a mistake, it may be that the former Fed chair is still adjusting to the more political role of a cabinet secretary.  All the same, her initial statement is likely to be taken as a Freudian slip that shows even administration policymakers expect a more serious acceleration in inflation and may need to hike interest rates earlier than the Fed is willing to admit.  That could spark a renewed bout of inflation concerns, rising bond yields, and volatility in the equity markets in the coming days.

U.S. Fiscal Policy:  An analysis by the Tax Policy Center indicates that President Biden’s proposal to hike capital gains taxes to 43.4% for those whose income exceeds $1 million would affect less than 1 in 20 taxpayers who file Schedule D.  However, the tax hike would apply to almost two-thirds of the entire volume of capital gains, simply because so many of those gains are earned by taxpayers with very high incomes.

United States-Taiwan-China:  Amid rising fears of a Chinese seizure of Taiwan and calls for the U.S. to explicitly commit itself to Taiwan’s defense, White House Asia chief Kurt Campbell warned that there would be significant downsides to “strategic clarity.”  Campbell’s pushback echoes a recent statement by Director of National Intelligence Haines that a U.S. shift away from strategic ambiguity and toward an explicit commitment to defend Taiwan would be seen by China as deeply destabilizing and could make China even more aggressive.

• Asked whether the world should be preparing for possible conflict over Taiwan, Campbell played down the risk, saying the Chinese military activity was merely an effort to “turn the screws” on Taiwan.
• Despite Campbell’s pushback against an explicit commitment to Taiwan, the administration and U.S. allies continue to take a tough stance on China.  At a meeting of G7 foreign ministers today, Japanese Foreign Minister Motegi voiced “grave concerns” over China’s unilateral attempts to change the status quo in the East and South China Seas.  He said Japan is also concerned about Beijing’s handling of human rights in connection with the Muslim Uyghur minority in the Xinjiang region.
• Because of China’s growing power and the rising threat of conflict with the U.S., especially over Taiwan, we continue to deepen our focus on the region.  We have published a new, multi-part Weekly Geopolitical Report series on the geopolitics of Taiwan and its place in the global technology industry; Part I can be found here.

European Union-China:  The EU today unveiled draft rules that would grant the bloc’s antitrust regulators new powers to block foreign companies from making acquisitions in Europe or from receiving public contracts if they are deemed to have benefited from government subsidies. Companies will face stiff fines if they fail to comply with the EU’s demands.

• Although the rules don’t single out China specifically, that country would be a main target.  If approved by all 27 of the EU’s member states and the European Parliament, the rules would allow the bloc to crack down on state-subsidized Chinese companies in much the same way it has targeted big U.S. multinationals.
• The legislation is the latest sign of Europe’s shifting stance toward China, the bloc’s biggest trading partner for goods and a crucial market for its exporters.  As we have discussed many times previously, growing friction between China and the world’s liberal democracies could be economically disruptive and potentially catch investors in the crossfire.

Spain:  The center-right People’s Party scored a spectacular victory in a pivotal regional election in Madrid — doubling its share of the vote, inflicting a humiliating defeat on the country’s governing Socialist Party, and prompting the resignation of the leader of the radical leftwing Podemos Party.

• Even though the PP will have to rely on the support of the hard-right Vox party to govern, the victory still marks a major turnaround for Spain’s main opposition party, which had suffered falling support in recent years.
• The victory will also mark PP regional chief Isabel Díaz Ayuso as key to the party’s future.  Basing her campaign on the slogan “Freedom,” Díaz Ayuso has clashed repeatedly with the Socialist-led national government over coronavirus policy, imposing fewer restrictions than the rest of the country and keeping the region’s hospitality industry open for months.

Israel:  Following Israel’s inconclusive elections earlier this year, Prime Minister Netanyahu missed a deadline to form a new government by midnight last night.  As a result, the country’s president is now expected to offer Netanyahu’s rivals an opportunity to assemble a government or hand responsibility for selecting a new prime minister to Israel’s parliament. If those efforts fail, Israel could be heading toward another election—the fifth since 2019.

COVID-19:  Official data show confirmed cases have risen to 154,458,235 worldwide, with 3,230,178 deaths.  In the United States, confirmed cases rose to 32,513,803, with 578,504 deaths.  Vaccine doses delivered in the U.S. now total 318,474,035, while the number of people who have received at least their first shot totals 147,894,671.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections fell to approximately 40,000 yesterday, well below both the seven-day moving average of 49,619 and the 14-day moving average of 52,446.  On a less positive note, however, new deaths related to the virus rose to 916.  Meanwhile, the CDC reported that 56.4% of U.S. adults have now received at least one dose of a vaccine, and 40.8% have been fully vaccinated.
• President Biden set a new goal of getting 70% of U.S. adults at least one vaccine dose by July 4 and having at least 160 million U.S. adults fully vaccinated by the same date.  To accomplish that, the administration will reallocate doses to states with higher demand and direct pharmacies to offer walk-in vaccinations.
• New data show that EU member states have now administered 33.6 vaccine doses per 100 inhabitants.  That’s less than half the level in the U.K. and the U.S., but it’s a big jump from just a month ago and far more than in most developing countries.
  • The data suggest that the EU vaccination program is now moving into high gear after the removal of bureaucratic and logistical issues that snarled the early stages of its vaccine campaign.  Of particular importance: deliveries from vaccine manufacturers have risen sharply, allowing governments to relax their rules regarding which of their citizens are eligible for a shot.
  • Coupled with renewed lockdowns in many areas, the faster vaccination push holds out the promise that EU infections, hospitalizations, and deaths could soon start to fall.  If that sparks a quick economic rebound similar to that of the U.S., it would likely be positive for risk assets in Europe and elsewhere.  We note that it could also prompt some rebound in European bond yields and potentially put the dollar on a downward path again.
• Despite the improvement in Europe, the virus resurgence in India continues unabated.  A key problem is a nationwide shortfall in oxygen supplies, leaving many COVID-19 victims to die from asphyxiation.

 Economic and Financial Market Impacts

• Fortunately, data on the global service sector continues to show a rebound, even in some countries still facing high or even worsening infections.  For example, India’s Purchasing Managers Index for the service sector only fell to 54.0 in April, compared with 54.6 in March (see data tables below).  As with all PMIs, the index is designed so that readings over 50 point to expanding activity.  While stock prices have softened recently in India, Brazil, and some other countries facing high or worsening infection rates, the resilience of the service sector could help explain why stock prices have held up better than might have been expected.
• Just as the post-pandemic recovery looks set to favor small-cap stocks in the U.S., an analysis by the Financial Times shows a similar dynamic has taken hold in the U.K.  The FTSE index of small-cap equities excluding investment trusts has soared almost 70% over the past year, widely outpacing the 23% rise for the FTSE 350 Index of the biggest stocks listed on U.K. markets.
• The National Center for Health Statistics said the pandemic pushed total U.S. births down 4% to just 3.61 million in 2020, marking the lowest total since 1979.  Although it’s not clear how much of a rebound might be in store for 2021 and the coming years, the result will be at least some additional slowing in population growth and stronger population aging in the coming years.  This will tend to be a headwind for economic growth and inflation.

 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 yet another Federal Reserve official hammering home the message that U.S. monetary policy is likely to remain loose for as far as the eye can see.  Besides that, it’s been a relatively slow news day, but we did find several tidbits from overseas that could touch on the markets today.  Finally, we close with a review of the latest coronavirus pandemic news.

U.S. Monetary Policy:  In remarks yesterday, New York FRB President Williams told the Fed’s party line that while the U.S. economy is likely to have a very strong year ahead, there isn’t yet an imminent need for the central bank to pull back on its aggressive levels of monetary policy support.  According to Williams, “We are still far from our goals of maximum employment and price stability . . . Let me emphasize that the data and conditions we are seeing now are not nearly enough for the FOMC to shift its monetary policy stance.”  The remarks underscore the policymakers’ intent to keep interest rates ultralow and asset purchases high for the foreseeable future, which we expect to continue supporting risk assets.

U.S. Financial Services Industry:  In a speech yesterday, Federal Reserve Chair Powell said rules requiring banks to lend in the low-income communities where they have branches should be extended to cover all firms providing consumer credit.  The remarks signal Powell’s support for efforts to overhaul the more-than-40-year-old Community Reinvestment Act to encompass non-banks that increasingly provide the bulk of the credit to individual borrowers, particularly in the $11 trillion mortgage market.

Japan:  Former Prime Minister Abe urged members of his Liberal Democratic Party to re-elect his successor, Prime Minister Suga, as head of the party when his term ends in September.  As Chief Cabinet Secretary, Suga has served as Abe’s right-hand man and the public face of the Abe administration since 2012, but some have speculated that a rift has emerged between the two.  Suga has also come under fire for the government’s COVID-19 response.  Public dissatisfaction has grown as vaccine rollouts have been slow, and the country is still struggling to stem rising coronavirus cases.  Political instability at the top of the Japanese government would likely be at least a short-term negative for Japanese equities.

Germany:  Police in Berlin have arrested a suspected far-right extremist who they say sent dozens of death threats to German politicians signed with the name “NSU 2.0” — a reference to a notorious neo-Nazi group from the 1990s.  The case has made huge waves in Germany and rung alarm bells about the growing strength of the far right.

China-Philippines:  Although Philippine President Duterte has tried to play nice with China despite its infringement on Philippine waters, it appears some members of his administration haven’t gotten the memo and have decided to push back.  In a tweet yesterday, Foreign Minister Locsin wrote, “China, my friend, how politely can I put it? Let me see… O… GET THE F–K OUT” of Philippine waters in the South China Sea.

COVID-19:  Official data show confirmed cases have risen to 153,632,236 worldwide, with 3,215,270 deaths.  In the United States, confirmed cases rose to 32,472,596, with 577,565 deaths.  Vaccine doses delivered in the U.S. now total 312,509,575, while the number of people who have received at least their first shot totals 147,517,734.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose to approximately 49,000 yesterday, almost matching the seven-day moving average of 49,209 but still much lower than the 14-day moving average of 53,686.  New deaths related to the virus came in at a moderate 455.  Meanwhile, while the pace of vaccinations has slowed recently, the CDC reported that more than 40% of U.S. residents are currently fully inoculated against the disease.
• The vaccine from Pfizer (PFE, USD, 39.83) will likely be approved for use in young people aged 12 to 15 by sometime next week, according to sources familiar with the process.  If so, it would help keep the mass vaccination drive in the U.S. in high gear despite some recent slowing.
• In New York and New Jersey, state officials said they are lifting most capacity limits on businesses as more people get vaccinated and infections continue to decline. Capacity limits will end May 19 for retail stores, restaurants, gyms, amusement parks, salons, barbershops, offices, museums, and theaters.
• Tourist meccas like New Orleans and Las Vegas are already reporting a surge of visitors as they open up.  The rebound in tourism appears to be a sign of the major snapback expected in much of the nation’s service industries, as pandemic restrictions are lifted.
• In Germany, the government has prepared legislation saying that people who have been inoculated against COVID-19 or have recovered from the disease will no longer be subject to curfews or restrictions on social gatherings beginning as early as this week.  Despite concerns that the move could discriminate against younger people who are still months away from being able to get a vaccination, Justice Minister Lambrecht argued that since vaccinated people no longer present a health risk to others, the curbs on their fundamental rights must be lifted.
• As the pandemic worsens in India, officials in Africa worry they could face a similar fate.  In total, Africa has received just 32 million vaccine doses, of which about 18 million have made it into people’s arms. Doses from the multilateral Covax program make up the bulk of jabs deployed so far, but supply has dried up after New Delhi blocked exports by the Serum Institute of India to battle its own outbreak.
• To justify its decision last week to deny emergency approval for Russia’s Sputnik V vaccine, a high-ranking official in Brazil’s health authority said the agency has doubts about the compound’s safety and efficacy.  For example, the official inquired about the methodology used in the vaccine’s clinical trials and complained that Russia was defensive when questioned by the agency.  Frustrated with the growing infection rate in Brazil, several medical groups in the country are trying to develop their own home-grown vaccines.

 Economic and Financial Market Impacts

• With pandemic monetary policy responses driving interest rates lower all over the world, even conservative German savers have turned to the stock market.

U.S. Policy Response

• As anticipated, after the Fed allowed looser capital rules on U.S. banks to expire at the end of March, major institutions have been pushing large corporate clients to shift their deposits into money market funds.  The benefit for the banks is that they earn a fee for managing the money funds, but the deposits are not counted in the supplementary leverage ratio that determines how much capital they need to hold.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  It’s Monday and the first trading day of May.  Various global markets are closed or seeing light trading today due to lingering May Day celebrations.  U.S. equity futures are trending higher this morning.  Economics and policy lead off our coverage today.  International news comes next, followed by an update on China.  We close with our usual pandemic update.

Economics and policy:  Labor markets, inflation worries, and colleges dominate the news.

• One of the factors economists are trying to discern is the effects that follow a pandemic. We know that policy actions have flooded households with cash.  This wall of money has raised inflation fears.  However, we have contended that it is critical to follow the money.  In other words, the mere presence of liquidity does not mean inflation will follow.  The WSJ notes that much of the cash is being held in older households, where it is less likely to be spent.  The latest data, which for Q4, from the Fed’s Distributional Financial Accounts, shows that cash held by the top 10% of households rose $451.6 billion from Q3.  For the 89% to 51% middle, it rose $89.9 billion, and for the bottom 50%, it rose $47.7 billion.  Some of this data will change with recent fiscal injections, but there is clear evidence that the bulk of the liquidity is in households that will either hold it for a while or likely use it to buy financial assets.
• That doesn’t mean we are not seeing price increases. Lumber prices are soaring, the consequence of rising demand that hit an industry that has been contracting supply since the Great Financial Crisis (here’s a great podcast on the topic).  We are seeing numerous reports that industries, from restaurants to food processors, are struggling to find workers.  Some of this is due to households having all that cash.  Workers can be more discerning in employment opportunities.  However, there is also another issue.  During the pandemic, some workers who were laid off as businesses closed may have trained or found work in other industries.  Some of these industries had rather poor labor practices—often, they demanded flexible schedules that burdened workers and prevented them from managing childcare or working multiple jobs.  If these workers moved on, these industries would be forced to train new workers, and in a high growth period, will probably be forced to pay more or restructure jobs to make them more attractive.
  • Don’t underestimate the economy’s ability to adapt. For example, it looks like lumber pricing may be high for a while; we expect that soon we will see builders take a look at residential steel studding.  Steel has attractive properties for residential homebuilding.  It’s strong. It can withstand wind and earthquakes better.  It offers greater flexibility in design.  It used to cost about 15% more than wood framing.  With lumber prices up this much, steel will likely make inroads, and once it does, some of the lumber demand will be lost, permanently.  Although iron ore prices are up, it is important to remember that steel, unlike wood, is recyclable.
• Some of the pricing issues are due to the nature of this recovery. The last fast recovery from recession was 1982.  In every recession since then, the recovery has tended to be slow.  Businesses assumed this recovery would be too.  But, unlike previous business cycles, the fiscal and monetary response was so aggressive that we are seeing a true “V” recovery.  Expectations of a slow recovery led firms to downsize dramatically a year ago.  They shed labor and cut inventories.  Based on the past three decades of experience, that made sense.  Unfortunately, it was a mistake this time around.  Now, businesses are scrambling for workers and materials.[1]
• The consensus of policymakers is that the rise in prices will be temporary. We tend to agree with this assessment.  For now, the key to inflation is expectations.  We will know inflation is a problem when (a) firms begin to treat inventory as an asset instead of something to be minimized[2] and (b) when households buy, now fearing higher prices later.  We are watching residential real estate closely; home prices have been rising, as have mortgage rates.  If buyers continue to bid prices up on fears of the lack of supply, this would be a concern.  However, we would not be surprised to see prospective buyers start to balk at prices in the near future.  If they don’t, it would be evidence that inflation expectations are building.
  • Another worry is that policymakers are abandoning any pretext of fiscal control. The Biden administration is looking for higher taxes, suggesting a full abandonment isn’t underway quite yet.  Also, the path to higher spending isn’t going to be smooth either.  There is some evidence that infrastructure spending may not be as large as proposed.
  • It’s also worth noting that all the recently proposed infrastructure and family spending is over a decade, but the taxes would be implemented immediately, leading to a fiscal contraction. This fact is mostly being lost in the current discussion.
• College enrollment is down 5.9%. Some of this is due to the uncertainty surrounding the pandemic, but demographics and a drop in international students are also affecting it.  Although the highly selective colleges are turning away students, there are scads of colleges still looking for students even at this late date.
• There is a global sand crisis.
• European banks are building a plan to take on American payment firms.
• How did big tech get big? Through acquisitions.

International roundup:  Iran is in the news, the EU and G-7 counter Russian propaganda, and Kim Jong-un won’t be ignored.

• Two items of note on Iran.
  • Although this news started circulating last week, Iran and the KSA are holding “secret” talks (not much of a secret anymore!). We suspect this is because Riyadh has concluded that the U.S. is eventually going to leave, and these two powers are going to have to get along.
  • There were reports in Iran state media that the U.S. and Iran had struck a deal where the U.S. would give Iran money, and Tehran would release prisoners. Washington has denied the reports.  Although we would not be shocked by such an arrangement, it is also possible that Iran “leaked” the news to pressure the Biden administration.  It is also conceivable that hardline elements in Iran released the reports to undermine talks, knowing that this deal would be unpopular in the U.S.
• In the face of persistent Russian disinformation, the EU and G-7 nations are proposing steps to counter these activities.
• The Biden administration is said to be offering North Korea a new policy that tries to fall between the arms-length Obama policy and the grand gesture Trump policy. So far Pyongyang seems unimpressed.
• Madrid is holding regional elections in Spain. The campaigning is getting especially ugly.
• Protests against taxes in Colombia are increasing.

China:  Regulators are cracking down on fintech, small businesses are struggling, and a new opioid is emerging from China.

• Last November, the Ant Financial IPO was scuttled at the last minute. That started a trend where tech firms that had ventured into fintech are now facing scrutiny from regulators.  Tencent (TCEHY, USD, 79.66) is facing antitrust penalties.
• Sluggish consumer demand is leading to a slow recovery for China’s small businesses.
• There are reports that a new synthetic opioid, Isotonitazene, called “Iso,” is starting to circulate. It is said to be similar to fentanyl and may be a response to Chinese authorities cracking down on fentanyl production.

COVID-19:  The number of reported cases is 152,946,524 with 3,204,301 fatalities.  Global cases have reached a new peak.  In the U.S., there are 32,422,234 confirmed cases with 577,046 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 312,509,575 doses of the vaccine have been distributed, with 245,591,469 doses injected.  The number receiving at least one dose is 147,047,012, while the number of second doses, which would grant the highest level of immunity, is 104,774,652.  The FT has a page on global vaccine distribution.

Virology

• Although cases in the U.S. continue to decline, India is facing a serious crisis. It recorded 400,000 new cases and record fatalities.  In local elections, the BJP, PM Modi’s party, suffered losses; pundits tie the losses to the pandemic.  India’s health care system is under severe strain.  Starting tomorrow, the U.S. will restrict travel from India.
• South America is also seeing widespread infections.
• Turkey has announced its first full lockdown.
• In the U.S., researchers are concluding that herd immunity is unlikely. Vaccine hesitancy likely means that the U.S. won’t reach a point where 70% of the population is either vaccinated or has immunity from being infected.  That doesn’t mean that some degree of normalcy will return, but we will likely see COVID-19 become endemic.  That could mean that, like the flu, it will cycle through the population on occasion, leading to localized lockdowns.
• The AstraZeneca (AZN, USD, 53.07) blood clotting problem appears mostly to affect young adults.
• Drug companies are working on making the next generation of COVID-19 vaccines easier to take; nasal sprays or pills might replace injections.

 View PDF

---

[1] Semiconductors are a classic example.

[2] When we move from just in time to just in case inventory management.

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities are expected to open lower this morning as weak GDP from Europe and concerns about rising COVID-19 cases in emerging markets have weighed on market sentiment. There was a lot of overnight news. We start off today’s report with a discussion about the double-dip recession in the Eurozone. International news follows, where the EU is accusing a tech company of being anti-competitive, there was a stampede in Israel, and more. Economics and policy are up next, including details of Biden’s tax plan and a possible ban on menthols. China news follows, and we close with pandemic coverage.

Eurozone: There are rising concerns about the global economy following weak GDP numbers coming out of Europe. The Eurozone fell into a double-dip recession primarily due to contractions in three out of the four largest economies in the bloc. Germany, Italy, and Spain saw their respective economies contract following botched vaccine rollouts and the reimposition of restrictions. France, the only country out of the four to not contract, was forced to reimplement restrictions earlier this month, further adding to the uncertainty of the state of the Eurozone economy. The bad news coming out of Europe has largely offset optimism caused by the strong U.S. GDP report and clouds optimism of a fast global recovery. As the pandemic recedes, we may see a fairly unbalanced recovery as countries begin to emerge at different times. This could be a positive for exporters as a staggering recovery could lead to sustained demand for goods as firms rebuild their inventories. However, the downside is that supply chain issues could also be prolonged until everything returns to normal.

International news: Israel objects to restoring the nuclear deal, Russia withdraws from the Ukraine border, and more.

• In Israel, at least 44 people were killed and 150 people injured as people fell and were stampeded following a trip to Mount Meron to celebrate the Lag B’Omer festival.
• The United Nations warned that if the military coup and coronavirus outbreak continue to persist in Myanmar, it could force almost half the country’s population to fall below the poverty line of about $1/day.
• The Central Bank of Nigeria removed the boards of First Bank Nigeria Holdings and its subsidiary following its appointment of a new CEO without regulatory approval. The bank is Nigeria’s third largest by assets and is considered systemically important.
• Ties between Russia and Eastern European countries have deteriorated as mistrust over Russian influence has led these countries to distance themselves from Moscow.
• Regulators in the European Union accused Apple (AAPL, $133.48) of acting like a monopoly by requiring music streamers to use the in-app pay system to sell digital content and taking a commission. Additionally, regulators complained that Apple “distorted competition” by limiting the way app developers can inform users about cheaper alternatives to subscribe. The accusation adds further scrutiny to the digital giant already facing a similar lawsuit brought about by Epic Games.

Economics and policy: Senator Joe Manchin is concerned with additional spending, new tax thresholds, and a potential ban on menthols.

• Support for the president’s infrastructure plan may have hit a snag after Senator Joe Manchin (D- WV) voiced his discomfort with the price tag. His vote will be crucial to getting the bill passed and he has already stated his apprehension with raising taxes to a level that may make U.S. firms uncompetitive.
• The tax plan proposed by the Biden administration is expected to lower the threshold for the highest income tax bracket. The top income levels are now going to be 452.7K for individuals and 509.0K for families, below the current levels of 523.6K and 628.3K, respectively. Biden plans to raise the tax rate of the top bracket, from 37% to 39.6%, in order to fund the infrastructure package.
• The FDA is working on production standards that, if adopted, would ban menthol cigarettes. The agency is also working on banning any type of flavored cigars. The goal of this regulation is to further prevent people from smoking and therefore reduce the amount of deaths linked to the habit.
• The U.S. Department of Agriculture has informed pork processors to slow down the processing of hogs to 1,106 hogs an hour while worker safety is evaluated.
• Congressional Democrats are pushing to expand Medicare eligibility and drug pricing measures within the infrastructure plan. So far, it doesn’t appear that President Biden will support the proposal.

China:  Rising tensions with Australia, PBOC targets Big Tech, and the WHO faces pressure from scientists.

• China has accused Australia of economic coercion as the two sides escalate their war of words. Tensions have risen sharply over the last week or so when two Belt and Road Initiative agreements were cancelled due to concerns that they may conflict with Australia’s foreign policy. In response to Australia’s criticism implying that China’s “militarization of issues” has increased the prospect of war, China claimed that Australia’s perception of a threat is the real reason why the two sides’ relationship has deteriorated as of late. The growing feud between the two countries suggests that China is finding it harder to impose its will on countries aligned with the West.
• In a quest to rein in Big Tech within the country, the People’s Bank of China has called for tech firms to adhere to the guideline of data and lending practices. China has taken a more assertive role in regulating tech firms within its country as it views the industry as a national security concern.
  • In response to the crackdown, Alibaba Group Holding (BABA, $234.18) has decided to freeze the pay of its top executives.
• A growing number of scientists have requested that the World Health Organization (WHO) should consider looking into other possible origins of the COVID-19 virus outside of merely animals. It has also emphasized the hypothesis that it originated in a lab shouldn’t be readily dismissed. The organization’s previous investigation concluded that the virus “probably spread” from bats to humans via another animal but concerns about the limited scope of the investigation have led many to question the findings.

COVID-19:  The number of reported cases is 149,903,893 with 3,155,755 fatalities.  In the U.S., there are 32,261,274 confirmed cases with 574,767 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 301,857,885 doses of the vaccine have been distributed with 234,639,414 doses injected.  The number receiving at least one dose is 142,692,987, while the number of second doses, which would grant the highest level of immunity, is 98,044,421.  The FT has a page on global vaccine distribution.  The weekly Axios map shows rising cases in about half the country.

Virology

• U.K. medicine regulators released the age breakdown of the rare blood clotting disorder linked to the Oxford/AstraZeneca vaccine. The results show that younger people below the age of 60 are particularly vulnerable to this side effect. That being said, it is extremely rare for people to suffer from blood clots once receiving the vaccine.
  • AstraZeneca is still awaiting approval in the U.S. following issues with its data, which has prevented the vaccine from being approved.
• Michigan Governor Gretchen Whitmer has announced a new plan to start reducing pandemic-related restrictions. The plan calls for the rule on remote working to be lifted after 55% of people 16 and over have received their first vaccine shot, and after 60% have received their first dose the late night curfew on restaurants will be lifted and gyms will be able to operate at 50%. When the state reaches 70% vaccinations, the restriction on state gatherings and face mask order will be lifted.
  • New York Mayor Bill de Blasio has announced that he aims to fully reopen the city by July 1.
• India continues to struggle to contain the virus as high caseloads and a faltering vaccine rollout have prevented officials from slowing the virus. The virus has become so widespread that the U.S. has told its citizens to leave India.
• Oregon and Washington have seen a spike in COVID-19 cases. This rise appears to be targeting younger people aged 29 years and younger.

The CDC will allow cruise ships to sail in U.S. waters by mid-July. There will be several guidelines that cruises will have to follow but the department will allow voyagers to skip tests if they can show that 98% of the staff and 95% of passengers are fully vaccinated.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning on this GDP day.  We cover the data in detail below, but the short take is that the data came in a bit below forecast.  Although consumption was robust, falling inventories reduced the overall number.  U.S. equity futures are higher this morning as stocks continue to trend higher.  Our coverage leads off with President Biden’s address to Congress and the spending plans.  The FOMC meeting recap follows.  Our roundup of China news is next, followed by international news.  An update on economics and policy follows.  Our usual update of pandemic news is next, and we close with technology.

The Biden address to Congress:  There is a ton of media coverage of the speech, so our focus is more on two things—what the speech (and policy) signals and the chances of passage.  In 1996, President Clinton’s State of the Union address is remembered for the famous line “The era of big government is over.”  To a great extent, this was obvious by 1996.  It wasn’t so much that the government has shrunk, but the confidence that it could solve problems was mostly lost.  Clinton’s line was less a birthing and more of a funeral.  The GOP had moved on from big government with Reagan; Clinton was indicating that the Democrats were too.

The Biden address has all sorts of details and spending plans, but the clear message is “big government is back.”  The Great Financial Crisis showed that the private sector alone couldn’t fix the problems of excessive debt, slow growth, and inequality, at least in a way that was politically acceptable.  So now, fiscal support and higher taxes are the order of the day.

What makes this change interesting from a political perspective is usually, these sorts of changes are accompanied by legislative dominance.  Roosevelt enjoyed a strong Congressional majority.  Reagan gained seats in Congress, reversing years of Democratic dominance.  Biden has a very aggressive program, about $6.0 trillion in total spending, with very narrow majorities in Congress.  The proposals include fiscal support for families, infrastructure spending, and funding to support the transition away from fossil fuels.  Included is a redistributive tax proposal to pay for it.  Getting everything through will likely require Congressional leaders to use reconciliation, which could reduce the scope of the proposals.

Here is what we are watching:

• It’s important to remember that this legislative action is occurring in a period where party affiliations are in flux. The rising stars in the GOP are the “populist Turks” of Hawley, Rubio, Cotton, and Cruz.  They might not be very opposed to the Biden tax plans and antitrust policies.  There will be party differences.  We expect the GOP to be less inclined to go “green.”  However, the idea that the GOP is the party of capital is probably out of date.  If anything, Biden’s strongest opposition could come from the tech/finance wing within the Democrats (e.g., the SALT controversy).
• President Biden, unlike most administrations, clearly realizes he is on the clock. We suspect he has another year, at most, to get everything done.  The GOP will likely regain control of Congress at the midterms; history is on the Republican’s side.  The problem is that because the administration is working with slim majorities, the chances are high that some of what he gets passed is undone in the next administration (either in 2024 or 2028).  In fact, this may be the greatest risk to investors.  Policy swings will likely become increasingly violent, thus making long-term projections more difficult and lead to truncated market trends.
• If there is one trend we would not diminish, it’s fiscal deficits. In MMT, there are limited reasons to tax.  The first is to cool inflation by withdrawing liquidity (paradoxically, from a political standpoint, this requires taxing the less affluent).  The second is to tax things you want less of…so “sin” taxes or levies on unwanted behavior.[1]  Therefore, a government taxes the rich not to raise revenue but to reduce its influence.  Thus, a tax rate that brings less revenue isn’t the point.  Expect both sides of the aisle to mostly give up on fiscal austerity.  Of course, this will change at some point.  Inflation control is usually when that trend changes.  But, for the foreseeable future, high deficits will be the norm, and eventually, we expect that eventually yield curve control will be required.

The FOMC:  The Fed made almost no changes to policy or the statement.  Rates are steady, as are bond purchases.  It did admit that the economy is doing better and inflation, though rising, is transitory.  Forward guidance indicates that policy is going to be steady for at least a couple of years.  Not a whole lot of news emerged from the press conference either.  The Fed is paying attention to the issues with money markets at what occurred with Archegos, but Powell made it clear he didn’t view high asset prices, in isolation, as a sign of trouble.  Initially, we did see a modest rally in Treasuries, gold recovered, and the dollar declined.  The market reaction was consistent with a dovish policy statement.

China:  German policy to China may change, the population is falling, and regulators that initially approved the Ant Financial IPO are probably in trouble.

• China has been able to use its trade with Germany as leverage against the EU. If German elections in the fall lead to a Green-led government, if party rhetoric can be believed, Germany, and likely the EU, would be less compliant toward China.  This development has caught the attention of Beijing.
• Last year, when the Ant Financial IPO was scuttled, one of the remarkable issues was that the sale was pulled just before the IPO was to be held. Now, Chinese regulators are investigating why the IPO was initially approved in the first place.  Of course, the issue is likely that the Xi government is looking to see if regulators were swayed by some factors to approve the stock sale.  But, if we see bureaucrats punished for approving the sale, it could prove to be a dampener for future IPOs.
• As we noted earlier this week, China’s population likely fell last year, the first annual decline since the famine triggered by the Great Leap Forward in the 1950s. We think it will take several weeks before Beijing officially confirms this news. The reports are, to some extent, a pre-release of this adverse news.  However, we do note that Beijing’s initial reaction to the news was to deny its accuracy.  Although the pandemic played a role, China, through its one-child policy, has created a social situation that has discouraged family formation and childbearing.  Such situations are very difficult to reverse.
  • Part of the way the CPC plans to address the population decline is to delay retirements. Currently, the retirement age for men is 60, 55 for white-collar women, and 50 for blue-collar women.  Reports suggest that the idea of lifting the retirement age is deeply unpopular.
  • The decline in population will, over time, reduce China’s economic growth and power. Although immigration could mitigate this, it is unlikely China would adopt this solution.  The U.S. is also seeing slower population growth, but historically, America has been more open to immigration.
• China is considering a pricing mechanism for pollution. Usually, this would be something like a carbon tax; in economics, pollution is usually a “negative externality,” meaning the costs of pollution are rarely fully reflected in the market price.  It is not clear how China plans to do this, but the fact it is being discussed bears watching.
• Here is an interesting insight into China and the CPC. China’s largest on-demand delivery company is called Meituan (MPNGY, USD, 80.29).  It has come under scrutiny for its treatment of its drivers.  General Secretary Xi referred to the drivers recently.  A party official, adopting a version of “Undercover Boss,” took a job as a delivery driver for the company and reported how difficult the job was.  The party official has been widely complimented in the official press.  Meanwhile, a driver who has become a labor activist has been detained for his criticism.  The moral is that it’s acceptable for the CPC to point out the failings and crimes of a company or official, but it is not acceptable for a common citizen to do so.
• We continue to monitor the situation with Huarong Asset Management (2799, HKD, 1.02); we note that China’s Industrial and Commercial Bank (IDCBF, USD, 0.69) has given a loan to the company to ensure the company can pay its April 27 interest due on bonds. Chinese regulators have encouraged Chinese banks to offer credit for the next six months to facilitate the refinancing of debt.  It is still unclear how China will deal with this issue and avoid creating moral hazards due to a bailout.
  • Two high-speed rail projects have been delayed due to debt concerns.
• There are increasing reports that China, though far from the Arctic, views the region as a key area to expand its influence.
• Remember the fad of bike rentals in major urban areas? In China, a number of firms have tried to grab market share by flooding cities with bike rentals.  Pictures in this article show how China is now dealing with massive ‘graveyards’ of these bicycles that have been damaged and abandoned.

International roundup:  Brexit is approved (finally!), and we continue to watch the German Greens.

• The European Parliament, calling Brexit a historic mistake, voted to approve the deal anyway. So, at long last, Brexit is now official.  However, that doesn’t mean everything is completely wrapped up.
• The Greens, as we noted above, are taking a harder line on China. They also appear supportive of fiscal spending and want to end the official policy of zero budget deficits.
• In recent reports, we noted that central European nations were expelling Russian diplomats over the actions of Russian operatives accused of destroying arms destined to be sent to Ukraine. We note that Bulgaria has joined the trend.

Economics and policy:  Labor markets, semiconductors, and prices lead the news today.

• There is growing concern about the inability of firms to hire workers. It is a complicated issue, one that we will be commenting on in the coming weeks in the AAW.  The expanded unemployment benefits and cash support may be leading potential workers away from accepting jobs they would have accepted before.  Another factor has been the pattern of older workers opting for retirement during the pandemic.  It’s possible they won’t return to the labor markets.  An additional issue could be the use of a bachelor’s degree as a screening device.  Studies indicate that employers have been moving to use the degree as a minimum job requirement for positions that arguably don’t need one.  Firms like the fact that a worker would make the effort to get a degree and perhaps hope that the worker taking a job he is overqualified for would eventually move up in the company.  But, inflating the requirement for a job may be keeping some potentially qualified workers from some jobs, exacerbating the inability to fill positions.  We will be watching in the next few months for signs that employers are relaxing standards for positions.
• The semiconductor crisis continues. One by one, automakers have been cutting production due to the lack of chips.  Tech firms are not immune, either.  Taiwan is warning that that drought is a threat to chip production.  Taiwan is critical to semiconductor production, and the process uses lots of water.
• Grain prices have been on a tear. Corn, for example, is up 16% in April.  Usually, high prices trigger a supply response from farmers.  However, the response so far has been modest.  Weather concerns are playing a role.  The spring, cold weather (it was snowing last week in the Midwest) is putting planting behind schedule in the key corn states of Iowa and Illinois.  For the country, 17% of the acreage has been planted compared to the 20% five-year average.
• We have been watching trends in residential real estate; namely, younger households are moving to the suburbs, and older households are downsizing into retirement. This report confirms these trends.  Meanwhile, landlords are complaining about promised relief from the government.
• Canada’s finance minister has called Biden’s global tax plan a “breakthrough moment” for international trade talks.
• Amazon (AMZN, USD, 3458.50) announced pay increases.

COVID-19:  The number of reported cases is 149,718,851 with 3,530,418 fatalities.  In the U.S., there are 32,230,809 confirmed cases with 574,330 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 301,857,885 doses of the vaccine have been distributed with 234,639,414 doses injected.  The number receiving at least one dose is 142,692,987, while the number of second doses, which would grant the highest level of immunity, is 98,044,421.  The FT has a page on global vaccine distribution.  The weekly Axios map shows the majority of states are reporting either steady cases or declines.  Oregon, which had been reopening, has reinstituted restrictions due to a rise in cases.

Virology

• There is a growing concern about vaccine hesitancy; recently, the pace of vaccines has slowed, and reports of unused vaccinations have emerged. One way to address this issue is to follow the plan in West Virginia, which is to give recipients a $100 savings bond for their trouble.
  • New York City will fully reopen on July 1.
  • There is growing evidence that vaccinations are slowing the spread of the virus in the U.S.
• Russia and China have engaged in a disinformation campaign to undermine confidence in Western vaccines. The EU is monitoring these activities.
  • Brazil, which has been suffering from an uncontrolled outbreak, has rejected the Russian Sputnik vaccine due to the lack of documentation for “safety, quality, and effectiveness.”
  • Meanwhile, Russia and China are resisting efforts by the WHO to expand studies over the two countries’ pandemic responses.
  • The Brazil variant is now spreading into South Africa.
  • BioNTech (BNTX, USD, 175.77) reports that it believes its vaccine will be effective against the Indian mutation.
• In India, where the virus is also raging, the new variants appear to be spreading into the countryside. The Philippines is also facing a resurgence in infections.
• Germany’s domestic intelligence agencies are now monitoring coronavirus deniers.
• Vaccine manufacturers are planning to increase vaccine production.
• Japan, which is dealing with an uptick in cases, outlined rules for the Summer Olympics.

Technology: 

• Foreign governments are getting increasingly hostile to the large tech firms. Although the U.S. has been slower to react, we note two new books from Hawley (R-MO) and Sen. Klobuchar (D-MN) on antitrust and technology.  Although these senators probably don’t agree on much, it does appear there is a level of bipartisan support.

 View PDF

---

[1] One of our criticisms of MMT is that it ignores the financial markets.  Hyman Minsky is claimed by MMT as being part of its intellectual “family tree,” but Minsky argued that there can be situations where the government must reduce the deficit to improve financial confidence and reduce interest rates.  MMT obliquely relies on the central bank to address this issue.

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with key U.S. policy news.  The Federal Reserve wraps up its latest policy meeting this afternoon, with no change expected in its massive monetary stimulus program.  This evening, President Biden will propose his latest new spending program, but this time with a proposed series of tax hikes to pay for it.  We next turn to international news items, including lots of interesting developments in the Middle East.  Finally, we present the latest in the coronavirus pandemic.

U.S. Monetary Policy:  The Fed will wrap up its latest two-day policy meeting this afternoon.  The officials are expected to make no change in the benchmark fed funds interest rate or the central bank’s massive asset purchases, but we will be closely watching the post-meeting press conference for clues about future policy changes.  A few things to watch can be found here.

U.S. Fiscal Policy:  At a joint session of Congress this evening, President Biden will lay out his third major economic proposal.   It follows his $1.9 trillion pandemic relief package, passed into law early this year, and his $2.3 trillion package of spending on infrastructure and other programs that is still working its way through Congress.

• The “American Families Plan” to be presented tonight focuses on measures designed to improve educational outcomes and ease childcare concerns that can make it difficult for women to participate in the workforce.  It proposes spending $1.0 trillion over the next decade on child care, education (including universal preschool for 3- and 4-year-olds and two years of tuition-free community college for all Americans), paid leave, and other benefits, in addition to extending tax breaks worth some $800 million over the coming ten years.
• To pay for the new programs, the administration proposes raising the top income-tax rate from 37% to 39.6%.  For households making more than $1 million, the plan would also raise the top rate on capital gains and dividends to 39.6% from 20%.
  • Including existing payroll and investment taxes—each 3.8%—the top rates on wages and capital gains would reach 43.4%, up from 23.8%.
  • The plan would also adjust inheritance taxes. Unrealized gains would be treated as sold and taxable at death, with an exemption of $1 million per person, in addition to the existing exclusion of up to $500,000 for a married couple’s primary residence.
• As we’ve noted before, Republicans and even some Democrats in Congress are expected to push back against the latest proposals.  Biden has signaled flexibility, which will probably serve him well and may help get some of his package passed into law, but whatever legislation emerges from the new proposal will probably be much more heavily skewed toward spending than new taxes.  To the extent that the final product adds to the current level of fiscal stimulus already in the system, it could help juice the economy further and add to the positive environment for risk assets.  However, if Biden has more success than expected regarding tax hikes, it will likely create headwinds for the stock market.

United States-Iran:  Following an incident involving Iranian harassment of U.S. Navy ships in the Persian Gulf earlier this month, a U.S. patrol boat was forced on Monday to fire warning shots against three Iranian fast-attack boats swarming and harassing it.  One possible theory behind the harassment is that Iranian leaders are testing President Biden’s mettle.  They could also be trying to build leverage for the Vienna talks on resuming Iran’s 2015 nuclear deal.  Of course, the incidents could also have been touched off by rogue commanders.  In any case, the incidents are risky, and an accidental violent confrontation that would roil risk assets and boost oil prices can’t be ruled out.

Saudi Arabia-Iran:  Saudi Crown Prince Mohammed bin Salman claimed in a television interview that Saudi Arabia wants to resolve its differences with rival Iran, saying, “At the end of the day, Iran is a neighboring country. All what we ask for is to have a good and distinguished relationship with Iran.”  The statement comes just days after the Financial Times revealed that top Saudi and Iranian intelligence officials held secret talks this month in Baghdad in an effort to repair relations between the regional powerhouses.  While any rapprochement between the Saudis and the Iranians could help ease geopolitical risks in the Middle East, another important aspect of the story is that it appears to be more evidence that the Biden administration is having significant success in resetting its security relationships around the globe, from repairing or building new alliances against China to reining in longstanding allies who sometimes seemed to get out of control during the Trump administration.  It isn’t immediately clear what sticks or carrots Biden is using to pull this off.  All the same, a reinvigorated U.S. leadership position in geopolitics could help create a more predictable environment for global investors.

European Union:  With the governments of Germany, France, Italy, and Spain ready this week to submit plans for spending their part of the EU’s €750 billion pandemic relief fund, German Finance Minister Scholz and French Finance Minister Le Maire issued a warning that Brussels must approve the plans quickly and get the funds flowing as soon as possible.  Otherwise, they warned, the EU would continue to lag behind the rebounding U.S. and Chinese economies.

Brexit:  The European Parliament today gave its final approval to the post-Brexit trade deal reached in late December between the U.K. and the EU.  Like people around the world, we’re thrilled that we don’t have to think too much about Britain’s exit from the EU anymore!  However, we still expect to see a few snarly issues come up between the two sides from time to time, such as the recent ones relating to vaccine shipments and the impact on Northern Ireland.

Russia-Slovakia, et al.:  The Russian foreign ministry expelled seven diplomats from Slovakia, Lithuania, Latvia, and Estonia over their countries’ support for the Czech Republic when it recently expelled Russian diplomats over a 2014 spying and sabotage incident.

China:  The government is reportedly delaying the release of its 2020 census as it struggles to come to terms with the first apparent Chinese population decline since the famine that accompanied the Great Leap Forward in the late 1950s.  The tally is expected to show that the country’s population fell back below 1.4 billion last year, after surpassing that level in 2019.

China-Hong Kong:  The Hong Kong municipal government has amended its immigration law in a move that lawyers warn could increase business risks by handing the government broad powers to prevent individuals from leaving the Chinese territory.

COVID-19:  Official data show confirmed cases have risen to 148,834,824 worldwide, with 3,138,421 deaths.  In the United States, confirmed cases rose to 32,177,167, with 573,383 deaths.  Vaccine doses delivered in the U.S. now total 297,543,635, while the number of people who have received at least their first shot totals 141,751,857.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections totaled just over 50,000 yesterday, compared with the seven-day moving average of 55,272 and the 14-day moving average of 61,197.  However, on a less positive note, new deaths related to the virus jumped to 863.  At the same time, mass vaccinations continue, and official data indicates 42.7% of U.S. residents have now received at least one shot, and 29.1% are fully vaccinated.
• The CDC issued new guidelines saying people who are fully vaccinated don’t need to wear a facemask when walking, hiking, biking, running alone, or gathering in small groups outside.  Officials said they hope the ease in recommendations will encourage more people to get vaccinated.
  • According to the revised guidelines, vaccinated people can also dispense with masks when exercising with household members, dining at restaurants outside, and gathering outdoors with small groups that include some unvaccinated people.
  • At the same time, the guidelines recommend that fully vaccinated people still wear a mask at indoor gatherings with unvaccinated people and when visiting a barber, hair salon, shopping mall, museum, movie theater, or crowded house of worship, due to lingering concerns that even vaccinated people could potentially transmit COVID-19.
• In New York, Governor Cuomo announced that state mass-vaccination centers will open to walk-ins beginning on Thursday, just as New York City’s centers did last week.  The move to walk-ins reflects the impact of rising vaccine supplies as the initial wave of demand moderates.
• In Japan, new infections continue to surge in Tokyo and Osaka, and several other metropolitan areas.  Adding to the problems:  the government reports that only about 1.1% of the country’s population has been fully vaccinated so far.
• As infections continue to surge in India, driven in part by new mutations, the B.1.617 variant first identified there has now been identified in the U.S. and 18 other countries.  In a promising sign, however, Indian scientists said a vaccine developed by the country’s Bharat Biotech proved effective, in a small lab study, against the B.1.617 variant.
• Infections are spreading from India to its neighbors, so the Chinese government is offering vaccine doses and other assistance in a bid to burnish its reputation and increase its influence in the region.
• Finally, in a move that will surely irritate Xi Jinping, the Biden administration is preparing to exert greater influence over the next phase of the World Health Organization’s inquiry into the origins of the pandemic.  Experts from the Department of Health and Human Services, the Department of State, the Agriculture Department, and five other federal agencies are reportedly developing action recommendations to be submitted to the WHO for the second phase of the investigation.
  • In addition, the administration plans to push back on China’s hypothesis that the virus could have spread via frozen food products, according to people familiar with the work.
  • Instead, the experts are expected to urge the release of more data and more testing of animals and humans for early evidence of the new coronavirus, including in parts of southern China where related viruses were previously found.

 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 a range of U.S. political and policy news, followed by various international developments that could affect the financial markets and the investment backdrop today.  We end with the latest news related to the coronavirus pandemic.

U.S. Congress:  The Census Bureau yesterday announced how the 2020 population count will affect the apportionment of seats in the House of Representatives.  Under the formula set out in the law, Texas will gain two more seats, while Oregon, Montana, Colorado, North Carolina, and Florida will each gain one additional seat.  California, Illinois, Michigan, Ohio, Pennsylvania, West Virginia, and New York will all lose one seat.

• The changes are expected to favor Republicans beginning in 2022 because red-leaning states are gaining more net seats and because the GOP has more control in redrawing the new congressional maps.
• The party of the incumbent president usually loses seats at the mid-term elections, but the new apportionment system will make it even tougher for the Democrats to hold their current slim majority in the House in 2022.  That will probably give the Biden administration even more reason to try to push through ambitious legislation as soon as possible.

U.S. Tax Policy:  As President Biden prepares to lay out his next economic initiative this week, including tax hikes to help pay the bill, Director of the National Economic Council Brian Deese yesterday said there is no evidence that capital gains tax rates had any “significant impact” on the level of U.S. investment or economic growth over the last 30 to 40 years.  However, he justified the proposal to hike capital gains taxes as a way to improve fairness in the tax system, while Biden’s spending programs boost labor force participation and enhance national economic competitiveness.

• According to Deese, one key reason for the lack of correlation between capital gains tax rates and investment is that much investment capital comes from pension funds, sovereign wealth funds, and other entities with little to no tax exposure.
• Despite Deese’s effort to justify the tax hike, the administration continues to face resistance from both Republicans and some Democrats, which will ensure that Biden’s proposals will at least be watered down as they pass through Congress.

U.S. Monetary Policy:  The Federal Reserve begins its latest two-day policy meeting this morning, with a decision scheduled to be released when the meeting ends tomorrow.  We don’t expect any change in the benchmark fed funds interest rate or the central bank’s massive asset purchases, but we will be closely watching the post-meeting press conference for clues about future policy changes.

U.S. Labor Policy:  President Biden today will issue an executive order raising the minimum wage to $15 per hour for federal contractors starting in January 2022.  The higher wages will also need to be enshrined in annual contract extensions, and they must be indexed to inflation.  Even though Biden’s hike in the minimum wage across the broader economy has faltered, the move on federal contractors could help put pressure on private businesses to raise their wage rates or risk losing workers to firms working for the government.  Therefore, the proposal will probably feed into the recent concerns about rising costs and inflation, which boosted bond yields and created stock volatility earlier in the year.

United States-Turkey:  Following President Biden’s official declaration that ethnic Armenians were subjected to genocide a century ago in what is now Turkish territory, Turkish President Erdogan said U.S.-Turkish relations have sunk to a new low.  However, he stopped short of outlining any retaliatory steps and instead reiterated his desire to work with the U.S., signaling concern that escalating tensions further could harm Turkey’s economy.

United States-Iran:  According to the U.S. Navy, three small boats belonging to Iran’s elite Islamic Revolutionary Guards Corps swarmed and harassed two Navy ships for three straight hours in the Persian Gulf early this month.  It was the first such incident since April 2020.

• U.S. officials are unsure to what degree such incidents are directed by Tehran or launched by rogue ship commanders working for the IRGC and taking their own initiative.
• Over the weekend, a leaked tape surfaced in which Iran’s foreign minister, Mohammad Javad Zarif, was heard saying that the IRGC often sabotaged Tehran’s efforts, taking matters into their own hands over the concerns of the country’s foreign ministry or government.

COVID-19:  Official data show confirmed cases have risen to 147,986,651 worldwide, with 3,123,358 deaths.  In the United States, confirmed cases rose to 32,125,970, with 572,701 deaths.  Vaccine doses delivered in the U.S. now total 290,692,005, while the number of people who have received at least their first shot totals 140,969,663.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose to approximately 56,000 yesterday, but they remained below both the seven-day moving average of 58,164 and the 14-day moving average of 62,807.  New deaths related to the virus totaled 466.  Meanwhile, as the nation’s mass vaccination program continues, some 42.5% of U.S. residents have now received at least one inoculation shot, and 28.9% are considered fully vaccinated.
• France’s Sanofi (SNY, $51.87) signed a deal to help manufacture as many as 200 million doses of the vaccine from Moderna (MRNA, $177.61) starting in September.  According to the firm, Sanofi will fill vials and finish packaging for the Moderna vaccine at a Sanofi plant in New Jersey, and finished doses of vaccine will be for the U.S. supply.
• Amid progress against the pandemic, New York Governor Cuomo issued orders to further open up his state’s economy.  Offices in the state will be allowed to operate at 75% of capacity beginning May 15, while casinos and gambling facilities will be able to move to 50% of their capacity.  Gyms and fitness centers outside New York City will be permitted to operate at 50%.  Outdoor spectator events—both sports and entertainment—will be allowed to perform at 33% of capacity.
• In California, Governor Newsome will face a recall election over his strict pandemic lockdown policies after the Secretary of State’s office confirmed that a petition to force the election received more than enough signatures.
• Despite EU leaders’ preference for a coordinated approach, several European countries (including France, Italy, Croatia, and Greece) are working on plans to permit tourists from the U.S. as early as this summer, provided they can show proof of vaccination or a fresh molecular test showing no COVID-19 infection.  Given their reliance on tourism, some European countries could see a quick improvement in their economic performance if they can lure in large numbers of visitors from the U.S.
• Amid the slow vaccine rollout in Japan, even as cases surge ahead of the Olympic Games planned for Tokyo this summer, the government has finally gotten around to authorizing medically licensed Self-Defense Force personnel to help give vaccine shots.
• As India reported a single-country, single-day record of 352,991 new infections yesterday and hospitals around the country appeared on the brink of collapse, President Biden said the U.S. would send it millions of doses of the vaccine from AstraZeneca (AZN, $52.37), as well as oxygen and other items in short supply.  Besides the obvious humanitarian reasons, the move marks a stark effort by the U.S. to counter the “vaccine diplomacy” that China and Russia have been pursuing for months with their own vaccines.
• Although the Biden announcement might have been a shot in the arm for the AstraZeneca vaccine (pardon the pun), it actually revealed yet another problem with the shot.  People familiar with the plans said the promise to deliver the vaccine doses within “weeks” rather than “days” reflected manufacturing hiccups at a contract manufacturer’s plant in Baltimore.
• The Brazilian federal health regulator has rejected importing Russia’s Sputnik V vaccine after technical staff pointed to “inherent risks.”  They said there was a lack of information guaranteeing its safety, quality, and effectiveness.

 Economic and Financial Market Impacts

• According to mobile phone data from analytics firm Placer.ai, traffic at a representative sample of 50 malls in March was up 86% from the same month last year.  While that foot traffic was still 24% lower than in March 2019, mall owners suggest that their business has turned a corner, driven by factors such as mass vaccinations, looser pandemic restrictions, and federal stimulus checks.  If such data continues to accumulate, it will help validate the rosy forecasts for a quick economic rebound that have helped buoy risk assets this year.
• An analysis of Census Bureau data by the Wall Street Journal shows women thrown out of the labor force because of the pandemic are getting back into it more slowly than men, likely because of factors such as limited access to child care, a lack of attractive jobs, the demands of home and virtual schooling, and health concerns.
• Reflecting ongoing concerns about inflation as the economy reopens from the pandemic and continues to receive lots of fiscal and monetary stimulus, demand remains high for Treasury Inflation-Protected Securities (TIPS).

U.S. Policy Response

• The SBA announced that restaurants, bars, and other food-service businesses will be allowed to apply for the aid from the Restaurant Revitalization Fund, part of last month’s $1.9 trillion pandemic relief plan, beginning on May 3. Grant recipients will be eligible to receive funding equal to their pandemic-related revenue loss, up to $10 million per business, although any single physical location can receive no more than $5 million.

 View PDF