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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  The S&P 500 moved above 4,000 last week, and equity futures are moving further higher this morning.  Some of the upward pressure is coming from Friday’s employment data, which we recap in today’s comment.  BTW, the IMF meeting is on the docket this week.  Our coverage begins with Jordan; it appears there was a coup plot underway that was apparently thwarted.  Economics and policy follow, with an update of the pandemic next.  We close an international news roundup.

Jordan:  At least 20 people have been arrested in what appears to be a conspiracy to overthrow the government of King Abdullah II, king of Jordan.  The half-brother of the king and former crown prince, Prince Hamzah bin Hussein, was included in those arrested.  He is reportedly under house arrest.  Their father, the late King Hussein, had four wives and 11 children, meaning that there are numerous family members with royal linage but no path to power.  Prince Hamzah bin Hussein has emerged as a prominent critic of the king, accusing the government of corruption and incompetence.  He has developed a strong online following for his comments.  He has also fostered strong ties to tribal leaders in Jordan who have considerable informal power.  The king has accused the prince of involvement in the coup; the prince is arguing that his arrest is an attempt to silence his criticism.  In addition to the prince, there were several high-ranking, and former high-ranking, officials and members of the royal family arrested.  The government has suggested “foreign involvement” in the plot, although it is unclear who that foreign power is exactly.  Interestingly enough, most of the nations in the region responded with supporting King Abdullah, suggesting the foreign power may be outside the region.

Jordan is a small country with a small economy, but it is a source of stability for the region.  The country has an accord with Israel and has mostly been a neutral party in the region’s numerous conflicts.  It has housed refugees from the Syrian civil war.  Instability in Jordan would unsettle the region, and thus, we would expect a rush of economic support for the king.

Economics and policy:  Housing and the infrastructure bill lead the news.

• Strong demand and low supply are rapidly lifting home prices, creating the strongest conditions since the housing bubble. The demand part is being driven, to some extent, by the Millennial generation moving into their home-buying years.  The supply problem is caused mostly by two issues.  First, boomers are hanging on to their homes longer.  The pandemic has stalled the usual generational shift to downsizing.  Second, homebuilding is just now reaching normal levels in the wake of the housing collapse in 2006.

The drop in building from 2009 until recently means there is a dearth of supply.

• • Although such strong conditions naturally raise concerns about a repeat of the housing bubble, so far, lenders are maintaining strong lending standards. By avoiding weaker credits, the likelihood of a replay of the “naughts” is low.
• Unfortunately, the combination of high prices and tight lending standards are pricing out less affluent buyers. This situation may lead them into home renting, and residential real estate has captured the attention of the capital markets.
• There are reports of rising delinquencies on subprime auto loans. We will be watching to see if the aid payments address this issue.
• The White House’s infrastructure package is facing criticism from various parts of the political spectrum. We are watching centrist Democrat opposition to corporate tax hikes.  It would not be a surprise to see a tax rate compromise coupled with a lift in the gasoline tax.
  • One of the criticisms of raising the corporate tax rate, along with other proposed measures, is that it would make U.S. corporate taxes among the world’s highest again. A way to resolve this issue would be to moderate the rate hikes or the other taxing provisions. Another way would be to encourage other nations to raise their corporate taxes as well.  It appears Treasury Secretary Yellen is quietly pushing the second option.
• As we have noted for some time, the affiliations of the political parties are in flux. Capital owners have traditionally been Republicans, although the Democrats made inroads into the group in the 1990s.  Now, as the GOP adopts a more blue-collar appeal, corporate interests are finding they are less influential in the party.

COVID-19:  The number of reported cases is 131,401,449 with 2,854,727 fatalities.  In the U.S., there are 30,706,531 confirmed cases with 555,001 deaths.  Both cases and fatalities in the U.S. are declining.  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 207,891,295 doses of the vaccine have been distributed with 165,053,746 doses injected.  The number receiving at least one dose is 106,214,924, while the number of second doses, which would grant the highest level of immunity, is 61,416,536.  Around 3 million Americans are being vaccinated daily.  The FT has a page on global vaccine distribution.

Virology

• The COVID passport issue isn’t just an American one. PM Johnson is also facing criticism on this issue, but it isn’t stopping a pilot project.  Israel has created a “Green Pass,” a document designed to carry on a smartphone.  It has become the document that allows its holder to participate in mass events, e.g., concerts, sporting events, religious gatherers, etc.  Although political resistance to such passports remains strong, meaning it is unlikely that governments will force their adoption, we think it is highly likely that the private sector will insist, meaning that for practical purposes, the vaccination card in the U.S. will become the de facto
• Meanwhile, in Europe, a third wave of infections is underway. New variants and the lack of vaccination progress are leading to lockdowns and another downturn in economic activity.
• In vaccine news:
  • There are additional reports of blood clotting being tied to the AstraZeneca (AZN, USD, 49.53) vaccine; these reports are coming from the U.K.
  • A study of the Pfizer (PFE, USD, 36.30) vaccine shows it to be effective against the South African variant.
• The pandemic has fueled a teacher shortage. The pandemic led to early retirements and a decline in the population of substitute teachers.  There are rising concerns about the future impact of those students affected by the past year.

China and international news:  A roundup.

• For the past decade, we have seen China move through a cycle of credit restrictions, a consequent drop in growth, and a resurgence in borrowing to offset the slower growth. We are moving into another credit crunch cycle.  China has a serious debt problem, but it can’t really address the debt issue without accepting slower growth.  Since it hasn’t been able to accept slower growth, the debt issue continues.
• Western multinationals are facing a dilemma; to maintain their business in China, they must adhere to Beijing’s protocols. However, by doing so, they run afoul of Western mores and restrictions.  Companies will likely try to avoid the limelight so as to continue current operations, but eventually, they will be forced to choose.
• The U.S. is scheduled to pull its remaining troops from Afghanistan on May 1. American negotiators are trying to create conditions that will allow that withdrawal to occur.
• The U.S. and other signatories to the Iran nuclear deal are set to meet next week to discuss two goals. First, the Europeans want the U.S. to remove Trump-era sanctions, and second, Iran must roll back its nuclear activities to bring it back into compliance.  American negotiators won’t be in the formal talks but will be in the background.  We doubt much will come of this.  Iran has little reason to trust that the U.S. will continue to maintain the arrangement, and the political cost of easing sanctions for the White House will be high.
• Cuba has been seeing a rise in political dissent. The latest is a hunger strike where dissidents have been using this method to protest the government’s actions.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

We have published our latest Weekly Geopolitical Report, which constitutes Part III of our series on the Geopolitics of Central Bank Digital Currencies (CBDC).  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is our latest Confluence of Ideas podcast.  Our most recent Asset Allocation Weekly, chart book, and podcast are also available.  Note: Due to the upcoming Good Friday and Easter holidays, we will not publish an AAW this week; it will resume on April 9.  Being Thursday, there is a new Weekly Energy Update.  You can find all this research and more on our website.  As a reminder, due to the Good Friday market closures, there will be no Daily Comment tomorrow; we will be back on Monday and recap the employment report on that day.

Good morning.  It’s Opening Day!  Major League Baseball kicks off its season to mostly restricted crowds.  On the first day of Q2, U.S. equity futures are ticking higher.  Our coverage begins with economics and policy the day after the infrastructure package was revealed.  An update on the Archegos event comes next.  China and international news follow.  Technology is next, and we close with a pandemic update.

Economics and policy:  The infrastructure package dominates this sector’s news.

• Yesterday, we discussed the proposed infrastructure package, which was formally released yesterday. Although a spending package of this size and breadth will always be controversial, the fact that it includes tax increases means that opposition will likely escalate.  The opposition is already preparing to oppose tax hikes.  We note that the wealth tax didn’t make the cut; such taxes are devilishly difficult to enforce (wealth can slip across borders, as can wealth holders).  The experience in other nations suggests wealth taxes are not all that effective.
  • The underlying thesis of what the White House is doing is that government spending is necessary to boost economic growth. This idea was uncontroversial from the Great Depression into the 1970s, but the inflation that occurred in that decade was partly blamed on the disincentives to private sector investment.  This cycling of ideas is part of our thesis that societies move through equality and efficiency cycles.  We have been in an efficiency cycle since 1978 but have been slowly trending toward an equality cycle over the last decade.  This presidency is accelerating that trend.
  • Although there are concerns about “crowding out” a situation where rising public investment displaces private investment, we are currently in a situation where both public and private investment are below trend.

This chart shows real public and private investment against the trend.  There was clear displacement during the Great Depression and the war years, although the cause of the drop in private investment probably had more to do with weak demand and excessive investment as the industrial revolution came to a close.  But, in the 1950s, both rose against trend.  What we have been experiencing this century is unusual; public sector investment has been falling against trend since the early 1970s, but since the Great Financial Crisis, both are below trend.  Thus, we are probably in a position where (a) we probably have too little public investment, and (b) there is probably room for both rising public and private investment.  In fact, one could argue that in the 1950- the 60s, we were able to increase both.

• There is another item of note. We have been accumulating research on the semiconductor industry.  It is a highly efficient industry that is becoming a notable geopolitical risk.  Not only are parts of the industry strung out around the world, but Taiwan is absolutely essential, and China has a large segment as well.  The package attempts to reduce this geopolitical risk by proposing to spend $50 billion on building capacity in the U.S.
• All that being said, it is critically important to remember two points. First, although the need for investment is reasonably clear, getting it right is really hard.  Investment is one of the hardest things society does because it requires some projection into the future.  If one gets it right, he or she is blessed with stronger growth and lower inflation.  Getting it wrong means resources are squandered.[1]  So, if the investment allocation is done well, this investment will effectively pay for itself.  If it isn’t, we will expand debt for little purpose.  In reality, what has been proposed will probably fall somewhere in between. It should also be remembered that private sector investment carries the same risks.  What tends to make private sector investment preferred is that the threat of ruin makes investors careful.  Public sector investment lacks a profit motive, and thus, it is even more difficult to get right.  Second, this package, paradoxically, could end up acting as a drag on growth.  It should be noted the spending is spread over eight years, but the tax increases hit immediately.  It will take years for the benefits of the spending to be felt, but paying for it will occur new.  We can debate if this makes sense (actually, it doesn’t), but this is the structure of the current bill.
• So, will it pass? We have our doubts.  The GOP would probably be on board for parts of the package and might even go along with a smaller increase in the corporate tax rate.  We don’t see any member of the opposition voting for the package as currently constructed.  However, within the majority, there are deep divisions.  The populist left has figured out the second point above and wants even more spending.  Centrist Democrats are already balking at the tax hikes.

• Although we are poised for really strong GDP growth, this growth is coming from a place of weakness for many parts and sectors of the U.S. Thus, the ability of the economy to absorb fiscal spending may be unusually high.  That isn’t to say this situation is permanent, but at present, we are not all that concerned about overheating the economy.
• The administration has suspended collections on defaulted student loans of over 1.0 million borrowers as part of pandemic relief.
• The EU and U.K. are locked in a fight over swaps clearing, a business that has been dominated by London for some time. We look for New York to offer to appease both sides.
• South Korea is reporting a surge in ship orders, suggesting that international trade will likely rebound.
• Fortunately, the shipping snag in the Suez has been resolved; unfortunately, those in Long Beach and Los Angeles remain. Pandemic-related capacity reduction and an increase in goods demand contributed to the backup.
• Supply constraints are also showing up in other industries. Autos continue to be hampered by the lack of semiconductors.  Consumer staples prices are poised to rise on increasing input costs.  Even cardboard boxes are becoming scarce.
• Housing regulators are moving to reduce the availability of mortgages for vacation and second homes. This area of residential real estate has been active but may be under threat due to these changes.

Archegos:  So far, the good news is that the collapse of Archegos Capital has not been systemic.  Although a number of investment banks have suffered losses (some more than others), it doesn’t appear that anyone is in enough trouble to require a bailout.  Still, the event highlighted the problems within the non-bank financial system (“shadow banking”), namely, leverage is widespread.  Servicing banks don’t seem to have a good idea about the security of their collateral.  It also showed how the financial services industry is extremely adept at creating products that (a) allow for high levels of leverage to occur and (b) seem structured to avoid regulatory scrutiny.  The event also shows that regulators always seem to be chasing situations and making new rules that would have protected the markets from what just happened but do little to affect future events.  The SEC is examining what occurred with Archegos; reports suggest that the family office space may be riskier than generally perceived.

 China:  China’s lending practices and messaging control dominate the headlines.

• A new report that investigates the terms and conditions of Chinese loans to emerging and frontier markets suggests that Beijing lends similar to a 19^th century imperialist. Terms include confidentiality clauses and measures that exclude China’s loans from global resolution bodies, such as the Paris Club.  Our position is that the belt and road project is a modern version of 19^th century imperialism, a natural progression given China’s excess capacity.  Essentially, China can no longer rely on the wider world to buy its exports, and thus, is creating colonies through debt and investment to force smaller, less-developed nations to be a conduit for its excess production.
• China is increasing pressure on foreign correspondents who publish reports that Beijing doesn’t like. A British and an Irish journalist have left the country, citing excessive pressure.  Increasingly, Beijing is controlling the message and is intolerant to positions that stray from the CPC’s line.
• The U.S. and Taiwan have announced a cooperative agreement among their respective coast guards. Beijing isn’t pleased.  Adding to the pressure, Taiwan is purchasing Patriot missile systems.
• Huawei (002502, CNY, 2.94) reported falling revenue in Q4, as U.S. sanctions weigh on the company. In a surprising development, Ericsson (ERIC, USD, 13.19), who generally benefits from sanctions on Huawei, has been lobbying against sanctions on the Chinese company.  As sanctions hit Huawei, China has been threatening Ericsson’s business in China and has also expanded to other Swedish businesses that operate in China.  This situation highlights the difficulty of sanctioning China; unlike the Soviet Union, China is a major international economic force and has multiple ways to not only evade sanctions, but retaliate.
• We are noting a steady number of articles quoting U.S. officials expressing concern that China is considering an invasion of Taiwan. This is a topic will we be investigating in the coming weeks.

International news:  The Taliban is winning; the U.S. restricts trade with Myanmar and the EU takes aim at Poland.

• As the conflict in Afghanistan winds down, it looks like the Taliban is poised to return to power. The lesson learned in conflicts with superpowers is that the cost/benefits eventually tilt towards withdrawal, especially if the country in conflict isn’t a key security risk to the superpower.  The Taliban simply waited the U.S. out.  In some respects, it’s amazing the U.S. stayed as long as it did, but in the end, Afghanistan just isn’t a big enough problem to maintain the conflict.
• In light of the continued problems in Myanmar, the USTR announced that the U.S. was suspending trade engagement with the country. It isn’t clear if this action will sway the generals (given China’s deep involvement, it’s doubtful), but the U.S. action may allow other nations also to restrict trade until the situation is resolved.
• The European Commission has referred Poland to the ECJ to investigate the independence of the Polish judiciary. The right-wing populist (RWP) government in Poland has taken steps to reduce the power and independence of its judiciary.  This has been a sticking point for the EU for some time.  It appears that the EU is formally moving to deal with this issue.  As the EU moves against the RWP in Poland, we note that Hungarian PM Orban is trying to build an EU coalition of like-minded political movements.
• Russia has seen a series of intelligence gaffes as its spies in Italy, the Netherlands, and Bulgaria have been outed gathering data on NATO and the EU. It is unclear why counterintelligence across Europe is suddenly uncovering these actions by Russia.  It could be that they have become so widespread that they are hard to not find.  Or, another possibility is that Russian intelligence has a mole, and that person has revealed sources.  The fact that they are all now being captured may mean that the mole has moved on.
• Alexei Navalny has announced a hunger strike to protest his lack of medical treatment.
• Ireland’s PM is calling on the EU and U.K. to “reset” relations as tensions in Northern Ireland increase.
• There was an attempted coup in Niger in an apparent effort to prevent the swearing-in of Mohamed Bazoum, the president-elect, tomorrow. The outgoing president, who lost in a disputed vote, may be behind the coup attempt.  Niger is the world’s sixth-largest miner of uranium.
• Canada is moving to aggressively attract immigrants. Although increasing immigration is unpopular with many Western nations, Canada remains sparsely populated[2], and immigration may be the only way to significantly boost population growth.
• It’s not easy being green; Green parties across Europe are popular but have a hard time turning environmental concerns into political power. This is a problem with single-issue parties.  Other parties can easily co-opt the message.

Technology:  We don’t trust or particularly like tech firms.

• Recent surveys show a drop in trust held in technology firms. Data collected by Edelman shows that trust in tech firms fell globally but plummeted in the U.S.  The rising lack of trust will tend to increase the odds of higher regulation.  In a related issue, taking tech money in Washington is becoming toxic.
• In cyberwar, the U.S. has tended to mostly “play offense,” focusing on attacking rather than defending. A rash of hacks has shown the weakness of that position.  The government agency tasked with protecting America is underfunded and understaffed, raising fears of continued vulnerability.

COVID-19:  The number of reported cases is 129,032,284 with 2,818,245 fatalities.  In the U.S., there are 30,461,312 confirmed cases with 552,073 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 195,581,725 doses of the vaccine have been distributed with 150,273,725 doses injected.  The number receiving at least one dose is 97,593,290, while the number of second doses, which would grant the highest level of immunity, is 54,607,041.  The FT has a page on global vaccine distribution.  The Axios map shows that infections are starting to increase again despite accelerating vaccinations.

Virology

• Although the focus remains on vaccines, it is highly likely that COVID-19 will remain endemic after the pandemic ends. That means it will continue to circulate and have the potential for outbreaks.  Widespread vaccination will tend to reduce the impact on the medical system (we would expect that fewer hospitalizations will result), but the nature of the virus means that mutations will emerge, and vaccines won’t offer persistent sterilizing immunity.  That is why antiviral treatments will continue to be important.  Recently, a cocktail of various treatments was tested and showed some promise in reducing the effects of the virus.
• The next debate will likely be over vaccine “passports.” So far, the U.S. has no digital or central repository monitoring who has been vaccinated.  The card one receives when vaccinated is the only record a person will have to show they have received the shot.  It is not hard to imagine that industries with high levels of close contact—airlines, casinos, sports arenas, cruise ships—will want their patrons to be vaccinated to prevent outbreaks.  However, this desire will run into vaccine hesitancy.  Already, there are calls to outlaw vaccine passports.  This situation could be complicated by the insurance industry; it would not be a stretch to see insurance companies insisting that the aforementioned industries require passports for protection against lawsuits resulting from outbreaks.
• Some vaccine “good news”—mothers who are vaccinated and become pregnant give protection to their offspring. Pfizer (PFE, USD, 36.25) is testing a freeze-dried version of the vaccine that would reduce the costs of storage and handling.  The freeze-dried version would only require refrigeration and not the super-cold temperatures of the current vaccine.  The company also announced its vaccine could protect for at least six months.  Another study shows it to be very effective in adolescents.
• Russia claims it has developed a veterinary version of a COVID-19 vaccine.
• Some unfortunate vaccine news—Johnson & Johnson (JNJ, USD, 164.35) had 15 million doses ruined due to a manufacturing error.
• The EU announced it would not send any more vaccines to the U.K. until its quotas are met.
• France announced new lockdowns.
• In the wake of the WHO study on the origins of COVID-19, the U.S. and others are calling for a new, independent study. We doubt China will cooperate; in fact, Beijing is calling for investigations of other countries to see if the virus originated there.
• India has halted vaccine exports in a bid to build domestic supplies.

 View PDF

---

[1] Although a whole different story, this is why China’s economy is such a “high wire act.”  China relies on investment to grow, and, as Michael Pettis has pointed out, it has probably reached the point where the true value of its investment is close to zero if not negative.  In other words, high-speed rail to nowhere increases GDP at the time of the investment but should be written to zero upon completion to account for the waste.

[2] Canada has 10 people per mi² compared to the U.S. at 87 per mi².

 

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with an overview of the new economic plan that President Biden will propose in a speech today in Pittsburgh.  We next review other key U.S. and international news, including today’s latest U.S.-China tensions.  We end with recent developments related to the coronavirus pandemic.

U.S. Fiscal Policy:  President Biden today will release a $2 trillion infrastructure plan centered on fixing roads and bridges, expanding broadband internet access, and boosting funding for research and development.  Under the plan, that spending would be paid for over 15 years by raising the corporate tax rate to 28% from 21% and increasing taxes on companies’ foreign earnings.

• The proposal includes $621 billion to modernize transportation infrastructure like roads and bridges, $400 billion to help care for the aging and disabled, $300 billion to boost the manufacturing industry, $213 billion on retrofitting and building affordable housing, and $100 billion to expand broadband access, among other investments.
  • The plan calls for modernizing 20,000 miles of roadway; building 500,000 electric vehicle charging stations, replacing the country’s existing lead pipes and service lines, repairing aging schools, and investing billions of dollars in domestic semiconductor manufacturing.
  • The plan would also establish a standard mandating that increasing portions of the country’s electricity be generated from low-carbon sources, with a goal of eliminating carbon emissions from the power grid by 2035.
• A second plan focused on childcare, healthcare, and education will be released in April.
• As justification for the plan, Biden is expected to argue that the investments are necessary to help the U.S. compete with China and tackle climate change.
• Obviously, the huge amount of additional spending and tax hikes will generate pushback from Republicans and moderate Democrats.  Nevertheless, Biden has promised to be flexible where necessary and firm where it’s essential.  His success in pushing through his $1.9 trillion pandemic relief package suggests all things are possible.  In any case, the prospect of massive new fiscal stimulus on top of today’s loose monetary policy could buoy equities and further undermine bonds, pushing yields higher. Although, those factors will be battling it out with concerns about higher taxes.  The result could potentially be increased volatility and only muted gains for risk assets over the course of the year.

U.S. Bond Market:  While domestic expectations for faster economic growth and rising inflation have clearly been a factor in the recent run-up in bond yields, new reporting suggests another important factor.  Many Japanese institutional investors sold down their holdings of U.S. Treasuries in order to lock in their investment returns ahead of their fiscal year end on March 31.

United States-China:  In its annual human rights report, the U.S. Department of State accused China of being an “authoritarian state” and committing “genocide and crimes against humanity” against its Uyghur minority.  According to the report, China is detaining more than one million Uyghurs and other Muslims in its western Xinjiang region and is engaging in abuses including rape, forced sterilization, coerced abortions, torture, and forced labor.  The report provides further evidence that the Biden administration is continuing much of the hardline approach to China adopted by former President Trump.  It is even going further than Trump in expanding its focus toward human rights and reinvigorating U.S. alliances.  Today’s report will further hike tensions with China, which, as we have often argued, raises the risk that investors could be caught in the crossfire.

Australia:  The government announced today that it is fast-tracking plans to manufacture advanced missiles and other guided weapons in response to growing tensions in the Indo-Pacific region and concerns over its reliance on imports.  According to Prime Minister Morrison, the government will spend $1 billion to develop an indigenous manufacturing capability along with a major western defense contractor.  The move highlights the possibility that military tensions between China and the major liberal democracies could eventually present investors with new opportunities in the defense sector, despite concerns that growing government debt will lead to tighter public budgets.

Slovakia:  Prime Minister Matovic has stepped down to end a crisis in the year-old ruling coalition that was sparked by his decision to buy Russia’s Sputnik V coronavirus vaccine.  Matovic will be replaced by his ally Eduard Heger, a member of the same Ordinary People party who currently serves as finance minister.  Matovic, in turn, is set to replace Heger at the finance ministry.  All four parties in the right-wing coalition have approved the changes.

Brazil:  Following up on President Bolsonaro’s cabinet shuffle on Monday, described in yesterday’s Comment, the chiefs of Brazil’s army, navy, and air force all stepped down in apparent solidarity with the ousted defense minister.  The resignations point to growing dissatisfaction with Bolsonaro’s attempts to politicize the military, especially as his government comes under fire for failing to prioritize or take control over the coronavirus pandemic.

COVID-19:  Official data show confirmed cases have risen to 128,301,662 worldwide, with 2,805,972 deaths.  In the United States, confirmed cases rose to 30,394,189, with 550,998 deaths.  Vaccine doses delivered in the U.S. now total 189,451,285, while the number of people who have received at least their first shot totals 96,044,046.  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 60,000 yesterday, coming in below the seven-day moving average of 65,789 but slightly above the 14-day moving average of 59,741.  The figures remain well below the levels reached at the beginning of the year; nevertheless, they reflect a recent plateau and then rebound as factors such as new, more transmissible mutations and quick restriction loosening offset the gains from mass vaccinations.  Meanwhile, yesterday’s deaths related to the virus rose to 804.  On the vaccination front, 28.9% of U.S. residents have now received at least one dose of a coronavirus vaccine, and 16.1% are fully vaccinated.
• In a study involving 2,200 children, the vaccine developed by Pfizer (PFE, $36.11) and BioNTech (BNTX, $104.44) was found to be 100% effective in protecting against symptomatic disease in those over 12 years old, with no safety concerns.
  • Given the results, Pfizer said it would ask U.S. health regulators in the coming weeks to expand the use of the shots to those 12 to 15 years of age.
  • The timetable for authorization in the U.S. could mean kids will be able to be vaccinated before the next school year begins in the fall.
• In contrast with the improved conditions in the U.S. and the U.K. since early 2021, the pandemic continues to rebound in Europe.  In France today, President Macron is expected to announce strict new lockdown measures aimed at controlling a third wave that is overwhelming the country’s hospitals.  He may even be forced to close schools after pleas from teachers, doctors, and local officials.
  • Macron’s determination to keep schools open after the first coronavirus lockdown a year ago — in contrast to the closures ordered in many other countries — has been popular in France.
  • However, Macron has come under intense criticism in recent weeks for ignoring the warnings of scientists and doctors about the need for tighter measures against the third wave.
• What appears to be a fourth wave of the pandemic is materializing in Japan mere weeks after the country began easing virus countermeasures.
• Following a similar move by Canada, yesterday the German government said the vaccine from AstraZeneca (AZN, $49.97) would be restricted for people younger than 60 years of age due to new blood-clotting incidents found among recipients.  Despite a recent ruling by the European Medicines Agency that the vaccine is “safe and effective,” Germans under 60 will only be able to receive it if they specifically demand it, and if their request is granted by a physician.  Besides marking another body blow to the vaccine’s reputation, the decision is likely to further slow Germany’s plodding vaccination program.
• The WHO team that visited China early this year to investigate the origins of the pandemic issued its report arguing that the coronavirus most likely jumped to humans from an animal,.  However, the real story was the international response to the document.  The U.S. and more than a dozen other countries issued a joint statement complaining the investigation came too late, and the team wasn’t afforded full or timely access to pertinent data by the Chinese government.
  • Rather, the statement called for “transparent and independent analysis and evaluation, free from interference and undue influence.”
  • On top of that, WHO Director, General Ghebreyesus, called for a more extensive probe into whether the coronavirus had escaped from a lab, the strongest terms he has used in public on the matter.
  • As might be expected, the Chinese government responded by warning against politicizing the issue and calling for similar probes in other countries.

 Economic and Financial Market Impacts

• Boosted by online shopping, the market for corrugated boxes is booming, with demand surging and prices skyrocketing.

Foreign Policy Response

• In China, the government’s effort to withdraw the pandemic stimulus it implemented last year has started to undermine the country’s currency.  In the tightly regulated onshore market, the renminbi has fallen 1.4% against the greenback so far in March, marking its worst one-month drop since August 2019 and erasing the currency’s gains against the dollar since the new year.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with an Archegos trading update and the extent to which it might be portending broader risks in the markets.  We next review the latest developments in the U.S. tax policy, where Democrats in the Senate have floated a proposal to tax unrealized capital gains at death, subject to an exemption.  Finally, we review key international news and the latest trends in the coronavirus pandemic.

Archegos:  It now appears that the forced margin calls on hedge fund Archegos, which led to elevated market volatility in the midst of massive block sales in certain stocks over the last few days, related as much to competition among the fund’s prime brokers as to fears about the stocks themselves.  A report by the Financial Times indicated that prior to the fund’s troubles becoming public knowledge, representatives from its trading partners Goldman Sachs (GS, $325.73), Morgan Stanley (MS, $77.88), Credit Suisse (CS, $11.39), UBS (UBS, $15.59), and Nomura (NMR, $5.68) held a meeting with Archegos to discuss an orderly wind-down of troubled trades.  The goal was to implement orderly, coordinated sales that would minimize market impacts and any hit to the banks’ own balance sheets as they worked to sell down stakes in companies that Archegos had amassed through derivatives instruments.  Although it’s unclear whether an understanding was actually reached among the banks, several sources said it was quickly clear that some banks began selling to stem their own losses, triggering a rush to the exits.

• Those firms that moved quickly, including Morgan Stanley, evidently were able to minimize their losses.  The banks that moved slowly, including Credit Suisse and Nomura, incurred the heaviest losses.
• Of course, many other issues related to Archegos remain.  These include the extent to which the fund’s risky positions were driven by today’s loose monetary policy and massive amounts of liquidity, whether regulators will now try to close the loophole that allowed the fund to use swaps to amass huge stakes in companies, and whether there was a systematic breakdown in the banks’ risk control processes.

U.S. Tax Policy:  Several progressive Democrats in the Senate have released a draft proposal to tax unrealized capital gains at death, subject to a $1 million exemption.  The tax would aim to raise money from high-income households to help pay for President Biden’s proposed spending on infrastructure and social programs.

• Under current law, someone who dies with appreciated assets—including homes, businesses, and stocks in taxable accounts—doesn’t have to pay capital-gains taxes on that increase. Instead, the heirs have to pay capital-gains taxes only after they sell and only on gains after the original owner’s death.
• That “stepped-up basis” is a longstanding feature of the tax code, but it has come under increasing attacks from Democrats who see wealthy people’s profits escaping the income tax.

United States-Taiwan-China:  The Biden administration is reportedly preparing to issue guidelines, making it easier for U.S. diplomats to meet Taiwanese officials.  The new rules, including some adopted by President Trump, would contravene decades-old restrictions meant to avoid provoking China.  The new rules will almost certainly anger Beijing and further worsen tensions between the U.S. and China.

Turkey:  Just ten days after sacking the head of the Turkish central bank for his effort to hike interest rates, President Erdogan has also fired the institution’s deputy governor and replaced him with a lesser-known commercial banker.  With Erdogan once again showing his penchant for taking control of monetary policy, the lira is down approximately 1.8% against the dollar so far today.

Russia:  Amid reports that jailed opposition leader Alexei Navalny is suffering medical issues and not being offered sufficient treatment, some 500 physicians and medical experts in Russia have signed an online petition saying that at a bare minimum, an independent physician whom Navalny trusts should have the opportunity to examine him.  In addition, the petition suggests Navalny be examined by experts from the Charite clinic in Berlin, Germany, where he was treated after he was poisoned in Siberia last year; the current deterioration of his condition may be related to the attack.  The situation illustrates the Kremlin’s balancing act in trying to muzzle Navalny without causing political pushback among Russians.

Brazil:  President Bolsonaro has announced a sweeping reshuffle of his cabinet, including new foreign and defense ministers, as political pressure mounts on him to get a grip on the country’s coronavirus crisis.  Not only did Bolsonaro replace his chief of staff, justice minister, and attorney general, but he also replaced his ministers of defense and foreign affairs.

• In particular, Foreign Minister Araújo had been under pressure from lawmakers unhappy with Brazil’s efforts to acquire coronavirus vaccines.
• Critics have blamed Araújo for Brazil’s increasing international isolation.  Just as important, they have complained that his belligerent stance toward China has led to delays in the delivery from China of important pharmaceutical ingredients.

Global Supply Chains:   The skyscraper-sized container ship stuck in the Suez Canal for almost a week was finally freed yesterday, clearing the way for hundreds of backlogged ships to traverse the waterway over the coming days.  The effects of the blockage are likely to linger for weeks or even months.  While the clearing of the canal will ultimately be a positive for the world’s tight and disrupted supply chains, a separate report said the recent fire at a major Japanese facility producing computer chips for the auto industry caused more damage than earlier known, and fully restarting production could take up to four months.

COVID-19:  Official data show confirmed cases have risen to 127,775,460 worldwide, with 2,794,246 deaths.  In the United States, confirmed cases rose to 30,332,358, with 550,073 deaths.  Vaccine doses delivered in the U.S. now total 180,646,565, while the number of people who have received at least their first shot totals 95,015,762.  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 68,000 yesterday, surpassing both the seven-day moving average of 63,239 and the 14-day moving average of 58,829.  Infections are now clearly on the upswing again, as factors such as new, more transmissible mutations and the removal of social distancing rules combine to offset much of the advantage of expanding vaccinations.  On the other hand, deaths related to the virus totaled a relatively low 668 yesterday, and they continue to trend modestly downward.
• In a CDC study of almost 4,000 vaccinated healthcare workers, first responders, and other essential workers, the COVID-19 shots developed by Moderna (MRNA, $123.42) and Pfizer (PFE, $36.62) were confirmed to be 90% effective at reducing the risk of both symptomatic and asymptomatic infection two weeks after a second dose.  The study confirms that the vaccines are highly effective in real-world conditions, which can be more complex and challenging than the conditions in clinical trials.
• In contrast, the vaccine from AstraZeneca (AZN, $50.81) continues to face ups and downs.  Canadian authorities yesterday recommended a halt on administering the vaccine to people under age 55 in light of evidence from Europe because of potentially serious side effects targeting younger women.
  • The change in guidance marked a sharp shift from Canadian health officials, who until now have said the AstraZeneca vaccine was safe for people of all ages.
  • The Canadian officials had issued their previous positive opinion of the shot as recently as early March, when governments in Europe paused the vaccine’s use due to worries over blood clotting.
• President Biden said his administration is more than doubling the number of pharmacies in the federal vaccination program and opening additional mass vaccination sites. He said 90% of adults would be eligible for vaccination by April 19, and 90% will have a vaccination site within 5 miles of their residence.
  • Biden also called on governors and local officials to maintain or reinstate mask mandates and said states should pause their reopening efforts.
  • Meanwhile, CDC Director Walensky said people and officials are letting their guard down too early, giving her a “recurring feeling . . . of impending doom.”
• New York state will make COVID-19 vaccine shots available to residents 30 years old and up starting today, while New Jersey yesterday expanded eligibility to include more public-facing workers.
• As more and more people get vaccinated, polling shows vaccine hesitancy is declining quickly.  In a survey of 80,000 adults in the U.S. earlier this month, about 17% said they would either definitely or probably not get vaccinated, down from 22% in January.
  • The decline was almost entirely due to fewer respondents saying they probably would not get the shot.
  • The share that stated they definitely would not has remained essentially unchanged in the past two months.
• As Japan struggles to procure COVID-19 vaccines from foreign manufactures in a timely manner, the government has backpedaled on its plan to let people choose which vaccine to get.  Its vaccinations chief said nothing has been decided yet.
• A WHO-led team investigating the origins of the pandemic reported that data provided by China and examined during a recent mission to the country was insufficient to answer the critical questions of when, where, and how the virus began spreading.  The report calls for a closer examination of Chinese hospital records and blood samples from before the first known cases in December 2019.  More extensive testing of farms that supplied wild animals to a market that is linked to many early cases is also recommended.
• Government leaders from more than 24 countries have joined the head of the WHO, in calling for a new international treaty on pandemic preparedness and response.  It is aimed at improving alert systems, data sharing, and transparency, as well as widening access to vaccines.

 Economic and Financial Market Impacts

• Drivers returning to the road after the pandemic are expected to boost demand not only for gasoline but for the ethanol added to it.  On top of rising demand from China, that prospect has pushed corn prices higher by about 50% over the last six months.

U.S. Policy Response

• The Biden administration announced a three-month extension to a national eviction moratorium, a move designed to help millions of tenants who have fallen behind on their rent.  Courts have disagreed on whether the relief is legal.  The moratorium is now set to expire on June 30.  It was previously set to expire on Wednesday.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  We are down to the elite eight in NCAA men’s basketball, and opening day is just around the corner!  U.S. equity futures are a bit lower this morning but off their worst levels of the overnight session.  Coverage starts today with reports that a large family office is facing massive margin calls, which have led to aggressive selling of select equities.  We look at who is behind the situation and its potential impact.  Up next is the latest on the Suez situation.  International news follows, with Myanmar and Germany’s supreme court featured.  China news is next; economics and policy follow, and we close with the latest on COVID-19.

Who is Bill Hwang?  He comes out of Tiger Management, a hedge fund of yesteryear run by Julian Robertson.  He was one of Robertson’s “tiger cubs,” fund managers who spun out of Tiger Management to start their own hedge funds.  Hwang took an initial stake of $23 million at the turn of the century and turned it into $8.0 billion by the end of 2007.  His firm is called Archegros Capital Management, and it is a “long/short” hedge fund.  Since 2007, his fortunes have been mixed.  He was caught in the massive short squeeze of Volkswagen (VWAGY, USD 32.53), which rose 82% in one day after Porsche (POAHY, USD, 10.29) announced it had purchased shares.  He also paid the SEC $44 million in fines over insider trading of Chinese bank stocks.  Hong Kong exchanges banned him from trading for four years in 2014.  In response to these legal challenges, as well as market issues, Hwang converted his hedge fund into a family office.

On Friday, Goldman Sachs (GS, USD, 327.39), Credit Suisse (CS, USD 12.87), and Morgan Stanley (MS, USD, 79.98),[1] who acted as prime brokers for Archegros, issued margin calls on the family office.  Nomura (NMR, USD, 6.61) and Credit Suisse have warned they may “incur substantial losses.”  Reports indicate that banks liquidated at least $30 billion (yes, with a “B”) of positions.  Hwang tends to run a concentrated portfolio with leverage, which accentuates both gains and losses.  His holdings appear to be weighted toward U.S. media companies and Chinese tech stocks.  It appears the brokers initiated the stock sales, meaning this was a forced margin liquidation.

Here is the “known/known”—the sales are massive and were done in blocks, suggesting the bankers were worried about losses and wanted to move quickly to get as much out of the collateral as they could.  This sort of action with a trader of this size isn’t common.  Here are the “known/unknowns”—first, hedge fund managers often participate in the same ideas, and thus the sharp declines in selected stocks may also have ramifications for other managers.  Second, the leverage may have been larger than one would expect.  Margin loans are fixed at 50%, but traders can increase their leverage through derivatives, e.g., options, swaps, single stock futures, etc.  We suspect Hwang’s positions were highly leveraged, which triggered the unified response.  Third, and perhaps most important, we don’t know yet if the selling is nearly complete or if there is more to come.  The initial weakness in stock index futures suggests worries were elevated; so far, it looks like we may be close to completion, and this event is just another tale of hubris and leverage.  It is also possible that we aren’t finished yet, and wider selling may still be possible.

Suez:  There is some good news on this front.  The combined efforts of tugboats and excavators, along with the moon (from high tide), have partially refloated the stuck container vessel.

(Source:  FleetMon)

The ship’s bow has been freed from the eastern bank, and the stern has been shifted into the channel.  However, even if the boat is freed, it will take weeks for traffic to normalize completely.  This is leading shippers to consider alternative routes.  Security of supply concerns are leading consumers to reconsider just-in-time inventory methods.  Insurance firms are also facing a raft of claims.

International news:  Myanmar increasingly looks like a civil conflict, and the German Supreme Court throws a potential spanner into the Eurobond.

• On Saturday, the Myanmar military celebrated Armed Forces Day, and on Sunday, funerals were held for those who recently died in the violence. Both events triggered protests and attacks by security forces, leading to a bloody weekend where over 100 people perished in the violence.  U.S. and EU officials have condemned the violence, but given China’s support for the regime, there is little that can be done from the U.N.  The army appears to be following a path that it can rein in the protests by escalating the attacks.  So far, the rising death toll doesn’t seem to be reducing the scale of the protests.  There are reports that Thailand is seeing an influx of refugees from the fighting.  China has made large investments in Myanmar to create a land bridge to the Indian Ocean, allowing it to avoid various chokepoints closer to the South China Sea that are ostensibly controlled by the U.S. Navy.  A breakdown in civil order will put these investments and plans at risk.  We continue to watch to see if China attempts to intervene directly.
• The German Supreme Court has raised questions about German participation in the €750 billion Eurobond scheme. Although this doesn’t scotch the deal, it does raise a potential risk that we will need to monitor closely.  Politically, the potential ouster of the conservative coalition from power would tend to bring a more Eurocentric political group to power.  But the courts could still pose a problem.
• Slovakia’s PM, Igor Matovic, has stepped down after his government faced defections over his unilateral decision to import the Sputnik V vaccine.
• Protests emerged in Turkey over the weekend in response to Erdogan’s decision to pull out of a treaty that specifically protected women from violence.
• Alex Salmond, a major figure in Scotland’s SNP, who was recently acquitted of sexual harassment charges, has announced the creation of a new political party. Although it will support independence for Scotland, the division will make it more difficult to actually build momentum for separation.

China:  The EU and China are engaging in dueling sanctions, and China and Iran formalize ties.

• In light of EU sanctions on Chinese officials for human rights violations, Beijing has replied in kind. The CAI investment deal between China and the EU remains in the balance.  There are also worries that the application of sanctions may have misfired to some degree.
  • China has also sanctioned U.S. and Canadian officials.
• China, in a direct threat to U.S. policy in the Middle East, has inked an investment and security deal with Iran. The move will complicate the U.S. attempts to create a policy response with Iran.
• Industrial profits in China surged in January and February.
• As part of its “belt and road” project, China has made inroads into the Balkans. Its behavior in Serbia has recently been profiled; local leaders like the investment, and local people seem to be bearing the cost of adjustment.
• USTR Tai held her first interviews over the weekend; the bottom line, the Biden administration appears to be using Trump-era tariffs as leverage in negotiations.
• On the security front, China is challenging the Philippines, and U.S. officials are sounding the alarm over the vulnerability of Taiwan.

Economics and policy:  Infrastructure, taxes, and inflation lead the headlines.

• The Biden administration continues to float a massive infrastructure package. Tax hikes are also being considered.  Although there is much talk, we still think the path to getting both done is fraught with risk.  One factor is that tax hikes are not universally popular with centrist Democrats.
• China has been a deflationary force on the global economy for decades. That may be starting to reverse as costs rise in China to the point where Chinese firms are no longer willing to absorb them.  At the same time, China’s recent pullback from stimulus is adversely affecting commodity prices.  We don’t expect this situation to persist, but it is leading to price consolidation.
• Amazon (AMZN, USD, 3052.03) should know within the next week or so if its Alabama facility will approve a union.
• We are seeing a developed world surge in home prices, partly due to the pandemic. Although U.S. housing markets are clearly “hot,” lending behavior is much more responsible compared to the “naughts.”
• Farmland prices are also soaring due to elevated grain prices.

COVID-19:  The number of reported cases is 127,285,692 with 2,785,365 fatalities.  In the U.S., there are 30,262,717 confirmed cases with 549,335 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 180,646,465 doses of the vaccine have been distributed with 143,462,691 doses injected.  The number receiving at least one dose is 93,631,163, while the number of second doses, which would grant the highest level of immunity, is 51,593,564.  The FT has a page on global vaccine distribution.

 Virology

• First, the bad news: Brazil is facing a public health crisis.  Cases are surging, and the hospitals are overwhelmed.  The government refuses to engage in lockdowns, so we expect continued elevated infection rates.  India is also facing a new surge in cases with new variants
• Now, the good news: So far, vaccines appear to be very effective.  Older people are showing signs of being protected from the disease, and few health care workers are reporting infections after inoculations.
• It appears that vaccine passports are going to be part of our lives. The development of proof of vaccination or immunity is fraught with risk but is probably necessary for the reopening of the economy.
• Full herd immunity probably won’t be possible until children are vaccinated.
• Russia is quietly importing vaccines to deal with shortages.

 View PDF

---

[1] UBS (UBS, USD, 16.04) and Deutsche Bank (DB, USD, 12.35) also are listed as prime brokers, but we haven’t seen a direct mention that they were involved in margin sales.

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

[Posted: 9:30 AM EDT] | PDF

We have published our latest Weekly Geopolitical Report, which constitutes Part II of our series on the geopolitics of Central Bank Digital Currencies (CBDC).  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is our latest Confluence of Ideas podcast. It’s Friday, and our most recent Asset Allocation Weekly, chart book, and podcast are also available.  (Note: Due to the upcoming Good Friday and Easter holidays, we will not publish an AAW next week; it will resume on April 9.)  Finally, here is our latest Weekly Energy Update.  You can find all this research and more on our website.

Good morning, all! U.S. equity futures are higher this morning as investors are growing more optimistic for a stronger recovery.  We begin with President Biden’s first press conference.  Next, we provide an update on the Suez Canal blockage and give our views on the tech hearing on Capitol Hill.  Our news roundup includes economic and domestic stories, international news, and a virus update.

Biden’s Press Conference: On Thursday, President Biden held his first press conference since taking office. He started with a summary of the administration’s accomplishments and then took questions from reporters. Here are the highlights:

• The 100 million vaccination goal has already been met, and now the president is aiming for 200 million vaccinations within 100 days of taking office.
• There is no timeline for the Afghanistan withdrawal. President Biden has stated that he doesn’t expect the troops to withdraw in May but doesn’t think they will be stationed in Afghanistan beyond this year.
• Biden intends to run for office in 2024 but was unclear when he would formally launch a campaign.
• Filibuster reform could be taken up if conservatives use it to block voting rights legislation. However, the president was reluctant to commit to supporting its complete removal.
• Biden also pushed back against criticism that he is the reason immigration has spiked in recent weeks. Several reports implied that immigrants may have been motivated by his nice-guy persona to come to America.  In response, the president attributed the rise in numbers as typical for all presidents, and he erroneously stated that the majority of families attempting to cross the border were immediately sent back.

Out of the items mentioned above, we believe President Biden’s potential run in 2024 is probably the most notable, although not for the reason many would expect.  Despite headlines implying that he has committed to running again, we felt like he was a bit more ambivalent toward the issue.  When asked why he hadn’t formally announced his intention to run again, as his predecessor did, he deflected the question by telling a joke at his predecessor’s expense, stating 2024 isn’t his current focus.  The president’s reluctance to commit to running again could have implications on his agenda going forward.  If conservatives consider him a lame duck, they could ramp up efforts to slow his agenda as they gear up to launch their own challenge in 2024. If we are right, this could mean Biden’s window of getting things done is a lot narrower than we originally thought and could add to the urgency in reforming the filibuster.

Suez Canal Update:  The ship in the Suez Canal remains stuck while specialist dredgers attempt to dig it out.  So far, all efforts to remove the ship have failed, and it is not expected to be removed for at least a week.  Shipping rates have since spiked as vessels have been forced to take a longer route to transport goods.  Additionally, the number of vessels queued up in canals has risen from 186 to 238.  Although this hasn’t led to a rise in oil prices yet, it is expected to happen in the coming weeks.

Tech Congressional Hearing: CEOs from Facebook (FB, $278.74), Twitter (TWTR, $61.20), and Google (Googl, $2,032.46) attended another hearing on Capitol Hill.  The five-hour hearing focused primarily on the January 6 Capitol riots and the role social media had in inciting the riot. As one could have expected, the hearing was quite tense.  Politicians forced CEOs to answer a series of “yes” or “no” questions, at times interrupting when answers went beyond that.  The interruptions were so frequent that Twitter CEO Jack Dorsey sarcastically posted a “yes” or “no” poll on Twitter.  Although it wasn’t clear that any legislation could be made based off the testimony, it does appear there is growing bipartisan support to regulate these social media companies.

U.S. Economic and Domestic Policy:

• In a bipartisan letter sent Thursday, 41 senators urged President Biden to take action to deter Iran’s nuclear program.  The letter asserted that Iran had accelerated its nuclear activity in “alarming ways,” and urged the Biden administration to use “economic and diplomatic tools” to deter further efforts.
• A severe tornado outbreak led the National Weather Service to issue a category five warning to southern states Alabama, Mississippi, and Tennessee.  Violent tornadoes are expected to hit major cities such as Jackson, Mississippi, Memphis, Tennessee, and Huntsville, Alabama.  At least three people have already been killed by the tornadoes in Alabama.
• The Federal Reserve announced on Thursday that buybacks and dividend limits will end for most firms on June 30 after the completion of the most recent round of stress tests. The pandemic-era restrictions were designed to ensure that banks remained healthy enough to continue lending during the pandemic.  That being said, banks will need to maintain capital requirements if they want to resume buybacks and dividend payouts.
• On Thursday, Congress extended the Paycheck Protection Program for two months.  Both lenders and small business owners were given an additional 30 days to adjust to program changes implemented by the Biden administration.  The changes were designed to help more self-employed people and small business owners take advantage of additional aid provided by the program.
• The U.S.-U.K. trade deal is expected to miss a deadline needed for it to fast-track through Congress.  The delay is due to the Biden administration’s insistence on a resolution to the Boeing (BA, $247.19)-Airbus (EADSY, $28.55) dispute.  The deal needed to be completed by the end of the month for it to be covered by legislation called the Trade Promotion Authority (TPA).  Missing the deadline could drastically slow down passage as lawmakers will likely attempt to bog down the deal with additional amendments to protect special interest groups such as agriculture.

International Economic News:

• The election in Israel on Thursday likely extended the parliamentary deadlock as it was unable to produce a clear winner.  The two main blocs, the Likud party and the Yesh Atid party, now need to form a coalition with smaller parties in order to reach the 61 seats needed to form government.  This is the fourth election in two years, and there are doubts regarding whether either side can gain enough support; it seems likely that another election will have to take place.
• The U.S. and Britain imposed sanctions on two conglomerates in Myanmar following the February 1 coup and crackdown.  The two conglomerates, Myanma Economic Holdings Public Company Ltd. (MEHL) and Myanmar Economic Corporation Ltd. (MEC,), control large sections of the Myanmar economy.  The European Union is also facing pressure to follow suit in issuing sanctions.
• The Biden administration announced that it would restore humanitarian aid to the Palestinians, along with an additional $15 million to help with the pandemic.  However, the administration made clear that the additional aid will be given to NGOs and not directly to the Palestinian Authority.  The Trump administration had withdrawn aid from Palestine following the decision to boycott the peace meeting in 2018.
• Canadian Prime Minister Justin Trudeau notched a win in the Supreme Court on Thursday.  The court ruled that because global warming is a national concern, the federal government can set national carbon prices.

 China:

• Western apparel companies have expressed concern over the alleged use of forced labor in Xinjiang.  These companies are now facing boycotts in China as well as a possible ban because of their decision to address the issue publicly.  Following H&M’s (HMRZF, $23.92) decision to no longer source its cotton from Xinjiang, China has effectively erased the clothing store from its online platform.  Nike (NKE, $128.64) and Adidas (ADDF, $310.50) have also faced criticism for their stance against forced labor used to produce cotton.

COVID-19:  Official data show confirmed cases have risen to 124,985,317 worldwide, with 2,746,720 deaths.  In the United States, confirmed cases rose to 30,021,447, with 545,422 deaths.  Vaccine doses delivered in the U.S. now total 169,223,125, while the number of people who have received at least their first shot totals 85,472,166.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Florida is targeting April 5 as the day that all its residents will be eligible to receive vaccinations.  It plans to lower the age limit from 50 to 40 on March 29 and eliminate age limits in the following week.  California and North Carolina have also stated they would lower age limits in April.
• Beginning Sunday, air travelers will not be permitted to get on a plane in Germany without proof of a negative COVID-19 test.  There are growing fears that COVID-19 cases could rise as the travel season starts.  Travelers using other means of transportation will also be required to show proof of a negative result.
• In New York, Mayor Bill de Blasio plans to create a vaccination center on Broadway that will be reserved for theatre workers in an effort to resume live theatre shows in the fall.
• President Biden stated he would like to have 200 million vaccinations administered within his first 100 days, after surpassing his mid-March goal of 100 million vaccinations.
• Figures released by the EU show that the bloc has exported more vaccines than it has administered domestically.  This finding could add to woes among member countries who have grown frustrated with the vaccine rollout and renewed lockdowns.  In response to the data, French President Emmanuel Macron announced he would support export controls on vaccines.
  • Tensions flared among EU countries as governments failed to agree on how to distribute additional vaccines to members in need.  Talks fell apart after Austrian Chancellor Sebastian Kurz’s demand for additional vaccines for Vienna was denied.  Following the meeting, there was a report that three EU member countries began discussions with a Chinese company, CanSino Biologics (6185:HK, HKD 265.20), regarding its vaccine.
• On Thursday, Pfizer announced it has begun testing vaccinations on children under 12 years of age. The new trials reflect growing progress in getting everyone vaccinated.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  U.S. equity markets have turned lower this morning.  Our coverage begins with the pandemic, with a focus on the mess that Chancellor Merkel finds herself in with elections coming in autumn.  China coverage follows; the diplomatic spat between the EU and China has intensified and Beijing and Moscow continue to tighten relations.  International coverage is next, followed by economics and policy, and we close with technology news.

COVID-19:  The number of reported cases is 124,894,108 with 2,745,702 fatalities.  In the U.S., there are 30,011,551 confirmed cases with 545,746 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 169,223,125 of the vaccine has been distributed with 130,473,853 of doses injected.  The number receiving at least one dose is 85,472,166, while the number of second doses, which would grant the highest level of immunity, is 46,365,515.  The FT has a page on global vaccine distribution.  The weekly Axios map shows a mixed bag; some states are reporting falling cases, but there is a disturbing rise in others.  Due to reporting issues, we have seen a jump in U.S. infections to 86K.

Virology

• Germany is facing a jump in infections that is leading to a political crisis. In light of a slow vaccine rollout and after a meeting with regional leaders, Chancellor Merkel decided to issue not only a lockdown order but to extend the Easter holiday by two days.  The backlash was strong; protests broke out and the political opposition was critical of the move.  The suddenness of the action and the lack of planning for how businesses and households would handle the changes to the holiday raised hackles.  And so, in the face of strong opposition, Merkel reversed her order and publicly took sole responsibility, asking Germans to forgive.
  • There is growing political fallout from the current government’s handling of the pandemic. Although Germany’s actions, at first, were considered strong, the inability to distribute vaccines, the persistent waves of infections followed by ineffective lockdown measures, and the fact that there appears to be “no light at the end of the tunnel” have weighed on the government.  Political standouts of the CDU, possible successors to Merkel, have seen their stars fall, raising the possibility that the CDU/CSU/SPD will fall from power in September.
  • Belgium has announced a lockdown over Easter; however, the measures don’t appear to be all that strict and there hasn’t been a notable public response.
• The EU’s vaccine program has been something of a mess. The leadership focused on price rather than securing supply.  In a globalized world, this has led to a situation where vaccines produced in the EU are being shipped to other parts of the world, where nations paid higher prices.  Europe is considering restricting vaccine exports in response, which will not make its trading partners happy.  But supply isn’t the only problem.  Logistics and clear lines of authority have been a problem, too.
  • A recent example has been a raid by Italian authorities on a vaccine manufacturing facility in Italy. Police found 29 million doses; the concern was that despite export restrictions AstraZeneca (AZN, USD, 48.79) was preparing to ship the doses outside the EU.  The company argued the vaccines were simply in the final stages of preparation before shipping.
  • The EU’s crackdown on exports has raised fears in the U.K. that doses it contracted won’t be shipped. Officials on both sides claim that the EU and U.K. have worked out their differences, but no details of an agreement have emerged.
• The U.K. is signaling that it will restrict travel between France and the U.K. due to the surge in COVID-19 cases in the EU.
• AstraZeneca has revised down its efficacy rate to 76% from its original report of 79% due to data integrity problems.
• The UAE has been aggressive in acquiring vaccines, allowing China and Russia to conduct clinical trials in return for vaccine supply. The Sinopharm (SHTDY, USD, 12.04) vaccine has been distributed; we note that health authorities are notifying some of the recipients who received two injections that they should receive a third, suggesting the prior inoculations were ineffective.  China claims a 79% efficacy rate, but never released any supporting data.  This vaccine has also been distributed in Egypt, Cambodia, Senegal, and Peru.  If it turns out the vaccine is ineffective, it would require these countries to source vaccines from other nations and would be a blow to China’s prestige.
• Studies published in the New England Journal of Medicine suggest that out of 8,121 fully vaccinated employees at the University of Texas Southwestern Medical Facility, only four contracted COVID-19 after inoculation. A similar study in Los Angeles hospitals shows seven out of 14,990.  Although we doubt the current vaccines will give us sterilizing immunity, these studies suggest it will be close.  In addition, those who did contract the disease reported mild symptoms, suggesting that getting the shot will keep a recipient from a serious case of the disease.

China:  China’s foreign relations with the EU and U.S. are getting increasingly difficult.  In response, Beijing is getting close to Russia.

• After chilly meetings in Alaska, U.S. officials are meeting with EU officials to build a common front against China. EU officials have been cool to an assertive stance on fears of disrupting business ties, but, recently, the EU did sanction Chinese officials over Xinjiang abuses.  This has led China to respond in kind.
  • The recent Comprehensive Agreement on Investment, a China-EU pact, looks to be in trouble. The European Parliament canceled a meeting to discuss the treaty and it may not come up for a while.  The postponement appears designed to give both sides a chance to cool tensions.  However, the U.S. is clearly trying to take advantage of the tensions by working to build a united front against China.
  • On a related note, the Chinese military was at the recent Alaska talks. Reports argue that the meetings did allow for both the U.S. and Chinese military to discuss methods to avoid accidents.
• Faced with increasing hostility, China is moving to tighten relations with Russia. Not only has China faced criticism from the U.S. and EU over human rights, but the U.S., as noted above, has met with EU officials and held a virtual leaders meeting with the “Quad” states.  Foreign ministers from China and Russia met earlier this week and proposed to break Western hegemony.  We also note that China has been dressing down the EU and U.S. as well.  It would appear that Beijing is uncomfortable with the U.S. lining up allies against it.
• The SEC is starting to implement regulations that could result in Chinese firms being delisted from U.S. exchanges. Under Sarbanes-Oxley, all public companies must be audited by the U.S. Public Company Accounting Oversight Board.  Chinese-listed firms have refused to participate.  Until the last administration, the rule was generally not enforced.  Now, it appears the Biden administration is prepared to follow through on this regulation.  U.S.-listed Chinese companies have been weaker on this news.
• This is the 100-year anniversary of the creation of the People’s Liberation Army. It is being celebrated by loyalty lessons (no parade plans, so far).  We must admit we are a bit puzzled by this decision; the fact that a century remembrance requires loyalty classes suggests General Secretary Xi is uncomfortable with his military’s allegiance.
• China continues to lag on its commitments to buy U.S. goods as part of the Phase I trade deal.
• Adm. John Aquilino told the Senate Armed Forces Committee that China is closer to being able to take Taiwan by force. Although such comments are sometimes used for budgetary reasons, we tend to agree with the admiral.

International news:  Israel is trying to form a government, North Korea launched missiles, and the Indian farmers’ strike continues.

• Israeli politics is always difficult for outsiders to fathom. There are multiple parties, many of which have splintered off from larger ones.  Coalition-building is difficult, leading to unstable governments and repeated elections.  Recent elections were inconclusive, so PM Netanyahu may be forced to bring an Islamist party into his coalition in order to form a government.  That means his coalition, if it forms in this manner, would include orthodox parties and an Islamist one.  If that is what develops, we would expect elections before year-end.
• North Korea doesn’t want to be ignored. Accordingly, it has launched a couple of missiles to remind everyone it is still a problem.
• The farmers’ strike continues in India against market reforms. The current subsidy program generates costly surpluses and general inefficiencies.  This situation is common as countries develop.  In the preindustrial stage, agriculture dominates the economy and occupations.  As economies industrialize, former farmers are forced into urban areas to work in industry, and agriculture itself becomes increasingly efficient.  One of India’s problems is that it never really industrialized.  Dana Rodrik, an economist, has raised concerns that automation in the current industrialized economies might trigger reshoring and prevent industrialization from occurring in developing nations.  If so, the farmers in India may have legitimate fears; if reforms reduce labor in Indian agriculture, there may not be an industrial sector to provide new jobs.
• Lebanon’s economy continues to spiral lower as a collapsing exchange rate is triggering food shortages and food price inflation.
• The U.K. has established a government-backed lending program to support businesses. However, the EU warns that if Northern Ireland firms participate in the program, it may mean they have received improper subsidies that would violate the terms of Brexit.  This situation highlights the problematic circumstances for Northern Ireland.
• A group of senators are lobbying the White House to officially recognize the Armenian genocide. The 1922 event is controversial; no U.S. administration has taken this step for fear of undermining relations with Ankara.  Candidate Biden seemed to indicate he was open to such a declaration.  Given current testy relations with Turkey, we might see this step taken.  If so, a hard break with Turkey becomes more likely.
• We continue to watch what appears to be a housing bubble in Canada. Unlike the U.S., Canada didn’t exactly address its housing market in 2008 and it has continued to rise in value.  As the U.S. experience showed, the end of a housing bubble has serious ramifications for an economy.
• The Sweden Democrats, a right-wing populist party, is poised to join the center-right coalition for next year’s elections. The party has been isolated from power for decades, but party leaders have been working to become a mainstream, anti-immigrant party.
• The opposition in Myanmar is hardening and appears to be evolving into a guerrilla movement. If this continues, it will be interesting to see how Beijing reacts.  China views Myanmar as a conduit for its Belt and Road project, and if the country becomes unstable, it would make it less reliable for transmitting goods.

Economics and policy:  The Suez Canal remains blocked, rental arrears continue to be an issue, we are watching what households do with the “stimmy,” and inflation worries are rising.

• The Suez Canal remains blocked, roiling global shipping. Over 100 ships are stuck, waiting for authorities to move the vessel.
• One of the concerns about the aftermath of the pandemic is squaring up rents in arrears. Landlords need to be paid to remain current on their mortgages; without rental payments, defaults at that level may start.  At the same time, if evictions begin, it may be difficult for landlords to find renters at current rental levels and could create a homelessness problem.  So far, the government’s response has been to delay evictions and hope for a resolution.  The current extension expires in a week; the government is considering an extension into July.
  • Part of the recently passed rescue package has $47 billion of relief to households. The expectation is that some (or all) of this money may be used for back rent and utility bills.  There is a concern about delays in receiving these checks, which is why the extension is being considered.
• Surveys of college-age Americans who received stimulus checks suggest the majority will be used for savings and debt reduction. If so, the forecast growth that is expected may not immediately materialize.  At the same time, these actions would improve household balance sheets and improve the chances of better future growth.
• Surveys of businesses conducted by the Atlanta FRB suggest supply worries are becoming the most significant concern among businesses. This fear is reflected in ISM surveys as well.  Supply bottlenecks are exacerbating inflation issues; the Suez situation is just one of these concerns.
  • Perhaps even more unsettling are surveys suggesting the youngest Americans are the most concerned about inflation. This is odd because they haven’t experienced it to any great degree.  Their worries may not express themselves as they did for baby boomers; the millennials may buy bitcoin instead.

• Despite problems caused by the pandemic’s supply disruptions, European automakers continue to maintain support for just-in-time inventory methods. We suspect that, as U.S. hegemony fades, we will shift to just-in-case inventory methods, but, at least in Europe, faith in the current model remains.
• Democrats are looking to raise taxes to “pay” for an infrastructure package. Their plans appear to be to pass a package in parts, using normal legislation to pass the less controversial elements, and reconciliation for the rest, including tax measures.  We expect a bruising fight.  One thing to watch is that tax increases may act to stem the recent rise in long-term interest rates.
• Looking for another reason to dislike bitcoin? Mining is apparently also tightening semiconductor supply.

Technology:  Tech leaders testify before Congress and Amazon (AMZN, USD, 3087.07) faces a union vote.

• The leaders of the major tech firms will be before Congress today to discuss the issues of disinformation and censorship. Although Congress is pretty much aligned against tech firms, the parties are not unified on their concerns.  We would expect the leaders to use that to their advantage.  Their goal is to avoid regulation; if that fails, the secondary goal is to use regulation to benefit themselves or harm their competition.
  • Facebook (FB, USD, 282.14) announced it has taken down a group of China-based accounts that were used by China to spread malware to monitor Uyghur dissidents outside of China.
• By the end of the month, Amazon will know the outcome of the unionization effort in Alabama. Regardless of the outcome, the company will face increasing pressure as policy moves to favor labor.
• Jack Ma announced that Ant Financial will increase commissions on loans it makes for banks in a bid to lift its eventual IPO price.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with the ongoing testimony before Congress from Federal Reserve Chair Powell and Treasury Secretary Yellen.  Both officials will wrap up their testimony before the Senate today.  We next turn to various overseas developments, including elections in Israel, new missile tests in North Korea, and a container ship causing a traffic jam in the Suez Canal.  Finally, we recap the latest news on the coronavirus pandemic.

U.S. Monetary Policy:  Testifying before the House Financial Services Committee yesterday, Fed Chair Powell repeated his view that the post-pandemic economic recovery is far from complete, and the Fed should keep monetary policy extraordinarily loose for some time to come.  Powell did note that the recovery and the latest fiscal package could push inflation higher, but he said such price hikes wouldn’t be very large or sustained, and even if they were, the policymakers have the tools necessary to get inflation under control again.

• Despite Powell’s sanguinity, many investors continue to fret that the Fed could end up behind the curve as inflation accelerates and might have to react by tightening policy sooner than planned.  Bond yields have recently risen in response, prompting volatility in stocks.
• At the same time, however, concerns about deadlier and more transmissible coronavirus mutations have started to make some investors question the thesis about a fast economic recovery, especially in Europe.  That contributed to the fall in stocks yesterday.
• All the same, it’s notable that if the European economy remains locked down, it would be a drag on global economic growth and could help hold down inflation.  In other words, inflation fears and bond yields could begin to moderate in the near term.  They may have already started to do so.  Eventually, a more balanced view of economic prospects and stable bond yields could prompt another up leg in equities.

U.S. Fiscal Policy:  In her testimony before the House Financial Services Committee yesterday, Treasury Secretary Yellen said tax increases would be required to fund President Biden’s evolving $3 trillion infrastructure and economic development package.  Facing strong opposition from Republicans, she pledged that the administration wouldn’t do anything to adversely impact small businesses or middle-income citizens.

• Just as the Biden spending plan would be broken into two parts, one for infrastructure and one for other economic initiatives, the developing tax plan would also include two parts.  Taxes on businesses would be included with the infrastructure spending plan, while taxes on higher-income households would be matched with the other spending proposals.
• Aides are expected to present the plan to Mr. Biden and his top advisers this week, meaning its details and configuration could change before the White House brings it to leaders on Capitol Hill.

Israel:  In yesterday’s parliamentary elections, Prime Minister Netanyahu’s alliance looks like it would come up just short of a majority in parliament, even if he manages to entice a former ally, Naftali Bennett, to join his camp.  The ultimate size of Netanyahu’s shortfall will depend on whether a small Islamist party clears the vote threshold to be represented in the Knesset.  If it does, the seat allocation would be shifted enough to make Netanyahu’s shortfall substantial.  Final results, and the formation of a government, are likely to be up in the air for days.

Turkey:  President Erdogan’s decision to replace the Turkish central bank chief continues to reverberate in the country’s financial markets.  The lira and Turkish assets have depreciated severely.  Meanwhile, the offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to an annualized 1,400% on Tuesday before easing to a still-elevated 500% late in the day.  Those rates indicate it is becoming more difficult for foreign investors to hedge their exposure to lira assets, unwind their bullish positions, or bet against the currency.

China:  Satellite imagery shows China has reclaimed land to extend a reef in an area of the Spratly Islands that is also claimed by Vietnam and the Philippines.  Moreover, the imagery suggests the Chinese may be preparing the site to construct a military radar system.  The aggressive moves to increase control and militarize the island will likely feed into concerns about Chinese territorial ambitions and further exacerbate tensions between China and other countries.

North Korea:  Officials in South Korea and at the U.S. Defense Department confirmed that the North Korean government tested two cruise missiles over the weekend.  However, the officials downplayed the development on grounds that it was not unusual for the regime and therefore didn’t require a response.

Global Shipping:  Adding to the port congestion, container shortages, and other woes that have been holding back global shipping and boosting prices in recent months, one of the world’s largest container ships has run aground in the Suez Canal, creating a massive traffic jam that might not be cleared for days.

COVID-19:  Official data show confirmed cases have risen to 124,330,400 worldwide, with 2,736,621 deaths.  In the United States, confirmed cases rose to 29,923,371, with 543,849 deaths.  Vaccine doses delivered in the U.S. now total 164,300,795, while the number of people who have received at least their first shot totals 83,930,495.  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 slightly to approximately 51,000 yesterday, but that was still within the recent range.  New infections have fallen dramatically since the beginning of the year, but they’ve hit a plateau as new, more transmissible mutations offset the impact of accelerating vaccinations.  Meanwhile, new deaths related to the virus came in at 844.
• Texas and Georgia announced plans to expand vaccine eligibility to all adults, joining a handful of states that will have fully opened appointments to residents by the end of the month.  Ohio began allowing unfilled appointments to be given to residents aged 16 and older as of Monday and will open up vaccinations to all adults on March 29.
• While the U.K. has given at least one vaccine dose to 41% of its population, and the U.S. has done so for about 25% of its people, countries in Asia that were initially far more successful in controlling the pandemic are now far behind in their vaccination efforts.  Although China and Hong Kong have given at least initial doses to about 5% of their citizens, most Asian countries have only hit about 3%.
• In an effort to encourage hesitant Russians to get vaccinated, the Kremlin said President Putin has finally been vaccinated.  However, officials deliberately decided not to reveal the name of the Russian-made vaccine Putin chose to take.
• AstraZeneca (AZN, $49.40) said it would publish more data on its U.S. clinical trial “within 48 hours,” after the independent monitoring board that oversaw the study warned that efficacy results released by the company on Monday were misleading.
• In an escalation of its dispute with the U.K. and AstraZeneca over access to vaccine production, the European Commission is drafting a new law broadening the basis for stopping vaccine shipments to countries that import from the EU but refuse to export their own vaccines or vaccine raw materials.
• Moderna (MRNA, $136.52) is developing a vaccine targeting the seasonal flu and COVID-19.  If successful, the combination would protect recipients from both illnesses. The shot could be ready for use in a couple of years, a timeline dictated by the company’s progress and the regulatory process.
• Pfizer (PFE, $35.36) said it has begun testing an oral COVID-19 drug on humans, and if proven to work safely could provide doctors yet another tool to fight the pandemic.  Researchers are enrolling 60 healthy subjects to evaluate the safety of different doses of the treatment.  If results are positive, Pfizer would determine whether the treatment works safely in people infected with COVID-19.

 Economic and Financial Market Impacts

• As broader vaccinations and economic reopening points toward increased driving this summer, and as fuel stockpiles remain contained, gasoline prices are marching higher.  According to the AAA, national gasoline prices averaged $2.88 this week, up 30% from one year ago.  Rising fuel prices could eventually help dampen the expected economic recovery later in the year, although they would naturally heighten concerns about broader inflation pressures.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we first provide an overview of the evolving infrastructure and economic plan being developed within the Biden administration.  Complementing the additional fiscal stimulus from that bill, we note that Federal Reserve Chair Powell will begin two days of testimony before Congress today, where he will reiterate the Fed’s commitment to a loose monetary policy.  We next turn to various international news, including still more tensions with China, before ending with an overview of the latest coronavirus developments.

U.S. Fiscal Policy:  Officials in the Biden administration are reportedly developing a multipart infrastructure and economic plan that would total approximately $3 trillion over ten years.  The first part of the plan would include spending on roads, bridges, and other infrastructure, including projects designed to address climate change.  The second part would consist of measures focused on education and other priorities, including extending the newly expanded child tax credit, scheduled to expire at the end of the year, and providing for universal prekindergarten and tuition-free community college.  The plan, which is still preliminary, is due to be presented to President Biden this week.

• If the proposals add up to $3 trillion over a decade, that will represent 1% of GDP and a 5% increase in federal spending beyond current projections.  Senior administration officials have discussed raising taxes on companies, among other options, to offset the cost of the spending packages.
• Obviously, an economic plan anywhere near $3 trillion would generate strong pushback from Republicans in Congress and potentially from centrist Democrats as well, especially if there are tax increases involved.  The administration has tried to lure those lawmakers with the promise that they could earmark some funds for their own districts, but the incentives may not be enough to get the bills passed.
• In any case, the continuing work on a new bill, after the $1.9 trillion pandemic relief bill just signed into law, will help keep alive expectations for additional fiscal stimulus and further upward pressure on inflation.  The result will likely be continuing upward pressure on stocks and volatility for bonds.

U.S. Monetary Policy:  Doing his best rendition of a broken record, Fed Chair Powell will say at today’s hearing of the House Financial Services Committee that even though the economic recovery from the coronavirus pandemic appears to be progressing and strengthening quicker than expected, it is still far from complete.  Therefore, according to Powell, the Fed will continue to keep its monetary policy extraordinarily loose.  That should further buoy equities, but because of concerns that loose policy will boost inflation and force the Fed’s hands at some point, Powell’s stance could also keep bonds volatile.

• Separately, the Norwegian central bank said that a faster-than-expected pickup in global economic activity coupled with notable growth in domestic house prices has prompted it to advance plans to boost interest rates from zero.  It now expects to hike rates before the end of 2021, which would make Norway the first major developed country to hike rates, although a couple of large emerging markets have also done so recently.
• The Norwegian announcement will likely increase speculation that the Fed could tighten policy earlier than Chair Powell keeps signaling.

United States-China:  The U.S., Canada, the United Kingdom, and the European Union unveiled sanctions against a range of Chinese officials and a paramilitary organization involved in the mass detention campaign against ethnic Uyghurs in China’s northwestern Xinjiang region.  The Chinese government responded by imposing its own sanctions on several EU officials and organizations, prompting a warning by some EU parliament members that the market-access deal recently negotiated between the bloc and China is now in jeopardy.

• For the U.K. and the EU, the decision marks the first use of human rights sanctions against China since the crackdown on the Tiananmen Square democracy movement in 1989.
• Separately, U.S. Secretary of State Blinken and EU foreign policy chief Borrell will relaunch the U.S.-EU China Dialogue in Brussels on Wednesday.  The dialogue, focused on security and human rights, was set up late in the Trump presidency, but it failed to gain traction because of EU frustration over Trump’s approach to foreign policy.
• Taken together, the coordinated sanctions and relaunch of the U.S.-EU China Dialogue provide additional evidence that the Biden administration is gaining traction with its effort to build a unified alliance against a range of Chinese behaviors.  Given China’s enormous economic heft, it’s still not clear how far the U.S. allies will go in pushing back against China.  For now, however, the trend is clear that tensions will likely keep increasing between the liberal democracies and China, potentially leaving investors in the crossfire.

United States-Mexico-Guatemala:  President Biden is sending two high-level officials to Mexico and Guatemala this week for consultations about ways to stem the recent surge in migrants seeking to cross into the U.S. over the southern border.

Norway-Russia:  In another sign of tighter restrictions on cross-border trade and investment, the Norwegian government said it will block Rolls-Royce (RYCEY, USD, 1.57) from selling a Norwegian engine maker to a Russian company over concerns it could allow sensitive technology to end up in Russian hands.

Israel:  The country will hold its fourth parliamentary elections in two years today, with Prime Minister Netanyahu trying to leverage his government’s super-fast vaccination program and economic reopening against several upstart centrist parties.

Saudi Arabia-Yemen:  Under pressure from the U.S., the Saudi government proposed a ceasefire and UN-sponsored political consultations to end the civil war in Yemen, but the Iranian-backed Houthi rebels immediately rejected the idea.

COVID-19:  Official data show confirmed cases have risen to 123,778,489 worldwide, with 2,725,516 deaths.  In the United States, confirmed cases rose to 29,870,135, with 542,993 deaths.  Vaccine doses delivered in the U.S. now total 156,734,555, while the number of people who have received at least their first shot totals 82,772,416.  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 a bit more than 50,000 yesterday, although that remained lower than the seven-day moving average of 54,308 and the 14-day moving average of 53,989.  The figures are consistent with the recent plateauing or even slight rebound in cases as more transmissible variants battle it out against expanding vaccinations.  On a more positive note, new deaths totaled only 593.
• In West Virginia, state officials opened up vaccinations to anyone over the age of 16, joining a range of other states lowering age requirements in an effort to broaden the injection program.
• In U.S. clinical trials aimed at securing approval from the FDA, interim data showed the vaccine developed by AstraZeneca (AZN, USD, 51.20) was 80% effective in participants aged 65 and over, a group previous AstraZeneca trials lacked in large numbers. The shot was also found to be 100% effective in preventing serious illness and hospitalization across ages and ethnicities.  Less than a day later, however, officials at the National Institute of Allergy and Infectious Diseases said an independent data monitoring board working with the company in conducting its trials “expressed concern that AstraZeneca may have included outdated information from that trial.”
  • The agency said it was urging AstraZeneca “to review the efficacy data and ensure the most accurate, up-to-date efficacy data be made public as quickly as possible.”  However, the company hasn’t responded to the concerns so far this morning.
  • In its initial data release, the company said it would continue to analyze the data and plans to request emergency authorization in the U.S. by mid-April.  If authorized by the FDA, the vaccine could become the fourth injection available in the U.S. starting in May.
  • What would have been a vote of confidence for the AstraZeneca shot will now likely heighten concerns about its efficacy and safety.  The development could also increase vaccination hesitancy among some people, although the overall rapid pace of vaccinations in the U.S. will likely continue.
• British Prime Minister Johnson has sent an emissary to Brussels in an effort to defuse the “vaccine war” with the EU, in which each side has threatened or allegedly disrupted vaccine exports to the other.  At least part of the issue is that AstraZeneca appears to have promised more doses of its vaccine than it can deliver to both the U.K. and the EU.  Coupled with today’s news of the potentially outdated trial results in the U.S., the spat presents a further reputational risk for the company.
• In news related to coronavirus treatments, Regeneron Pharmaceuticals (REGN, USD, 483.22) said its antibody drug reduced the risk of COVID-19 hospitalization or death by about 70% in a large clinical trial, the most definitive evidence yet that the medicine can aid recovery early in the course of the disease.

 Economic and Financial Market Impacts

• The European Central Bank released data showing euro banknotes in circulation rose by €156 billion over the past year despite cash falling as a share of daily transactions.  The 12.2% jump in physical euros in circulation mainly stemmed from EU households hoarding more cash in response to the uncertainty and disruption of the pandemic.
• In Japan, the average price of land has fallen for the first time in six years, due to a decline in demand for urban commercial property in the midst of the pandemic.  The price of land in all categories, including residential and industrial, fell 0.5% from a year earlier, as of January 1, compared with a 1.4% rise a year earlier.  Land prices across all categories in the Tokyo, Osaka, and Nagoya metropolitan areas, the three largest, slipped 0.7% from the previous year, while rural land prices dipped 0.3%.
• One silver lining from the move to remote work during the pandemic is that many people with disabilities found it easier to work and land jobs.

Foreign Policy Response

• In Poland, junior members of the governing coalition say they will vote against the “own resources” spending bill needed to implement the EU’s massive €750 billion pandemic relief plan, which includes mutualized EU debt backed by the full faith and credit of the bloc as a whole.  The opponents are perturbed mostly by EU rules linking the funds to “rule of law” requirements that they see as an affront to Polish sovereignty.  That means the government will have to rely on the opposition remaining to pass the bill.

 View PDF