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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  U.S. equity futures are turning modestly higher as Treasury yields have turned a bit lower this morning.  We are seeing a pattern where lower yields tend to lift tech over other sectors.  Our coverage begins with international news.  Turkey is in turmoil after the central bank head was replaced.  We move on to economics and policy, pandemic coverage, and close with China news.

International news:  Turkey has a new central bank governor and a weaker currency.  Turmoil in Myanmar continues.

• President Erdogan returned to form over the weekend, firing Naci Ağbal, the head of Turkey’s central bank. Ağbal was considered an orthodox central banker; he raised interest rates to contain inflation and arrest a declining TRY.  Since November, policy rates in Turkey have increased 900 bps to 19.0%.  However, the president ascribes to the idea that raising rates increases inflation and thus ran out of patience with Ağbal.  This is the third time in less than two years that Erdogan has fired his central banker.  He was replaced by Sahap Kavcioglu, a professor of banking who shares Erdogan’s position on the relationship between interest rates and inflation.  As expected, the currency is sharply lower today despite efforts by the new governor to calm markets.
  • Turkey also withdrew from an international treaty designed to reduce violence against women. Worldwide condemnation has resulted.
• Before the U.S./China meetings, the defense ministers of the U.S. and Japan agreed to cooperate closely in the event of a military event over Taiwan. Geopolitically, a Taiwan controlled by China would effectively cut Japan’s access to seaborn traffic from South Asia.  We would expect the Japanese military to take active measures if China decides to take Taiwan militarily.
  • A 7.2 magnitude earthquake hit northeastern Japan over the weekend.
• Malaysia has agreed to extradite a North Korean national charged with money laundering. Pyongyang has cut diplomatic ties with Malaysia over this decision.  Acquiring money through illegal activities is something of a cottage industry for North Korea; if other nations follow Malaysia’s lead, it will hurt North Korea’s economy.
• Although protests in Myanmar against the military coup continue, the more potent reaction has been a general strike which has mostly paralyzed the economy. It is not clear who can hold out the longest—the lack of economic activity is making life difficult for the strikers, but the government is also suffering.  The fact that ordinary workers joined the strike shows how the military misjudged the reaction of the people over the coup.
• The EU continues to struggle. Concerns over vaccine safety have led to slowing vaccinations.  Nations are facing a surge in infections, and economies are slowing down as a result.  As relations between the U.S., China, and Russia become strained, the EU finds itself caught in the middle and is fearful it will not be able to negotiate a middle ground.  We expect these problems to continue.  Germany has close ties to China’s economy and wants to complete the Nord Stream 2 pipeline with Russia.  Although EU leaders don’t have to deal with the harsh rhetoric of President Trump, the underlying geopolitical issues remain.
  • Igor Matovic, the PM of Slovakia, offered to resign (as long as the rest of the coalition does as well) after he faced criticism for unilaterally approving the use of Sputnik V, the Russian COVID-19 vaccine.
  • The U.K. and EU are making progress on creating a forum for financial services Although the U.K.’s separation from the EU has been messy, it does appear that there is some common ground for banking.
• SoD Austin made a surprise visit to Afghanistan on Sunday. The U.S. is planning to remove the remaining 3,500 troops from the country on May 1, although we would not be surprised to see that action postponed.  Austin’s visit may have been part of the decision processes regarding withdrawal.
• A fire at Renesas Electronics (RNECF, USD, 11.28), a Japanese chipmaker, will further reduce the semiconductor supply for the auto industry.

Economics and policy:  Generations are moving in together in response to high home prices and concerns over elder care.

• Elevated home prices and the pandemic are increasing, a trend that started after the Great Financial Crisis, multigenerational housing. After the Great Depression and the advent of Social Security, multigenerational housing became less frequent.

However, as the above chart shows, although it has been rising since 1980, the trend has accelerated this century.  Reports indicate that families are pooling their resources among parents, grandparents, and children to buy homes.  Such trends may reduce the number of homes sold, but they will tend to support larger homes and remodeling.  On the other hand, it isn’t a welcome trend for nursing homes and assisted living facilities.

• • There is a growing lumber shortage in the U.S.; a pine beetle in western Canada is contributing to the problem.
• Visa (V, USD, 206.90) is facing anti-trust investigations over its debit card actions. The DoJ has become increasingly hostile to industry practices that require concentration to function.
• Multinational trade deals have fallen from favor in the U.S. The lack of participation does not favor American industries that rely on trade, such as meat.
• In light of reports that the Biden administration is considering raising taxes, a new paper by the NBER suggests that underreporting by the highest earners may be more than 20%. Although better compliance would increase revenue, the bigger part of this story is that it gives political fodder to the goal of increasing marginal tax rates at the upper end.  After all, if they are cheaters, they should pay.
• As stimulus checks arrive, the “known/unknown” is what households will do with the money. There is evidence that most of what has been distributed was saved, at least initially.  There is also evidence that some debt reduction occurred.  If this pattern continues, economic growth forecasts are probably too high, but the improvement in balance sheets will be positive for long-term growth.  There is also some evidence that the relief checks will end up in equities.
• Big tech is facing an increasingly hostile regulatory environment. Both the populist right and left are turning on the industry, although for different reasons.  The industry is turning to the few remaining libertarian-leaning legislators for help.

COVID-19:  The number of reported cases is 123,287,417 with 2,716,696 fatalities.  In the U.S., there are 29,819,108 confirmed cases with 542,359 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.  Over the past two weeks, case counts in the U.S. are down 8.8%.  The CDC reports that 156,743,555 doses of the vaccine have been distributed with 124,481,412 doses injected.  The number receiving at least one dose is 81,415,769, while the number of second doses, which would grant the highest level of immunity, is 44,141,228.  The FT has a page on global vaccine distribution.

Virology

• The U.S.-based clinical trial of the AstraZeneca (ASN, USD, 49.21) vaccine showed 79% efficacy against symptomatic disease and 100% efficacy against severe disease. And, the study indicated it was effective for all age groups.  Although the vaccine has been controversial, this study should ease concerns and lead to emergency use approval in the U.S. soon.
  • Denmark has reported a death and a critical illness after two AstraZeneca vaccinations.
  • The EU is refusing to ship this vaccine from the Netherlands to the U.K., despite contracts by Britain to purchase it. PM Johnson is asking the EU to reconsider.  Vaccine nationalism remains a problem.
• Pakistan’s PM, Imran Khan, has tested positive for COVID-19.
• India is facing a new wave of infections from rising vaccine skepticism.
• To overcome vaccine hesitancy, companies are starting to offer giveaways to recipients. Companies are also offering bonuses to vaccinated employees.
• Meanwhile, U.S. vaccine production is increasing rapidly, which should lead to higher distribution.
• So far, the U.S. has focused on acquiring vaccines for Americans, but as distribution improves, we would expect the U.S. to push international distribution. America is lagging behind China and Russia on vaccine diplomacy.

China news:

The U.S. and China meeting was strained.  We wonder if American officials looked at each other after this weekend’s meeting with Chinese officials and said, “that went well, right?”  The meetings were difficult, to say the least.  The public presentations were fiery, although it does appear that the closed-door meetings were less fractious.  Although relations have been deteriorating for some time, it is clear China will not easily accept America’s plans to isolate it.

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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 I of our new 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 is Friday, so our most recent Asset Allocation Weekly, chart book, and podcast are also available.  Finally, here is our latest Weekly Energy Update.  You can find all this research and more on our website.

Good morning, and happy Friday!  U.S. equity futures are ticking higher this morning as Treasury yields are steady to lower.  Our coverage leads off with the Alaska summit meeting between the U.S. and China; we then turn to other international news.  Economics and policy are covered next, with a focus on immigration and Russia.  China news follows, and we close with the pandemic update.

Alaska Summit: On Thursday, U.S. and Chinese officials held the first of a two-day meeting in Anchorage.  The first face-to-face the U.S. and China have had since President Biden took office started with a bang.  Both sides began the meeting by hurling accusations at each other. The U.S. accused China of disrupting the “rules-based order that maintains global stability.”  In response, China stated the U.S. should speak for itself and not for other countries and accused it of inciting “some countries to attack China.”  Despite the fury exchanges between the two sides, tensions reportedly subsided once the meeting moved behind closed doors.

The clash between the two sides should have been expected.  Neither China nor the U.S. wants to appear to be lectured by the other side.  That being said, the uncharacteristic outbursts by the two-sides do highlight the growing hostilities between them.  The biggest takeaway from this meeting is that neither side appears to be willing to give concessions to the other without receiving something significant in return.  It could make China’s goal of getting the U.S. to lift tariffs difficult.  We expect the meeting to lay the groundwork for further discussions as the two work through their disagreements.  The meeting is scheduled to end today, with the two sides likely holding a press conference.  It is doubtful there will be an announcement of a breakthrough.

BREAKING–The Supplemental Leverage Ratio (SLR):  The Fed has decided not to extend the SLR relief on Treasuries.  To review, last year, during the panic, the Fed allowed banks to exclude Treasury holdings from leverage ratios, which allowed banks to hold more Treasuries without adding capital.  This helped absorb the increase in Treasury borrowing; by not extending the facility, banks may be forced to dump Treasuries and add supply pressure to an already weak market.  However, the New York FRB announced a doubling of the reverse repo facility, from $30 billion to $80 billion.  The expansion of the Fed’s reverse repo will allow the banks to repo the Treasuries to the Fed and prevent a “dumping” of the Treasuries.  The market’s initial reaction has been to sell long-duration Treasuries.  Although the Fed’s action does ease the dumping concern, the end of SLR relief removes a buyer of Treasuries from the market, commercial banks.

As this chart shows, large banks have been aggressive buyers of Treasuries over the past year.

Why did the Fed decide to end this program?  Several populist senators were questioning the facility, given that banks didn’t seem to need the support.  Although that is true, the impact will tend to lift Treasury yields, ceteris paribus.

International news:  The U.S. continues to promote its agenda abroad.

• Four countries, including the U.S., called on the Afghan government and the Taliban to reduce violence and begin discussions on sharing power, in an effort to end the two-decade war.  The deadline for the complete withdrawal of American troops is drawing closer.
• The central government officially declared Thursday that the coronavirus state of emergency currently imposed on Tokyo and three neighboring prefectures will be lifted on Monday.  Officials are urging the public to stay vigilant to avoid a resurgence of COVID-19 cases.
• According to a survey, British consumer morale struck a one-year high this month as the public became increasingly confident that an economic recovery from the COVID-19 pandemic is approaching and consumers would benefit directly.
• Tanzania’s leadership faced calls for a smooth succession after President John Magufuli, Africa’s most vehement coronavirus skeptic, died on Thursday following an 18-day absence from public life that drew speculation about his health.
• U.S. Defense Secretary Lloyd Austin arrived in India on Friday in a sign of their strengthening defense ties.  Austin will begin discussions about China, Afghanistan, and the Indo-Pacific region.  The meeting also intends to kick-start a new phase of the U.S.-India security partnership—one that aims to operationalize the gains made through years of arms sales, technology transfers, and defense agreements.
• The BOJ, like the Swiss National Bank, has been buying equities as part of its balance sheet expansion.  It announced it was dropping its annual equity purchase target, although it reserved the right to buy stocks if necessary.  This decision may dampen Japanese stocks, which have been very strong recently.

 Economics and policy:  The Biden administration’s takes on Russia and immigration.

• Over the past five days, confidence among low-and middle-income consumers increased more sharply than confidence among high-income consumers, signaling that the third stimulus bill may help counterbalance the K-shaped recovery in confidence and spending.
• The House voted on Thursday to create a path to citizenship for an estimated four million undocumented immigrants.  The move reopens a politically charged debate over the nation’s broken immigration system as President Biden confronts a growing surge of migrants at the border.
• Russia took the rare step of recalling its ambassador to Washington after Biden’s comments in a television interview, warning of the possibility of an “irreversible deterioration of relations.”  Seated in a gilded chair on the seventh anniversary of Russia’s annexation of Crimea, Putin all but called President Biden a killer himself.
• During a press conference on Thursday at the South Korean Ministry of Foreign Affairs, SoS Blinken called again for the “denuclearization of North Korea,” a shift in policy from the former administration’s call for the denuclearization of “the Korean peninsula.”
• Three senators demand the Senate Judiciary Committee convene a hearing examining new concerns regarding the Obama-era Federal Trade Commission’s decision not to take antitrust action against Google (GOOGL, $2,021.34) a decade ago.
• NASA said on Thursday that the largest rocket element it has ever built, the core stage of its Space Launch System (SLS), successfully passed its engine test, paving the way for additional future manned launches to the moon.
• The Biden administration is considering additional sanctions to block construction of the nearly completed Nord Stream 2 pipeline from Russia to Germany, potentially including the project’s parent company Nord Stream 2 AG, according to three people familiar with the matter.
• The U.S. government will be “more aggressive” in telling migrants not to come to the United States, a top U.S. official said on Thursday, after earlier warnings failed to stem the flow of thousands of Central Americans to the U.S.-Mexico border.
• On Thursday, U.S. Republican lawmakers reintroduced a bill that would revoke the permanent normal trading status that Washington has had with Beijing for the past two decades.  It is the latest in a series of efforts by China hawks in Congress to decouple the two countries’ economies.

China:  China continues to show assertiveness domestically.

• Apple (AAPL, $120.53) is expected to roll out changes to iPhones in the Spring that will give users more privacy from mobile advertising.  The changes will force apps to ask for permission before collecting tracking data on users.  Apple is facing problems in China, where tech companies are testing ways to beat the system and continue tracking users without prompting for their consent.
• Moves by the United States to maintain its loose monetary policy until the end of 2023, at least, to support its economic recovery and labor market have reinforced concerns in Beijing as it tries to reduce the risk of domestic asset bubbles by gradually tapering off stimulus policies enacted last year.
• China’s internet regulator rebuked LinkedIn executives this month for failing to control political content, according to three people briefed on the matter.  LinkedIn has been the lone major American social network allowed to operate in China, as it has agreed to censor controversial posts made by Chinese users.

COVID-19:  The number of reported cases is 121,708,510 with 2,686,366 fatalities.  In the U.S., there are 29,662,431 confirmed cases with 539,215 deaths.  U.S. case counts are the lowest since early October.  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 151,108,445 doses of the vaccine have been distributed, with 115,730,008 doses injected.  The number receiving a first dose is 75,495,716, while the number of second doses, which would grant the highest level of immunity, is 40,981,464.  The FT has a page on global vaccine distribution.

Virology

• Germany, France, Italy, and Spain said they would resume using the Oxford/AstraZeneca (AZN, $49.33) coronavirus vaccine after the EU drugs regulator said there was a “clear scientific conclusion” that the jab was “safe and effective.”
• Illinois adults of all ages, except those in Chicago, will be eligible to receive a COVID-19 vaccine beginning in mid-April, Governor Jay Pritzker announced on Thursday while laying out new guidelines aimed at further easing pandemic-era restrictions across the state.
• The Centers for Disease Control and Prevention said on Thursday the U.S. has administered 115.7 million doses of the vaccine, an increase of 2.7 million from the previous day. More than 75 million Americans have received at least one shot so far, equal to 22.7% of the total population and 29.2% of all adults.
• President Emmanuel Macron’s government has put Paris and several other regions under strict lockdown for a third time as hospitals run out of intensive care beds for COVID-19 patients.
• The prime minister said that despite the drop off in vaccine supply in April, “there is no change to the next steps of the roadmap,” and “our progress on the road to freedom continues unchecked.” Johnson said every adult in the U.K. would still be offered a jab by the end of July.
• As Brazil’s coronavirus outbreak spirals out of control, the country is facing a dangerous new shortage threatening to drive fatalities even higher: a lack of staff in intensive care units.

 View PDF

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

[Posted: 9:30 AM EDT] | PDF

Good morning!  U.S. equity futures have mostly failed to hold yesterday’s gains as long-duration Treasury yields continue to move higher.  Our coverage begins with economics and policy with a focus on the FOMC and monetary policy.  China news comes next as U.S. and Chinese officials prepare to meet in Alaska.  Pandemic coverage follows.  Our roundup of international news comes next, wrapping-up with technology.  We finish with a cautionary ESG tale.

Economics and policy:  We recap the Fed and other items.

• The Fed didn’t exactly surprise anyone. Policy rates and QE remained unchanged.  However, in the forecasts, the FOMC has lifted its GDP forecast to 6.5% for this year, up from 4.2% in December.  The forecast for core PCE was lifted to 2.2% this year, from 1.8% in December.  Inflation is expected to fall in 2022-23.  So, the FOMC is indicating that inflation will be transitory.  The “dot” plot showed a modest rise in support for a higher policy rate in 2023, but the majority still expect to keep rates steady through the end of 2023.

Overall, market action in the wake of the decision was surprisingly bullish.  Equities rallied, the dollar declined, precious metals rallied, but long-duration Treasuries did end the day with higher yields.  It’s not obvious what the financial markets were expecting.  There appeared to be great concern about rising long-duration Treasury yields going into the meeting.  Nothing about yield curve control or increasing QE was revealed.  The Fed did not decide on supplemental reserve ratios, and if last year’s adjustment is not extended, bank demand for Treasuries will likely decline.  Going into the meeting, it appeared the fear was the FOMC would allow inflation to rise unrestrained.  It’s hard to see how that was addressed.  It is not clear if the rally described above was merely a relief rally that won’t be sustained, or somehow, without saying much, the Fed managed to calm concerns.  Market action this morning suggests that yesterday’s rally is fading.  In the cold light of morning, it is clear the Fed hasn’t resolved the issue of long-duration interest rates.  It looks like we are probably on a path for 10-year T-note yields to approach the 1.90%/2.00% area; the key question is whether that level will trigger financial stress.

• There is a growing recognition that the U.S. fiscal stimulus action is far surpassing other developed economy nations. This development will have multiple effects.  First is that U.S. economic growth will be much stronger than Europe or developed Asia.  Second, and one area that seems to be overlooked by economists as they lift their economic forecasts, is that U.S. imports will likely rise.  The past four decades have shown countries that make strong unilateral fiscal expansions tend to see much of it lost to imports.  France in the 1980s was a classic example.  However, the impact on the U.S. might be less.  The U.S. is less globally integrated which will tend to mitigate the impact, and much of the recovery spending will likely focus on services, which face less import competition.
• Treasury Secretary Yellen is supporting a global minimum corporate tax. One of the problems in taxing capital is that if one nation has a low tax rate, corporations can shift activity to that nation, leading to lower taxes.  By supporting a corporate minimum, this “race to the bottom” could be avoided.  Such a provision would be a negative for earnings.
• Surprisingly, Congressional Democrats seem to be declining to use the Congressional Review Act, which allows Congress to reverse regulatory changes occurring near the end of an outgoing administration. However, the actions must be taken within 60 days of the new regulation.  Simply put, time is running out, meaning that many of the late Trump-era regulations could stay on the books.
• Here’s something to watch—many states raise payroll taxes, which pay for unemployment insurance, after a recession. This is done to rebuild reserves.  This tax hike could slow hiring as the tax is paid on the number of employees.  Essentially, this tax raises the cost of rehiring.
• Samsung (005930, KRW, 82300) is warning that the semiconductor shortage could increase in the near term.

China:  The U.S. and China meet today in what looks to be a tense atmosphere, and Myanmar is a growing problem for China.

• As China and U.S. officials prepare to meet, the U.S. has revealed a series of new sanctions and restrictions. First, 24 officials in Hong Kong have come under sanction for their actions on restricting elections in the former colony.  Second, the Commerce Department has served subpoenas on several Chinese tech and communications companies.  The FCC has joined in by announcing it has begun efforts to revoke authorization for two companies, China Unicom Americas (0762, HKD, 4.61) and Pacific Networks (3021, JPY, 3550), to operate in the U.S.  China’s plan for this meeting was to ask Washington to roll back Trump policies; the actions today suggest that isn’t likely.
  • The EU has joined the effort, announcing sanctions for Chinese nationals and one company due to human rights violations. The names have not been released yet (that is scheduled for Mar. 22).  It is the first time the EU has applied sanctions on China since Tiananmen Square.
  • China is opening trials for two Canadian nationals who were seized shortly after Meng Wanzhou was detained in Canada in late 2018.
• SoS Blinken and SoD Austin have completed a tour of Asian nations before today’s meetings with Chinese officials. The pair recently stopped in Tokyo to build support with Japan.  Kurt Campbell, the diplomatic coordinator for the U.S., also noted that relations with China cannot be normalize until the Chinese/Australian trade dispute is resolved.  One change we see from the previous administration is the desire to create a coalition to confront China.  What remains to be seen is what these coalition partners want in return.
  • On a side note, Pyongyang finally responded to U.S. diplomatic activities, with Kim’s sister warning against U.S./South Korean military exercises.
  • The U.S. Coast Guard is expanding its mandate into the Western Pacific to counter China.
• As we noted earlier this week, protestors in Myanmar are targeting Chinese company assets in-country, and Beijing is getting angry about this development. Workers at Chinese companies are finding themselves in the crossfire.  In response, the military has been increasingly using deadly force against protestors.
• China is making it difficult to gather information on conditions in Xinjiang. Without information, firms run the risk of trafficking in products made by labor in concentration camps, and nations struggle to know how and what to sanction over this issue.
• Beijing is expressing concern about the U.S. stimulus package, likely worried about the market disruption that may follow. The rise in 10-year T-note yields is probably behind their concern.
  • This worry comes in the context of Chinese regulators working feverishly to contain shadow banking to restrain credit growth. The problem is that these credit restrictions will tend to cut liquidity to the private sector, further harming economic growth.
• The U.K. has formally declared that China is in breach of the 1984 Hong Kong declaration. It is unlikely that there will be any repercussions from this decision.
• Chinese regulators are increasingly worried about the property market. They have proposed changing land sales to a regular auction period,  hoping to reduce bidding issues.  The expectation is that a regular auction would make it more difficult for less stable property developers to bid.  However, this will reduce prices, which would harm local governments.
  • The supply of land dedicated for rental properties will also be increased in a bid to reduce prices.
• One of the areas of internet growth is to provide service via satellite. That would provide broadband coverage to less populated areas.  In the U.S., the private sector is involved in sending up small satellites for this purpose.  China has indicated it intends to compete in this area.
• China is suffering from massive dust storms. This has led to flight cancellations and caused some roads to close due to visibility problems.

COVID-19:  The number of reported cases is 121,319,246 with 2,682,660 fatalities.  In the U.S., there are 29,608,162 confirmed cases with 538,093 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 147,590,615 doses of the vaccine have been distributed with 113,037,627 doses injected.  The number receiving at least one dose is 73,669,956, while the number of 2^nd doses, which would grant the highest level of immunity, is 39,989,196.  The FT has a page on global vaccine distribution.  U.S. case counts are steady or falling in most states.

Virology

• The concerns about the AstraZeneca (AZN, USD, 49.35) vaccine in the EU is turning into a geopolitical problem. As Germany decided to pause the use of the vaccine, other EU nations were generally forced to at least consider suspending the use of the vaccine or run the risk of appearing not cautious.  It seems the scientific consensus is the EU’s actions are an overabundance of caution.  The fact that blood clots followed injections runs the risk of the classic post hoc ergo propter hoc error.  Simply put, just because an event follows a prior event doesn’t mean there is a causal relationship.  Most researchers believe that the blood clotting was happenstance.  Also, there is likely a lack of perspective on relative risks.  All vaccines carry some degree of risk; it’s important to weigh the risks of the vaccine relative to contracting the disease.
  • The handling of the vaccine situation has put the EU bureaucracy in a bad light. Several errors were made.  First, focusing on cost instead of availability has reduced vaccine supply.  Second, a strong anti-vaccine movement in Europe has led to an overabundance of caution.  Third, the inability to police member states has led to individual countries, such as Hungary, approving the use of the Russian and Chinese vaccines.
  • We note that the EU drug regulator supports the AstraZeneca vaccine. They will rule on its safety soon.  However, the controversy will likely slow the vaccine rollout.
  • Meanwhile, EU Commissioner von der Leyen is threatening to cut off vaccine exports to countries that refuse to share their vaccines, a direct threat to the U.K. Naturally, Britain isn’t pleased with this development.  The U.K. NHS is warning that vaccine shortages will start to slow the pace of vaccinations.
  • Already, the EU has export restrictions in place that have been extended until the end of Q2.
  • As all this concern about vaccines rages in the EU, the bloc is facing a surge in cases, looking like a third wave is underway. Italy has already established new lockdown measures, and Poland will lockdown starting this weekend.
  • We should note that it isn’t all bad news in Europe. Serbia has the second-highest vaccination rate in Europe.  It has approved the Russian and Chinese vaccines to aid distribution.
  • The EU is planning on vaccine passports to support summer tourism. Iceland has announced it will allow vaccinated travelers to visit.
• China is now restricting travel visas to visitors who have had a Chinese vaccine.
• There is steady evidence that the vaccine expansion in the U.S. is bearing fruit. Movie theaters are reopening, as are theme parks.  The New York theater district is planning a spring season.  The U.S. is now extending vaccinations to remote areas.
• Another country that has done a good job in vaccine distribution is Chile.
• Moderna (MNRA, USD, 143.65) is now testing its vaccine on children.
• Research continues on “long COVID” patients.

International news:  There were elections in the Netherlands, and protests are emerging in Lebanon.

• The center-right People’s Party for Freedom and Democracy, the party of PM Mark Rutte, looks to retain power, although the makeup of his new government will likely have more center-left representation.
• EU officials are suggesting that the €750 billion fiscal package passed last year might be too small. The ECB is also offering banks regulatory flexibility on bad loans.
• Protests in Lebanon are escalating as the currency plummets in value. Although the official rate remains around 1500 LBP/USD, the black market rate is now around 15,000.  The country has been through a series of trials, from COVID-19 to a massive port explosion.  So far, the political system has not generated a plan for recovery.
• In light of a crush of immigrants on the U.S./Mexican frontier, Mexico is conducting immigration raids to slow the flow.
• Brazil’s central bank has raised rates as inflation surges.
• The U.S. may keep troops in Afghanistan past the May 1 deadline.

Technology:   

• There are numerous items on the labor front. Overall, the tech firms are seeing a clear upturn in labor activism.
  • In the U.K., Uber (UBER, USD, 56.07) is giving drivers “worker,” as compared to “employee” status. This change will make them eligible for benefits that will boost the costs of operating.  The change came after the company lost a legal battle to have its workers retain contractor status.
  • Next week, Amazon (AMZN, USD, 3130.56) will face a unionization vote in Alabama. Working conditions appear to be the biggest issue.  The company is aggressively trying to beat back the effort.
  • Workers at Google (GOOG, USD, 2088.25) have voted in a minority union. This is a union that won’t have formal NLRB recognition, thus not allowing it to collectively bargain.  The situation at Google shows a difference between white and blue-collar workers.  The former is more concerned about company activities and less about wages and working conditions.
• The Biden administration has put together a team on industrial organization that is clearly moving to overturn the Bork standard. Here is a roundup of the team.

An ESG cautionary tale:  Danone (DANOY, USD, 14.31) has been something of a “poster child” for ESG.  For example, last summer, the company officially adopted a French legal status, enterprise à mission, or a purpose-driven company, signaling to shareholders that it would not be solely focused on profit maximization.  Emmanuel Faber, the CEO and chairman who implemented these changes, has been ousted due to poor stock performance.  Investors like the conscience soothing that comes with ESG investing as long as it doesn’t affect equity performance.

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

[Posted: 9:30 AM EDT] | PDF

Happy St. Patrick’s Day!

Turning to today’s Comment, we open with a preview of the Federal Reserve’s latest policymaking conclave.  The meeting decision will be released early this afternoon, followed by a press conference.  We also review a range of other international and U.S. news before turning to the latest coronavirus developments.

U.S. Monetary Policy:  The Fed will end its latest policy meeting with a statement and press conference by Chair Powell this afternoon.  No significant change in policy is expected, especially since policymakers over the last couple of weeks have insisted that the U.S. economic outlook is still very uncertain, and both unemployment and inflation remain far from their goals.  All the same, investors will be looking for any hint of an earlier-than-expected monetary tightening in the policymakers’ updated economic forecasts and interest-rate projections.

• The housing boom touched off by the coronavirus pandemic continues to drive up demand, and prices, for a range of building materials such as lumber, copper, granite, and concrete.  The rising prices are likely to feed into investor concerns about accelerating inflation and could help keep the bond market volatile in the near term.
• Meanwhile, the February freeze that triggered mass blackouts in Texas led to chemical plant shutdowns that are disrupting global supply chains and causing a shortage of the raw materials needed for everything from medical face shields to smartphones.  Those supply disruptions could also feed into inflation fears and weigh on the bond market.

United States-China:  Wrapping up a meeting with Japanese leaders, Secretary of State Blinken issued a surprisingly pointed attack on Chinese geopolitical aggression and human rights abuses.  According to Blinken, “China uses coercion and aggression to systematically erode autonomy in Hong Kong, undercut democracy in Taiwan, abuse human rights in Xinjiang and Tibet, and assert maritime claims in the South China Sea that violate international law . . .. We will push back if necessary, on China’s coercions or aggressions.”

• It was also telling that the discussion about China reportedly dominated the key 90-minute meeting between Blinken, Secretary of Defense Austin, and Japanese Foreign Minister Motegi.
• Separately, Blinken also said the administration identified 24 Chinese officials whose actions had “reduced Hong Kong’s high degree of autonomy” after China passed a restrictive new election law for the city last week.  The move subjected the officials to sanctions under the Hong Kong Autonomy Act introduced by the Trump administration.  Blinken warned that any financial institution doing significant business with the officials would also be subject to sanctions.
• In sum, the Biden administration continues to sound and act tougher on China than had been expected.  That will probably keep U.S.-China tensions high and present an ongoing risk that investors could be caught in the crossfire.

United States-United Kingdom-Northern Ireland:  Just as President Biden prepared to hold St. Patrick’s Day talks with Irish premier Micheál Martin today, Congress passed a resolution warning that it would oppose any U.K.-U.S. trade deal unless Britain upheld the terms of the 1998 Good Friday peace agreement on Northern Ireland.

• The warning relates to British Prime Minister Johnson’s post-Brexit tussles with the EU over trade flowing through Northern Ireland.
• Even though the U.K. has made modest progress in establishing new, post-Brexit trade agreements with countries outside the EU, a trade deal with the U.S. is critical to Johnson’s vision of transforming the U.K. into a new, hyper-competitive trading country.

United Kingdom:  Prime Minister Johnson’s government issued an updated, post-Brexit national security plan under which the newly unfettered U.K. will attempt to buttress its security by tightening its ties to fast-growing Asian economies like China.  It will also reorient its military forces toward a stronger nuclear deterrence.  For example, rather than cutting its nuclear stockpile to 180 warheads or fewer in the coming years, the ceiling will be raised to 260 warheads.

Russia-Ukraine:  The Ukrainian government’s State Security Service (SBU) said it prevented a large-scale cyberattack by Russian hackers targeting classified government data.  The agency didn’t say whether any damage had been caused in the latest incident, but it blamed a hacker group it identified as Armageddon, which is controlled by Russia’s intelligence services.

COVID-19:  Official data show confirmed cases have risen to 120,819,288 worldwide, with 2,672,857 deaths.  In the United States, confirmed cases rose to 29,549,701with 536,922 deaths.  Vaccine doses delivered in the U.S. now total 142,918,525, while the number of people who have received at least their first shot totals 72,135,616.  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 52,329 yesterday, compared with the seven-day moving average of 55,333 and the 14-day moving average of 56,438.  New deaths related to the virus came in at 1,245, down a full 35% from two weeks earlier and far below the levels seen earlier in the year.
• In California, Los Angeles County was downgraded to the second-highest lockdown tier, which will now allow limited-capacity indoor dining at restaurants, gym reopenings, and other loosening measures.  Other counties also became eligible for the less-restrictive red tier, including San Diego, Riverside, Ventura, and Santa Barbara.  Given the size of California’s economy and population, the reopening measures could have a noticeable and positive impact on national economic data in the months ahead.
• In Florida, new data show the state was able to begin in-person learning at its schools without turning them into superspreaders.  The data will likely play into the debate regarding whether school districts around the U.S. should reopen their classrooms.  In addition, new research suggests schools can get by with a social distancing rule of three rather than six feet.  That would also help increase the number of students that schools could welcome back.
• Dr. Anthony Fauci, the administration’s chief medical officer for the pandemic, predicted that widespread vaccinations and continued social distancing could bring the country closer to a state of normalcy by late summer.  However, he also stressed that relaxing restrictions too soon could still spark a resurgence in the pandemic as is happening in Europe.
• On Fox News last night, former President Trump urged his supporters to get vaccinated.  According to Trump, “I would recommend it, and I would recommend it to a lot of people that don’t want to get it, and a lot of those people voted for me, frankly, . . . It’s a great vaccine. It’s a safe vaccine, and it’s something that works.”  Trump’s support could potentially lead to higher vaccination rates for those who have been hesitant regarding the vaccines, including many Republicans and Trump supporters.
• Echoing the statements by the World Health Organization on Monday, the European Medicines Agency yesterday issued a statement pushing back against some EU governments who have halted the use of the vaccine from AstraZeneca (AZN, 50.05) on concerns about blood clotting.  According to the EMA, the benefits of using the vaccine and preventing many deaths far exceed any likely risks.  The EMA is scheduled to issue a more detailed report on the blood clotting cases on Thursday.
• Pushed by tourism-reliant countries devastated by the pandemic, the European Commission plans to propose creating a COVID-19 certificate that would make it easier for EU citizens to travel inside the bloc.  The certificate would be granted to citizens who have proof of vaccination, a negative COVID-19 test, or proof of recovery from the virus for those who had contracted it previously.  With the certificate, EU citizens could travel to other member states and not be required to quarantine on arrival.
• Iceland will open its borders to all vaccinated foreigners beginning tomorrow, making the North Atlantic island one of the first countries in the world to reopen to tourists after the coronavirus.
  • Iceland’s government had already allowed vaccinated travelers from the EU to enter without quarantine.
  • The new decision means visitors from its main tourism markets, the U.S. and UK, will also be allowed to enter.
• Japanese Prime Minister Suga said the pandemic state of emergency around the Tokyo region will be lifted on Monday.  The move will allow easing pandemic restrictions and increased economic activity in the vital Tokyo area.

 U.S. Policy Response

• The House passed a bill extending the deadline for applying for a Paycheck Protection Program loan to May 31, sending the legislation to the Senate as the current March 31 deadline looms.  The House vote was 415-3, suggesting broad support for extending the deadline.

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

[Posted: 9:30 AM EDT] | PDF

Good morning, Monday!  We have an additional sign of spring, the semiannual clock adjustment.  March Madness begins this week, all in one city.  U.S. equity futures are ticking higher this morning as Treasury yields are steady to lower.  Our coverage leads off with international news; German regional elections were negative for the ruling CDU/CSU coalition.  Economics and policy are next, with a focus on bank leverage ratios and Treasury yields.  Immigration is also a growing issue.  China coverage is next, and we close with the pandemic update.

International news:  German regional elections and Myanmar lead our coverage.

• In the fall, Germany will hold national elections and the CDU/CSU center-right coalition will head into that election without Chancellor Merkel, who is retiring. This weekend, in what was viewed as an early test of the ruling coalition’s popularity, regional elections were held in Baden-Württemberg and Rhineland-Palatinate, two strongholds of the CDU/CSU.  It didn’t go well.  The Greens dominated, with the CDU’s vote share falling to a record low 23% in Baden-Württemberg.  In Rhineland-Palatinate, the SDU dominated with the CDU running second at 26.0%.  The AfD actually suffered losses, suggesting that the right-wing populists were not the cause of the CDU’s problems.  To some extent, this poor showing may be due to regional factors.  The Greens are being seen as a center-left pragmatic party that governs well; that may have been true in Baden-Württemberg, but it may not translate nationally.
  • The CDU has been hit with a series of scandals and, as is often the case for parties losing a strong leader, the succession leadership hasn’t inspired voters. The disruption caused by the pandemic is also a negative for the party in power, no matter how difficult the situation was.  This loss could give the CDU an incentive to adjust before September.
  • If the center-right does lose power in the autumn, it will be a risk factor for Eurozone assets and the EUR as Germany is the dominant nation in the bloc.
• Protests continue unabated in Myanmar and the death toll is grimly rising as well. Over 50 people were fatally shot over the weekend.  The military declared martial law over the Hlaingthaya district of Yangon over the weekend, the first declaration since the coup.  In an escalation, protestors burned down Chinese factories.  We will be watching to see how patient Beijing will be with Myanmar’s leaders if Chinese assets continue to be threatened.
• U.S. negotiators are ramping up efforts to bring the Afghanistan war to a close. Afghan officials worry that the talks are more about the end of U.S. involvement and less about stabilizing the country.
• The conservative government in Australia has been rocked by allegations of rape by members of the administration. The allegations and subsequent protests have started to adversely affect the government’s poll numbers.
• Although the Biden administration says it will “sit down tomorrow” with the Iranian leadership to restart talks, the reality is that both sides are far apart on numerous issues. We doubt Iran will return to talks until after the June elections.  We are seeing reports that former Iranian President Mahmoud Ahmadinejad is considering a run for his old position; the mullahs are reportedly cool to the idea.  Ahmadinejad has been open to talks with the U.S.
• The fallout from Brexit continues; about €100 billion of Irish-listed securities left the securities depository in London for EuroClear in Brussels over the weekend.

Economics and policy:  All eyes remain on the Treasury market.

• Last year, the Fed relaxed the supplemental leverage ratio (SLR), sort of an extra leverage ratio that banks have that acts as a restraint on bank balance sheets. In addition to the capital assigned to various bank assets, the SLR is an overall leverage ratio for all bank assets.  Essentially, it measures the assets relative to cash and equity, including common equity and some forms of preferred equity.  Last March, the Fed granted temporary relief to banks from the Treasuries they held, in that the Treasuries on the balance sheets of banks would not count against the SLR.  In addition, banks had restrictions on dividends and stock repurchases.
  • The dividend and stock repurchase restraints have been eased. The SLR adjustment is scheduled to end on March 31.  Senators Warren (D-MA) and Brown (D-OH) oppose extending the measure.
  • The fear is that if the SLR reverts back to its previous rules, banks will reduce their Treasury purchases. In fact, banks may be forced to reduce their holdings to comply with SLR rules.  This raises questions on who will buy to clear the Treasury markets and at what price (yield).

• One source of demand could be foreigners. Although foreigners have been net sellers recently, recent moves in the dollar have led to favorable hedging conditions.
• Despite opposition from the left-wing populists, the Fed could extend the waiver; that idea is apparently under consideration. The tradeoff might be restrictions on dividends and buybacks.
• A complicating factor is that as relief checks hit accounts as deposits, the corresponding increase in assets (at least initially, in reserves) will further stretch leverage ratios, leading to the paradoxical problem where stimulus leads to banks selling assets (and, given the liquidity in Treasuries, that will likely be the first asset sold), lifting interest rates and unsettling markets. Already, there is talk of banks applying a negative rate to commercial deposits or simply refusing to accept them.  Of course, the SLR itself seems unreasonable; it seems odd that a safe asset like Treasuries would be included in a leverage ratio anyway.
• We do expect this situation to be resolved, but it may require a crisis first.
• In anticipation of a change in immigration policy, there has been an influx of migrant children on the U.S./Mexican frontier. The Biden administration finds itself in the middle of controversy on this issue.  Left-wing populists are pushing hard for a more open border, but the White House fears that uncontrolled immigration will be a potent political point for the midterm elections.  The administration has been slow to overturn Trump-era immigration policies, likely trying to weave a middle road between the left and right.  The House will hold a couple of votes this week as a test of what might be possible.
• With the passage of the stimulus bill, the focus has shifted to infrastructure. Given the widening deficit, there is growing talk of tax measures to fund at least part of the spending.  It’s not clear to us if this will pass; centrist Democrats know that tax hikes will make reelection difficult in 2022.  There has been consideration of a wealth tax; OECD analysis of wealth taxes are that they are mostly ineffective because wealth can move around.
• Companies are still slow to respond to the inevitable end of LIBOR.
• One of the positive surprises is that state and local government coffers have held up during the pandemic. There was great fear, that we shared, that a drop in tax revenue would lead to a situation similar to what occurred in 2010-11, where cuts in state and local government spending more than offset federal spending.  So, why did the states do so well?  Taxes on pot sales.
• The U.S. is rethinking its cybersecurity policy in the wake of numerous recent failures.
• The Fed meets this week. Although no change in policy is expected, the markets will be watching to see if there is any concern about inflation.  We don’t expect any worry to be expressed.
• Florida has been experiencing a flood of outsiders moving in, and former residents moving out. The net result is that the state actually lost population last year.  The influx is being driven by the usual goal of retiring to a warmer climate and low taxes; the outflow is being driven by increasing temperatures, a reluctance to deal with hurricanes, and rising home prices.
• In the 1980s, New Zealand led the practice of central banks targeting inflation. The RBNZ may be starting a new trend; the central bank is starting to monitor home prices in formulating policy.  For the most part, developed market central banks have studiously avoided using asset prices to set policy.  This stance has tended to lead to policies that have fostered asset price inflation.  We will be watching to see if this becomes a new trend.

China:  CPC meetings are finished; now, we see how the policy is implemented.

• So now that the CPC meetings are behind us, what is the message of the next five-year plan? In a nutshell, self-sufficiency.  General Secretary Xi is embarking on a plan of deglobalization to protect China from U.S.-driven isolation.  Xi is also seemingly moving China to a war footing.
• China’s economy is doing well, but mostly due to rising investment. Since investment is usually debt-funded, the worry is that growth is being boosted by unsustainable borrowing.
• It is also becoming increasingly clear that Chinese regulators are cracking down on fintech. Part of the reason is a rise in consumer debt, mostly among younger households.  The fintech firms make borrowing easy; regulators appear poised to make borrowing more difficult, which may stunt consumption.
• In Europe, there is evidence of concern about Chinese dominance. First, German industry is pushing the EU to take a stronger stance against China’s trade practices.  Second, Ukraine announced it was nationalizing Motor Sich (MSICH, UAH, 5298), a firm that makes engines for cargo aircraft and helicopters, in order to prevent the company from being sold to Chinese firm Skyrizon (0941, HKD, 52.00).  Skyrizon is on the Commerce Department’s sanction list due to its ties to the Chinese military.  It appears the action was taken to avoid problems with Washington.
  • Meanwhile, a federal judge has blocked enforcement of the investment ban on Xiaomi (1810, HKD, 24.35), calling the process “deeply flawed.”
• The “five eyes” coalition is actively mining rare earths in Greenland.
• Microsoft (MSFT, USD, 235.75) is investigating if cybersecurity companies with which it collaborates may be leading vulnerabilities to hackers. The company is part of an international consortium of cybersecurity firms, some of which are Chinese.

COVID-19:  The number of reported cases is 119,942,311 with 2,655,161 fatalities.  In the U.S., there are 29,439,057 confirmed cases with 534,889 deaths.  U.S. case counts are the lowest since early October.  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 135,847,835 doses of the vaccine have been distributed, with 107,060,274 of doses injected.  The number receiving a first dose is 69,784,210, while the number of second doses, which would grant the highest level of immunity, is 37,459,269.  The FT has a page on global vaccine distribution.

Virology

• The travails of EU vaccine distribution continue. The Netherlands and Ireland have suspended use of the AstraZeneca (AZN, USD, 48.42) vaccine due to blood clotting concerns.  EU officials admit that “mistakes were made” in ordering vaccines; the EU seemed more worried about price than quantity and thus is coming up short to meet the needs of the members.  The grumbling is rising; Austria’s chancellor made calls to other heads of state to complain.
  • In contrast, the Johnson government is scaling up its vaccination efforts.
• Meanwhile, Israeli research shows that the Pfizer (PFE, USD, 34.94) vaccine was 97% effective in preventing illness. Even more importantly, it appears it halts asymptomatic spread, suggesting it grants sterilizing immunity.
• China and Russia have made diplomatic inroads by providing vaccines to the emerging world. The U.S. and Japan are stepping up foreign distribution efforts.  However, we note that Indian vaccine producers are warning that U.S. policy is slowing global distribution efforts.
  • There have been modest, at best, international efforts to distribute vaccines. For the most part, vaccine nationalism has tended to dominate, even for research.  The experience of South Africa shows that this policy, although reasonable, is short-sighted because the lack of vaccinations in the developed world will tend to foster variants of the virus that could be vaccine resistant.
• One of the ways we tried to measure the impact of COVID-19 was to compare it to influenza pandemics. The most recent research tends to suggest that COVID-19 was far more deadly.  This analysis potentially resolves a problem in the data; there wasn’t a lot of evidence in the economic data to suggest the 1956 and 1968 influenza pandemics were a big problem.  That wasn’t necessarily the case with the 1918 influenza pandemic, but even that one didn’t seem to have a huge effect.  The most recent data suggests the COVID-19 virus was more virulent than influenza, and thus, had a greater impact.
  • One of the natural experiments we have noted is how Florida has done relative to other states. The Sunshine State had less stringent policies relative to other states, but the performance in dealing with the pandemic appears to be about the same.  It is far too early to tell why this was the case, but the performance should give ample data to see what worked and what didn’t.
  • In addition, in the emerging world, waves of infections tended to dissipate.  It is unclear why this occurred.  Again, this will be another area for further analysis.

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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara.  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 the latest Confluence of Ideas podcast.  It is Friday, and a new Asset Allocation Weekly, chart book, and podcast are also available.  This week’s Weekly Energy Update is available.  You can find all this research and more on our website.

Good morning.  In a reversal, U.S. equity futures are flat this morning as concerns over the rise in Treasury yields outweighed the optimism garnered following the signing of the American Rescue Plan Act of 2021.  We start our discussion with a review of what’s next for the Biden administration and offer a brief summary and commentary about his primetime address.  Next, we cover economic and domestic policy news, review international and China-related news, and close with a pandemic update.

Fiscal stimulus: On Thursday, Biden signed his first piece of major legislation since taking office.  The $1,400 stimulus checks are expected to be sent to households starting as early as this weekend.  The American Rescue Plan was Biden’s first political achievement since taking office, and it will likely be the law he is most remembered for during his presidency.  Next, the Biden administration will turn to the infrastructure bill.  It is estimated to cost $2 trillion and already has received bipartisan opposition as moderates have stated they would like the bill to be paid partially through either the increase in taxes, budget cuts, or a combination of the two.  Right now, Biden’s approval rating is sitting near 60%, but we suspect that will change as Congress turns its attention to the immigration crisis on the southern border and as conservatives and progressives continue to voice frustration over the lack of progress made in increasing the federal minimum wage.  At this time, we remain confident that Biden will not have enough political capital to institute any major tax changes. Thus, we are not confident that his infrastructure bill will be successful.

Lockdown anniversary: Thursday marked the one-year anniversary of national lockdowns.  In remembrance of the day, President Biden discussed the progress made during the pandemic.  In his speech yesterday, he stated he would like all adults to be eligible for vaccines by May 1.  If enough people are vaccinated, restrictions could be lifted to allow for small gatherings by the July 4 holiday.  However, the president also cautioned that if the country were to relapse, there could be new lockdowns.  From our perspective, it appears the Biden administration has taken the position that the worst is behind us, and they may be right.  However, if they are wrong, it will likely be very difficult to implement new restrictions in the future.  People are clearly showing signs of fatigue.  Our primary concern is that as cases begin to fall, which can be partially attributed to warmer weather, people will be more reluctant to receive the vaccine and thus making it harder for the country to achieve herd immunity.  In that event, we suspect the virus could continue to be in circulation for a long time, especially in communities where there are many vaccine skeptics.  New variants that are resistant to the virus could also emerge.  In short, we acknowledge that a lot of progress has been made, but we think it is too soon to spike the football.

Economic and domestic policy: 

• The Biden administration has informed some suppliers to China’s Huawei Technologies Co. (002502,CNY, 2.900) of tighter conditions on previously approved export licenses, prohibiting items for use in or with 5G devices, according to people familiar with the move.
• On Thursday, the Biden administration formally rescinded the Trump-era “public charge” rule, which tightened restrictions on poorer immigrants seeking U.S. residency, as a dozen GOP state attorneys general scrambled to preserve it.
• The House on Thursday approved two pieces of legislation aimed at strengthening background checks on firearm sales and transfers, a leading priority for Democratic lawmakers.
• Bipartisan House lawmakers announced a deal on Thursday to extend the Paycheck Protection Program (PPP) for two months.  It would ensure funds could still flow to small businesses following the March 31 expiration date on the program.
• Yesterday, a group of bipartisan House lawmakers introduced legislation intended to protect critical infrastructure from cyberattacks after an unsuccessful hack of a Florida water treatment facility.

International news:

• The Biden administration is lifting a Trump-era suspension of aid to parts of Yemen under the control of Houthi rebels, according to U.S. officials and people briefed on the matter.
• In a new front in the conflict between Israel and Iran, Israel has targeted at least a dozen vessels bound for Syria, mostly carrying Iranian oil, out of concern that petroleum profits are funding extremism in the Middle East, U.S. and regional officials say.
• Prime Minister Yoshihide Suga and the leaders of the U.S., Australia, and India are expected to meet online Friday for the first “Quad” leaders’ summit.  Known officially as the Quadrilateral Security Dialogue, the Quad is an informal strategic forum of the four nations that hold semiregular meetings, joint military drills, and discussions about regional economic and development assistance.
• Malaysia’s government has introduced a law that punishes spreading coronavirus misinformation with jail time and hefty fines.  The emergency ordinance goes into effect on Friday and does not need parliamentary approval as the country is currently under a state of emergency to fight the virus.

China:

• Pony Ma’s Tencent Holdings Ltd. (TCEHY, USD, 89.28) has been put on notice.  Asia’s largest conglomerate was censured by China’s antitrust watchdog on Friday, as Beijing expands a crackdown that began with Jack Ma’s online empire.
• The European Union is set to target China with sanctions for the first time since the 1989 Tiananmen Square crackdown, blacklisting four people and one entity over human rights abuses in Xinjiang, several diplomats said.
• Alibaba (BABA, USD, 240.80) appears destined for softer treatment.  Officials familiar with Beijing’s thinking said regulators don’t want to crush a technology powerhouse popular with both Chinese households and global investors…as long as it disassociates itself from its flashy and outspoken founder and aligns itself more closely with the Communist Party.
• China drew the curtain on decades of adversarial politics in Hong Kong as the national legislature approved electoral changes that would put pro-Beijing loyalists firmly in charge of the city and squeeze opposition groups from elected office.
• Ahead of next week’s top-level meeting in Alaska, Chinese Premier Li Keqiang said Beijing hopes to resume dialogue with Washington, even if the two countries “can’t work everything out any time soon.”  But U.S. Secretary of State Antony Blinken has downplayed the prospect of restarting the dialogue between the two without concrete action from Beijing.

COVID-19:  Official data show confirmed cases have risen to 118,240,289 worldwide, with 2,623,789 deaths.  In the United States, confirmed cases rose to 29,166,566 with 529,469 deaths.  Vaccine doses delivered in the U.S. now total 127,869,155, while the number of people who have received at least their first shot totals 62,451,150.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• The Novavax (NVAX, USD, 207.19) vaccine was 100% effective in preventing severe COVID-19 symptoms in a final analysis of its trial that paves the way for the U.K. to authorize emergency use.
• The seven-day average of new cases has been declining for 59 days since the January 11 peak, meaning only the April-to-June drop was longer, at 67 days from its peak to the beginning of the subsequent surge. The July-to-September easing lasted 55 days.
• Denmark suspended the use of the AstraZeneca (AZN, USD, 48.00) vaccine over concerns about possible links to an increased risk of blood clots, the Danish Health Authority announced on Thursday.  Iceland and Norway also announced suspensions in administering the shots.
• The European Union authorized use of the Johnson & Johnson (JNJ, USD, 159.94) vaccine on Thursday, amid mounting frustration with a sluggish inoculation campaign that has been hobbled by supply shocks and logistics failures in addition to global battles ratcheting up over scarce doses.
• Hospitals in Brazil’s main cities are reaching capacity, health officials warned, as the country recorded the world’s highest COVID-19 death toll over the past week, triggering tighter restrictions on Thursday in its most populous state.
• Russia is ramping up overseas output of its COVID-19 vaccine, pledging to supply shots to almost one in 10 people on the planet this year even though it has produced only a tiny fraction of that so far.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara.  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 the latest Confluence of Ideas podcast.  A new Asset Allocation Weekly, chart book, and podcast are also available.  It’s Thursday, meaning a new Weekly Energy Update is available.  You can find all this research and more on our website.

Good morning.  Equity futures are moving higher this morning on the back of yesterday’s moderate inflation news.  It is ECB day, and it leads off our coverage this morning.  Up next is economics and policy, followed by technology.  China news is next as party meetings come to a close.  A pandemic update follows, and we close with a roundup of international news.

ECB:  Although the press conference is still underway at the time of this writing, the bank is planning to step up QE to offset the rise in yields, which are up in concert with U.S. yields.  Eurozone yields have declined, and equities are stronger as this action is seen as dovish.

Economics and policy:  The stimulus bill passed through Congress and is heading to the White House.

• Although the financial markets have discounted this outcome for some time, it’s now official—the $1.9 trillion stimulus bill has passed through Congress. As the OECD outlined yesterday, the stimulus plan will boost not only U.S. growth but help the world too (especially with China slowing down).  In the short run, the plan may boost the dollar and has already lifted interest rates, which is negative for emerging market stocks.  There is a clear pattern that fiscal deficits in the U.S. are dollar bearish, especially when coupled with easy monetary policy.  Thus, any strength likely is transitory.
• As fiscal spending translates into consumer spending, one factor that could affect GDP will be imports. Obviously, some spending will go to imports, which will depress GDP.  Another factor we continue to watch is the current problems in ports across the world.  Shipping costs are rising on shipping from China to Europe and to the U.S. as well.  Although these costs may become a factor in lifting inflation, they could also end up having the effect of delaying goods and less on higher prices.
• Although the economy is clearly on the mend, there are rising concerns about the disruptions the pandemic has caused to the labor market. Not only did the pandemic lead to job losses, but it also appears to have accelerated the substitution of capital for labor, meaning that some job categories may be permanently lost.  In other words, low-skilled jobs may be disappearing faster than expected, leading to low employment.  At the same time, it may also cause labor shortages with higher-skilled positions.
  • Racial and gender gaps have been studied for a long time, and an emerging issue is the education gap. Anne Case and Angus Deaton, who do work in this area, have shown in a recent paper that life expectancy for those with bachelor degrees or higher has increased, whereas those who lack those degrees have seen their life expectancy fall.
  • The education gap is also apparent in consumer confidence, which shows that optimism for those with bachelor’s degrees or higher is rising much faster than for those with less schooling.
• The House has passed a bill that protects union organizing efforts. Although we doubt it will pass the Senate, some of the populist GOP senators may decide to support it.  It is worrying the gig worker firms, raising concerns that it would make unionizing these workers easier.
• Cash-out refinancing is surging as homeowners take advantage of low mortgage rates and rising home prices. The levels are the highest since the housing bubble, but credit scores are also much higher for borrowers, suggesting that lenders did learn some lessons from the last crisis.
• The other policy item we are watching evolve is industrial policy. It is the idea that government should guide investment towards long-term goals.  In general, this concept was mostly a Cold War artifact, but it fell out of favor during the Reagan/Thatcher revolution.  During the Cold War, the government wanted to harness the private sector to achieve policy goals, but in the 1980s, it was seen as a ham-fisted attempt to “pick winners and losers.”  As we cycle to equality and away from efficiency and face the rising risk of conflict with China, there is renewed interest in industrial policy.  Although there is a risk the government creates malinvestment, from the perspective of a worker who lost his job to foreign trade, a policy designed to build capacity in the U.S. will be welcomed.

Technology:  Anti-trust and hacks dominate the news.

• The technology industry has been able to concentrate by adhering to the Bork standard, which argues that the key test to antitrust is the impact on consumers. It is hard to argue that consumers have been harmed by free products and efficient distribution.  However, there is a rethink occurring among legal circles that the Bork standard is too narrow.  First, it ignores the impact on labor; part of the reason these firms are customer-friendly results from their treatment of workers.  Second, it ignores the political impact that comes with market dominance.  Large firms can pay for lobbying and can gain regulatory capture.  Third, there is evidence that large firms stifle innovation that would disrupt current business models.  The Biden administration has been adding lawyers in its administration who are developing these arguments.  Tim Wu was appointed to the National Economic Council, and Lisa Khan, whose seminal paper on the topic, has been nominated for the FTC.  A shift to the pre-Bork standard, where size alone was a key determinant of antitrust, is a serious threat to large-cap tech firms.  At the same time, history would suggest that it isn’t necessarily bad for investors.  The breakup of Standard Oil was a value-enhancing development for shareholders.
  • We note that Congress is meeting on this topic to see where there are areas of bipartisanship.
• Be careful with those security cameras; hackers in China and Russia have exploited weak security in these “internet of things” items to break into networks. Hackers were able to observe activities in government and private firms.
• Facebook (FB, USD, 264.90) announced it would end a plan to run fiber optic cable from the U.S. to Hong Kong. The U.S. government pressured the company to conclude the program given changes in Hong Kong.

China:  The U.S. and China will meet.

• U.S. and Chinese officials will hold two days of talks next week in Alaska. This is the first meeting between the new administration and Chinese representatives.
• Although political pundits are focusing on infrastructure, the next big bill may be an anti-China package. It is possible that some infrastructure projects may be inserted into this bill, because opposing China is one of the rare bipartisan issues.  In a recent interview, Chief of Staff Klain defined infrastructure as ”the kind of investments this country needs to get ready to succeed in this century to beat China in the global economy.”
• It is well known that in budget battles, military leaders play up external threats to acquire funding. Apparently, this is true in China as well, where Gen. Xu Qilian, who is the effective leader of China’s military, has called for more spending because of the inevitability of war with the U.S. due to the Thucydides Trap.
• However, it isn’t just China’s brass that is warning about war. Philip Davidson, commander of the U.S. Indo-Pacific Command, said yesterday that China would probably be able to successfully invade Taiwan by 2027.
• The EU is preparing to unveil details of the EU-China market access deal. This agreement has been criticized as kowtowing to Beijing.
• The U.S., Australia, India, and Japan, otherwise referred to as the “Quad,” are preparing to meet via video call tomorrow. The arrangement is designed to build an alliance structure to counter China’s rise.  India has historically avoided such entanglements.  After all, it was one of the founders of the Non-Aligned Movement during the Cold War.  However, India faces a myriad of threats from China.  One of the newest to emerge is China’s dam-building in Tibet.  India fears that a series of dams may reduce water flow in the coming years.
• U.S. agriculture trade with China has started to ramp up.
• Recently, Texas’s electricity market was snarled by a series of unfortunate events. Interestingly enough, the Hunan province has faced rolling blackouts.  The area lacks both coal and hydro and has tried to fix the problem with long transmission lines.  Sadly, other provinces have been reluctant to supply Hunan during periods of elevated demand.
• We continue to monitor the idea of boycotting the 2022 winter Olympics in China.
• The EU claims TikTok is sending EU user data to China; this sort of activity has been a concern of U.S. policymakers.

COVID-19:  The number of reported cases is 118,134,623 with 2,622,190 fatalities.  In the U.S., there are 29,155,047 confirmed cases with 529,267 deaths.  U.S. infections are over 50,000 for the second consecutive day.  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 127,869,155 doses of the vaccine have been distributed with 95,721,290 doses injected.  The number receiving a first dose is 62,451,150, while the number of second doses, which would grant the highest level of immunity, is 32,904,161.  The FT has a page on global vaccine distribution.  This Axios map shows vaccine distribution in the U.S.

Virology

• Brazil continues to be hit hard by the pandemic, in part due to its new P.1 strain of the virus. Its cases and hospitalizations now exceed those of the U.S.
• We continue to monitor the development of virus passports. China has created one for its citizens so they can travel more easily.  At the same time, concerns abound.  First, medical data is protected in most Western developed nations, and it isn’t clear whether demanding such passports would not violate these rules.  Second, since there are no oversights or accepted rules on such documents, the potential for corruption or confusion is elevated.
• Firms report offering bonuses and higher wages to lure workers back as the economy ramps up. One significant difference to the last business cycle is that state government finances are on a much better footing.
• Professional sports teams have engaged in aggressive testing and social protocols. Researchers are learning important lessons from the concentrated data gathering.  One of the more important points is that the games and practices are not notable factors in transmission, but social gatherings (meals, haircuts) are vectors.
  • New research confirms that schools can safely reopen.
• On the vaccine front, the U.S. is planning to buy 100 million doses of the Johnson & Johnson (JNJ, USD, 159.15) single-shot vaccine. Moderna (MRNA, USD, 129.75) is testing a vaccine modified for the South African variant.  The Moderna vaccines hold the promise of easy “tweaking” for new variants.  Research on the idea that those vaccinated can be asymptomatic carriers continues.  The EU continues to export vaccines while dealing with a slow rollout on the continent.  After a Danish patient died in the wake of receiving the AstraZeneca (AZN, USD, 49.81) vaccine, Denmark has suspended its use along with Iceland and several Norwegian cities.  Blood clots are apparently the concern.
• On the anti-viral front, GlaxoSmithKline (GSK, USD, 35.60) reports that a drug based on monoclonal antibodies reduced death or hospitalization in 85% of its candidates. At the same time, it appears that convalescent plasma isn’t effective.

International news:  Technology and globalization, along with South Korea and Libya, lead the news.

• The tech industry tends to embrace globalization. In semiconductors, various nations and companies are involved in various aspects of the development of these products.  The U.S. tends to focus on design.  Both Europe and the U.S. build machine tools for the industry.  Asia is the home of most chip foundries.  As deglobalization expands, countries realize that (a) they are extremely dependent on semiconductor chips, and (b) the global dispersion that has supported efficiency has made nations vulnerable.  So, policymakers are reacting to these vulnerabilities by trying to use public spending and policy to foster national integration of the product.  China has been trying to develop chip design technology.  The U.S. is looking to support new foundries, and the latest nation/area to join this trend is the EU.  At the same time, the EU notes that it needs indigenous sources of demand as well.  China is engaging in similar policies, attempting to eliminate supply risks.  Protecting supply chains will undermine efficiency and raise costs, but not nearly as high as being denied access to these critical products.
• The U.S. has reached an agreement with South Korea on the latter’s support for U.S. troops stationed there. It is less than the last administration, but it is an increase. This quick approval is consistent with the current administration’s goal of building alliances.
• There is a deal for a power-sharing government in Libya. The country has been in a civil war since the fall of Qaddafi.
• There was a leak of a state department plan for the U.S. exit from Afghanistan. We doubt either side will fully approve, but we still expect the U.S. to exit this year.
• Tensions in Myanmar continue. The country’s youth appears to be the driving force.
• Germany has elections in the fall; although elections there have been rather sleepy affairs for most of the century, with Chancellor Merkel stepping down, this one could bring unwelcome excitement.
• PM Draghi’s term may be short if League party leaders have a say.

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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara.  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 the latest Confluence of Ideas podcast.  A new Asset Allocation Weekly, chart book, and podcast are also available.  This week’s Weekly Energy Update is available.  You can find all this research and more on our website.

Turning to today’s Comment, we open with U.S. news related to the bond market and the impact of fiscal stimulus.  Next is international news, especially related to China and Russia.  Finally, we look at the latest developments regarding the coronavirus pandemic, where President Biden’s massive new pandemic relief package is likely to get final approval in Congress today.  Various indicators now show that the massive monetary and fiscal relief provided over the last year has helped cushion the economy.  As discussed below, federal aid has even helped keep state government revenues on an even keel. The new package is likely to bolster consumer spending in particular, which should help fuel a powerful economic recovery in the coming months and help buoy risk assets as well.

U.S. Bond Market:  The Treasury Department will auction $38 billion in new 10-year notes today, in what could be an important test of demand amid massive government borrowing and market concerns about rising inflation.  It could also be a test of the thesis that major bank’s demand could be crimped by uncertainty over their continued exemption from a capital rule known as the Supplemental Reserve Ratio (SLR).  All those concerns have the potential to create choppy trading and unexpected outcomes in the financial markets today.

U.S. Infrastructure:  Now that President Biden’s “American Rescue Plan” is on the verge of becoming law, the administration is already starting to shift its focus to a major infrastructure rebuilding program.  In recent days, the president has reportedly met with lawmakers from both parties, as well as union leaders and government officials, to discuss the contours of a package.  Congressional Democrats say they expect him to press ahead as soon as the relief package is signed into law.  One key question is how the talk of even more fiscal stimulus will play into the current bond market concerns about future inflation.

United States-Japan-Australia-India:  In his first major multilateral meeting, President Biden will meet virtually with the “Quad” group on Friday to discuss the coronavirus pandemic, economic cooperation, and other important issues in the Indo-Pacific region.  Almost certainly, the discussion will also address China’s rising military, economic, and diplomatic aggressiveness and how the countries could work together to counter the threat.

• At a Senate Armed Services Committee hearing yesterday, Admiral Philip Davidson, head of the U.S. Navy’s Indo-Pacific Command, warned that the military balance in the region has “become more unfavorable” to the U.S. and could be encouraging the Chinese to take more aggressive action.  According to Davidson, “We are accumulating risk that may embolden China to unilaterally change the status quo before our forces may be able to deliver an effective response . . . I cannot for the life of me understand some of the capabilities that they’re putting in the field unless it is an aggressive posture.”
• Separately, U.S. and Chinese officials are trying to hammer out the details of the first high-level meetings between the countries during the Biden administration.  The discussions appear to focus on a potential meeting in Alaska involving Secretary of State Blinken, National Security Advisor Sullivan, and their Chinese counterparts.  Officials close to the administration say they want to ensure China is not completely sidelined while urging allies to work with the U.S. on adopting a more confrontational stance towards Beijing.

Russia:  The government’s communications regulator, Roskomnadzor, said it would slow down the speed of Twitter (TWTR, 67.52) in the country for failing to delete banned content.  The regulator said it would limit the speed of the service on all cellphones and half of the stationary devices, such as desktop computers, beginning March 10. It also warned it could block Twitter entirely if it failed to remove banned content linked to suicide, pornography, and drugs.

COVID-19:  Official data show confirmed cases have risen to 117,671,884 worldwide, with 2,612,526 deaths.  In the United States, confirmed cases rose to 29,096,566, with 527,705 deaths.  Vaccine doses delivered in the U.S. now total 123,232,775, while the number of people who have received at least their first shot totals 61,088,527.  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 55,900 yesterday, while new deaths related to the virus rose to almost 1,900.  However, those figures remain well below the levels seen at the beginning of the year, and stress on the healthcare system has been reduced dramatically.
• As vaccine supplies become more plentiful, some states are loosening eligibility requirements.  In Alaska, Governor Michael Dunleavy announced yesterday that all state residents aged 16 and over would be allowed to get a shot.  In New York, Governor Andrew Cuomo said residents age 60 and up can sign up for vaccinations beginning Wednesday. The state is also expanding vaccination eligibility on March 17 to certain essential workers who interact with the public, including some government employees, building workers, and certain nonprofit employees, among others.
• The Russian government signed a contract for its Sputnik V vaccine to be manufactured by a Swiss pharmaceutical firm at a factory in Italy as global demand for the shot increases.  The Russian government has already farmed vaccine production to China, India, South Korea, and Brazil.
• The Los Angeles Unified School District reached a tentative agreement with its teachers’ union that would allow some students to resume in-person learning for the first time in more than a year.  The deal will allow preschools and elementary schools to reopen in mid-April, though no specific start date was given.

 Economic and Financial Market Impacts

• Contrary to expectations, new data suggest the pandemic had a much smaller negative impact on state government revenues than first expected.  According to the Urban Institute, total state tax revenues were roughly flat in 2020 from the year before.
  • The better-than-anticipated results came as federal intervention buoyed households, businesses, and financial markets. The stable employment environment for the country’s most affluent workers also brought in stronger than expected tax revenue.
  • Analysts still expect states to confront budget gaps this year, but they are projecting smaller shortfalls partially filled in with federal aid.
• Preliminary data in Europe suggest the pandemic will drive global birthrates sharply lower, leading to even stronger demographic headwinds for economic growth in the long term.  However, those headwinds might also help keep down inflation and interest rates.

U.S. Policy Response

• President Biden’s $1.9 trillion pandemic relief package is expected to pass the House today, after which it can go to the president to be signed into law.  One notable item in the final version of the “American Rescue Plan Act” (ARPA) is that it exempts from income tax up to $10,200 of a worker’s unemployment benefits received in 2020, subject to specific household income caps.  That means many people who have already filed their 2020 tax return may need to file an amendment.  It also suggests that those who haven’t filed yet may want to delay filing until the IRS can issue any relevant rules and tax software programs can be updated appropriately.

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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara.  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 the latest Confluence of Ideas podcast.  A new Asset Allocation Weekly, chart book, and podcast are also available.  This week’s Weekly Energy Update is available.  You can find all this research and more on our website.

We open today’s Comment with a quick review of key international news, including an important overview regarding how U.S. firms see their business in China developing.  Then, we focus on the latest developments in the coronavirus pandemic, where President Biden’s $1.9 trillion “American Rescue Plan” looks increasingly certain to become law this week.  That’s giving a boost to U.S. stocks in general today.  Just as important, the bond market appears to be showing signs of nascent stabilization, perhaps because some bond buyers are reportedly taking advantage of the recent runup in yields.  If it lasts, the new buying could potentially put a cap on yields, which helps explain why technology stocks are jumping so far this morning.

United States-China:  A membership survey by the U.S. Chamber of Commerce in China showed that only 56% of respondents reported earning a profit in the country last year.  About 20% suffered losses, up from 11% reporting losses in 2019.  Two-thirds of U.S. companies said their revenue in China rose or remained stable in 2020—below the 79% that reported increasing or steady sales in last year’s survey.

United Kingdom-European Union:  British business leaders are already complaining that the government’s new minister for EU relations, Lord David Frost, is too abrasive concerning his dealings with Brussels, and he is threatening to undermine the U.K.-EU trade relationship.

Germany:  Ahead of critical state elections next weekend, Chancellor Merkel’s Christian Democratic Union is being pummeled by a scandal in which two CDU lawmakers earned substantial commissions on deals to procure urgently needed masks during the first wave of the coronavirus pandemic.  Both lawmakers have been forced to resign, but the scandal will make it even more difficult for the CDU to win in states like Baden-Württemberg and Rhineland-Palatinate.  It also raises questions about the leadership of new CDU chief Armin Laschet.

Brazil:  A supreme court judge has annulled the graft convictions of former President Luiz Inácio Lula da Silva, restoring the left-wing leader’s political rights ahead of elections next year.  If the decision stands, it could set the stage for an election battle between Lula da Silva and incumbent President Jair Bolsonaro, a right-wing populist and one of the most strident critics of Lula da Silva and his left-wing Workers’ party, also known as PT.  The potential political uncertainty is likely to be negative for Brazilian assets.

COVID-19:  Official data show confirmed cases have risen to 117,250,914 worldwide, with 2,604,123 deaths.  In the United States, confirmed cases rose to 29,045,983, with 525,904 deaths.  Vaccine doses delivered in the U.S. now total 116,378,615, while the number of people who have received at least their first shot totals 60,005,231.  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 topped 50,000 yesterday, although the new case count remained far below the figure reached at the beginning of the year.  Perhaps more importantly, new deaths related to the virus totaled just 719.  Vaccinations against the disease also continue apace, as 18.1% of the U.S. population has now received at least one shot.
• In an update to its pandemic safety guidelines, the CDC recommends that people who are fully vaccinated should continue to use facemasks and practice social distancing when around non-vaccinated people.  However, they can dispense with those precautions when around other fully vaccinated people.  Under the new guidelines, vaccinated individuals will not need to quarantine or receive a COVID-19 test after being exposed to the virus if they have no symptoms.
• The organizing committee for the Summer Olympic Games in Tokyo has decided to ban spectators from the ceremony launching the Olympic torch rely on March 25.  The committee will decide sometime in mid-March whether it will ban overseas spectators from the Games themselves, which are scheduled to open July 23.

Economic and Financial Market Impacts

• New polling by Axios/Ipsos indicates many people may be slow to return to normal life even after getting vaccinated.  Just 7% of respondents said they plan to stop wearing masks in public after receiving their shots, and only 13% said they plan to stop social distancing.  81% said they would continue to wear masks, and 66% said they would continue to social distance until the pandemic ends.  That raises a risk that the economic rebound this year could potentially be a bit more sluggish than currently expected.

U.S. Policy Response

• Several prominent Democrats in the House of Representatives signaled they would approve President Biden’s $1.9 trillion pandemic relief package when it comes up for a final vote this week, despite some provisions being watered down in the Senate.
  • That means the bill, formally designated as the “American Rescue Plan,” is increasingly certain to be passed into law, most likely on Tuesday or Wednesday.  This Wall Street Journal article provides an overview of the bill’s major provisions.
  • Not only would the new stimulus provide a jolt to U.S. economic growth in 2021, but the OECD today said it would boost global growth by an additional 1%.  In updated forecasts, the OECD now expects global GDP to rise by 5.6% this year, up from a forecast of 4.2% last November.  There is one potential downside: The OECD also warns that the rise in U.S. government bond yields in response to higher growth and inflation expectations could spark capital flight from emerging economies, where vaccine campaigns have barely begun and whose economic recovery is expected to take longer.
• The Federal Reserve yesterday said it would allow most of its remaining emergency asset purchase programs from last spring to expire as scheduled at the end of the month.  The plans include the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility.  According to the Fed, the programs are now seldom used.
  • Several other major programs expired at the end of December, including the Corporate Credit Facilities, the Municipal Liquidity Fund, and the Term Asset-Backed Securities Loan Fund.
  • The Fed said it would renew the Paycheck Protection Program Liquidity Facility, which extends credit to eligible financial institutions that originate PPP loans, through to the end of June.
  • Even though many of the Fed’s emergency programs are going away, the ultra-low fed funds benchmark interest rate and the Fed’s broader asset purchase program are keeping monetary policy extraordinarily loose.  This should lend additional support to risk assets on top of the strong forthcoming fiscal stimulus and the impending reopening of much of the economy.
• Still, a key question is whether the Fed will extend an emergency policy exempting cash and Treasury securities from banks’ supplementary leverage ratios (SLRs).  Some observers argue that the recent runup in yields stemmed, at least in part, from major banks running up against their SLR limits and not being able to buy more Treasuries without raising new capital or scaling back planned dividends.  Extending the exemption past its planned end on March 31 could give banks more capacity to gather deposits and buy government bonds, which could help calm the bond market.

Foreign Policy Response

• Despite European Central Bank chief Lagarde’s statement of concern over rising bond yields, new data show the ECB slowed its bond purchases in recent weeks, even as those yields spiked.  Regardless of Lagarde’s rhetoric, the data suggest that the ECB, like the Fed, is reluctant to actually intervene to cap yields just yet.  More detail about her views could come out in Lagarde’s press conference after the ECB’s March policy meeting on Thursday.

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