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 I of a 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.

Good morning, and Happy International Women’s Day!  Lots going on today.  U.S. equity futures are lower in the face of continued rising long-duration Treasuries.  We start with the markets this morning, particularly the 10-year Treasury.  Up next is policy; the Senate passed the stimulus bill, with the House expected to confirm the package.  As the U.S. expands fiscally, China is pulling away the punch bowl; our China coverage follows.  There was a major hack over the weekend, which we cover in the technology section.  International news follows, and we close with pandemic news.

Markets:  The 10-year T-note yield continues to move higher on expectations of stronger growth.  Although inflation fears are present, the rise in the term premium, which reflects a steepening yield curve, suggests that some of the rise is due to better economic prospects.  Although the rise in yields is causing concern in equities, our yield model suggests that what we are seeing is mostly a return to more normal interest rates.

We use monthly average yields for the 10-year T-note.  As the model shows, we are back to normal yields.  Some degree of overshoot is normal.  In the last cycle, we didn’t rise to the standard error level (around 2.25% in the current environment).  If we repeat the pattern of the past decade, a rise to 1.90% to 2.00% is likely.  Everything we are seeing from the FOMC suggests that policymakers are not very concerned about the rise.  What makes the FOMC take steps to halt the rise?  The most likely scenario would be a financial crisis.  So far, financial markets appear to be functioning, but as the past 25 years have shown, the financial system is brittle, and problems can develop quickly.  The key point, however, is that the Fed isn’t going to be preemptive in addressing financial stress.  Or, put another way, yield curve control likely comes after a problem, not before.

For equities, this policy stance doesn’t look favorable, at least at first glance.  But, much of what we are seeing in the major indices is a rotation.  Technology, which had been the market leader last year, is faltering, leading to a lower S&P.  However, beneath the surface, other parts of the market are surging, meaning that one shouldn’t mistake a weaker index for weaker equities more broadly.  Using Friday closing data, the S&P 500 market cap-weighted index is about flat for the year, while the equal-weighted index is up 4.7%.

The other area getting attention is the dollar.  The rise in yields has lifted the dollar, with the dollar index challenging resistance.  Don’t be fooled.  History shows that since 1990 there has been a pattern that the dollar tends to follow the fiscal deficit with about a two-year lag.  During the Reagan years, the dollar soared in the face of rising deficits, but that was a function of tight monetary/loose fiscal policy.  That isn’t the case now. We don’t expect the dollar’s strength to last.

Here are some other market stories we are following:

• LIBOR is entering its final chapter. Over the next 18 months, the phase-out of LIBOR will accelerate.
• Rising costs of commodities are likely to find their way into finished goods prices in the coming months.
• The fiscal charge (see below) is expected to make the U.S. the driver of global growth, especially with China retrenching (see below).
• The ECB is trying to cope with the rise in U.S. rates. They meet on Thursday, so we will hear more about this later in the week.
• The U.S. and the EU have agreed to suspend aircraft tariffs.
• At the end of March, a provision that exempted U.S. banks from counting Treasuries in their supplementary leverage ratio will end. Banks have been major buyers of Treasuries over the past year, and if the provision ends, that buying will likely cease.  The buying was especially pronounced in the big banks.  There is talk that the provision will be extended.  Although we have doubts that the banks’ appetite for Treasuries would continue at the same pace, ending the provision will likely be a short-term negative for bond prices.

Economics and policy:  The stimulus bill passed the Senate; House approval is likely.

• One reason discretionary fiscal policy fell from favor is that legislative time is different from economic time. In other words, when lawmakers are considering a fiscal boost, by the time they finally act, the need has usually passed.  To some extent, that pattern is being repeated with this bill.  Yet, there are underlying problems that this bill will help, mostly with rent assistance and reopening schools.  The money to households will be welcome.  We will be watching to see what happens with those funds, but don’t be surprised if the money is saved for a while or used to reduce debt.
• Now that the stimulus bill is passed, the most important senator, Joe Manchin, is making it clear that he won’t support an infrastructure bill in reconciliation. That means the White House will need to make a bill that the GOP will back, which could be a tall order.

China:  CPC meetings are wrapping up.

• China will target 6% GDP growth for 2021, which is a bit slower than the 8% that has been the normal target, but likely still too high to prevent more debt growth.
• China will lend $62 billion to fund tech innovation, part of China’s drive for tech self-sufficiency.
• China’s exports soared in February as the global economy began to recover.

• Beijing will cut the number of legislative members in Hong Kong as the CPC moves to gain control of elections.
• The U.S. will hold a summit with representatives from India, Japan, and Australia in a bid to revive the anti-China alliance.

Technology:  Hacks and policy dominate the news.

• Microsoft (MSFT, USD, 231.60) has been hit by a massive hacking campaign centered on the firm’s email software. Chinese government hackers are being implicated.
• Meanwhile, the fallout continues from the SolarWinds (SWI, USD, 16.13) hack, which originated in Russia and Eastern Europe.  The latest firm affected is privately held Accellion, a firewall company.
• The Biden administration has appointed Tim Wu to the post of advisor on competition policy. Wu is a proponent of the pre-Bork antitrust model that targets size alone.  His appointment is potentially bad news for the largest tech firms.

International news:  KSA oil facilities are hit by rockets and drones, the U.S. and South Korea make a deal, and the latest from the EU.

• Over the weekend, Houthi rebels attacked the oil port of Ras Tanura, the world’s largest oil port and the KSA’s biggest refinery. It doesn’t appear the attack was very successful, but it did send oil prices higher over the weekend.  As has been the pattern of rallies off such news, the gains have failed to hold.
• The U.S. and South Korea have reached a burden-sharing agreement. This issue had been a sticking point for the Trump administration, which was seeking a large increase in funding.  No details of the arrangement have emerged.
• It appears the U.S. will withdraw troops from Afghanistan in May as scheduled.
• Germany is planning legislation that would make German firms responsible for screening suppliers for human rights and environmental violations. Needless to say, corporations oppose the effort.
• Sweden is stepping up its efforts to contain Russian aggression. This report profiles the woman in charge of the effort.

COVID-19:  The number of reported cases is 116,911,000 with 2,594,813 fatalities.  In the U.S., there are 28,999,540 confirmed cases with 525,813 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 116,363,405 doses of the vaccine have been distributed with 90,351,750 doses injected.  The number receiving a first dose is 58,837,710, while the number of second doses, which would grant the highest level of immunity, is 30,686,881.  The FT has a page on global vaccine distribution.

Virology

• Hospitalizations are down to 40,212, the lowest level since October 20, 2020. They are down 70% from the January peak.  To some extent, this is the most critical number as hospitalizations measure the burden on the health care system.
• The debate over the Wuhan Institute of Virology continues. The WHO is scrapping its initial report on China as Beijing and Washington feud over its contents.  A group of scientists is calling for a new investigation.  It has emerged that diplomats expressed concerns over lax biosecurity measures at the Wuhan laboratory in 2017.  We doubt China will ever allow a full accounting of the virus’s emergence in its bid to control the narrative, even if the Wuhan laboratory is not implicated.
• Russia is engaging in a disinformation campaign to undermine confidence in Western vaccines.
• The EU is asking for U.S. vaccines to help cover its shortfall.
• Much of the pandemic news is positive. Vaccine distribution is starting to accelerate, and there is growing evidence that the worst is behind us.  However, not all is rosy.  The EU, whose vaccination program has left much to be desired, is seeing a rapid increase in infections from new variants.  Even more unsettling is the news from Brazil, where a new variant is not only spreading more rapidly but is re-infecting those who have already contracted the disease.  Brazil is mostly using Chinese vaccines, which may not be as effective against these new variations.

The mutations of the virus are likely to mean that we are moving from pandemic to endemic.  Simply put, COVID-19 will be with us, like influenza, for good.  That means that it will need to be managed.  This could mean that annual or periodic boosters are required, and perhaps more aggressive prevention measures during “COVID season,” which will probably coincide with flu season.  Two areas of further action are likely.  First, it is clear that some people suffer greatly from the virus, while others are asymptomatic.  For the most part, we have determined a set of comorbidities that seem to predict the impact of infection.  We would expect to see a finer set of factors be established over time, down to the genetic level.  Second, although most of the focus has been on vaccines, anti-viral drugs will also be important when it comes to adjusting to an endemic condition.

 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 I of a 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.  Being Friday, 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.  The Fed has spoken, and low interest rates are here to stay!  The market news this morning is that 10-year T-note yields are now above 1.5%.  Equity futures, which were lower most of the night, are now higher.  This initial decline is, of course, due to the rise in 10-year Treasuries, which now exceeds 1.5%; the reversal is likely the result of progress on the COVID-19 stimulus package.  Our coverage begins with financial, followed by economic and policy news.  China coverage is next, with a pandemic update afterward.  We close with our international news roundup.

 Financial Markets: Global equities, government bonds, and even cryptocurrencies are all under pressure following comments from Federal Reserve Chair Powell.  On Thursday, Powell did an interview with the Wall Street Journal in which he failed to reassure investors that the Federal Reserve would be willing to intervene in the bond market in order to stabilize interest rates.  Recent fears that the fiscal stimulus could cause the economy to overheat and accelerate inflation has ignited a sell-off in 10-year treasuries, which, in turn, led to higher rates.  The rise in interest rates has made its way into mortgage rates, which have now risen above 3.0%.  Additionally, higher rates have encouraged investors to shift away from riskier assets and into safer assets. Ironically, GameStop (GME, $132.35) closed 6.6% higher, suggesting Redditors still refuse to take a hint.

Rising yields have had a disproportionate impact on tech stocks as rising interest rates make it harder for these firms fund future projects and acquisitions.  As a result, the NASDAQ, which primarily tracks tech stocks, is down 9.7% from the high it reached in February.  Although the decline in tech may be steep, it is likely nothing to worry about, as the sector has generally outperformed its peers since the start of the pandemic.  Therefore, a market correction is rather appropriate given the circumstance.

At this time, we don’t think that rates are high enough to destabilize markets, but that could change if rates continue to rise at their current progression.  Outside food and energy prices, there haven’t been many inflationary pressures that could be attributed to excessive demand.  Thus, it is possible that inflation fears, while valid, may be a bit exaggerated.  We suspect that if treasuries rise above a predetermined level of rates, the fed will likely act in the form of a yield curve control.  The Fed has mentioned on several occasions that it is prioritizing full employment over inflation, therefore, reducing the likelihood of a premature exit of easy monetary policy.  If we are correct, the Fed may be moving to a policy similar to pre-Volcker, where the focus is more on the labor markets and less about inflation suppression.

Economics and policy:   The Senate has made progress in advancing the stimulus package, the Biden Administration to take on crypto, retail continues to show signs of improvement, and much more.

• Senate Democrats advanced a $1.9 trillion coronavirus relief package after making a series of adjustments related to student loans, infrastructure, and other matters.  Approval in the chamber expected within days.
  • A total of 158.5 million households would receive direct payments under the latest version of the stimulus bill, the White House said on Thursday.
• The Biden administration will soon have to settle a Bitcoin fight.  The battle concerns last-minute rules proposed by the outgoing Trump administration that would create new requirements for financial services firms to record the identities of cryptocurrency holders.  The measures are intended to smother attempts to use Bitcoin and other cryptocurrencies for money laundering or financing illegal activities.  If adopted, they could cause cryptocurrency prices to plummet.
• Costco Wholesale Corp. (COST, $319.04) sales climbed again in the latest quarter, as Americans continue to shop for food and goods for the home during the pandemic. The wholesale retail chain’s revenue rose to $44.77 billion in the quarter ending February 14, a 15% increase from the year-earlier period, driven by strong demand for fresh food and household goods, and topping analysts’ projections of $43.7 billion.
• Yesterday, Alabama’s governor extended an order mandating that residents wear face masks for another month to protect against COVID-19, breaking with Mississippi and Texas.  The issue once again becomes the focus of a political debate.
• The dollar rose to an eight-month high against the yen amid broad strength in the greenback and rising U.S. Treasury yields.
• A key House Republican told Joe Biden in a meeting on Thursday that the president’s plan to rebuild U.S. infrastructure will lose GOP support if it adds to the deficit or delves into issues beyond roads and bridges, such as expanding clean power sources.
• President Biden is scheduled to Join the First-Ever ‘“Quad” Leaders Meeting.  Leaders of the “Quad” bloc will hold their first-ever meeting as the four democracies of the U.S., Japan, India, and Australia seek to counter China’s rising influence.
• The U.S. and U.K. are weighing additional penalties against Russia over the use of chemical weapons, with options ranging from sanctions against oligarchs to the extreme step of targeting the nation’s sovereign debt, according to sources familiar with the matter.

 China:  China sets out its new five-year plan

• China set its economic growth target above 6% for the year as it rebounds strongly from the pandemic-induced slump .The government aims to add more than 11 million urban jobs this year and plans a budget deficit of 3.2% of gross domestic product, Premier Li Keqiang said Friday at the opening of the National People’s Congress.
  • China pledged to boost spending and drive research into cutting-edge chips and artificial intelligence in its latest five-year targets, laying out a technological blueprint to vie for global influence with the U.S.
• Chinese lawmakers are pushing ahead with a plan to curb the ability of democracy activists to win elections in Hong Kong, with local reports saying a vote for the territory’s legislature would be delayed another year to September 2022.
• Roughly nine-in-ten U.S. adults (89%) consider China a competitor or enemy, rather than a partner, according to a new Pew Research Center survey. Many also support taking a firmer approach to the bilateral relationship, whether by promoting human rights in China, getting tougher on China economically, or limiting Chinese students studying abroad in the United States. More broadly, 48% think limiting China’s power and influence should be a top foreign policy priority for the U.S., up from 32% in 2018.
• The People’s Bank of China (PBOC) has been spearheading work on the digital yuan, a so-called central bank digital currency (CBDC) that aims to replace some of the cash in circulation. Real-world trials are already underway in the world’s second-largest economy.
• This week a U.S.-government-backed commission of technology experts completed a three-year review of the country’s artificial intelligence capabilities, urging the development of a new national technology strategy to stay competitive with China.

COVID-19:  The number of reported cases is 115,482,343 with 2,567,404 fatalities.  In the U.S., there are 28,813,812 confirmed cases with 519,944 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 109,905,530 doses of the vaccine have been distributed with 82,572,848 doses injected.  The number receiving a first dose is 54,035,670, while the number of second doses, which would grant the highest level of immunity, is 27,795,980.  The FT has a page on global vaccine distribution.  And the Axios map shows a dramatic decline in infections.

Virology

• The factory that Pfizer Inc. (PFE, $34.20) plans to use to boost production of its COVID-19 vaccine for its massive U.S. inoculation effort was cited by federal inspectors last year for repeated quality-control violations.
• The average number of vaccine doses administered across the United States per day topped two million for the first time on Wednesday, according to data from the Centers for Disease Control and Prevention.  A month ago, the average was about 1.3 million.
• The Japanese government recommended extending by two weeks its virus state of emergency, set to expire on Sunday, for the Tokyo region, as it looks to host the Olympics in about four months.
• The burden from COVID-19 is weighing more heavily on hospitals in New York than anywhere else in the U.S., even as Governor Andrew Cuomo takes steps toward rolling back pandemic protections.
• A World Health Organization team investigating the origins of COVID-19 is planning to scrap an interim report on its recent mission to China amid mounting tensions between Beijing and Washington over the investigation and an appeal from one international group of scientists for a new probe.
• On Thursday, Italy blocked the export of 250,000 AstraZeneca (AZN, $37.23) doses to Australia, becoming the first EU country to exercise an export ban resulting from a vaccine shortfall in the bloc.
• Wells Fargo & Co.(WFC,$37.16), which has the largest workforce among U.S. banks, is encouraging employees to get vaccinated against COVID-19 and is offering paid time off for the inoculations.

 International news:

• Myanmar’s military rulers attempted to move about $1 billion held at the Federal Reserve Bank of New York days after seizing power on February 1, prompting U.S. officials to put a freeze on the funds, according to three people familiar with the matter including one U.S. government official.
• U.S. and Iraqi officials believe that an Iran-backed group with a history of targeting Americans in Iraq was responsible for Wednesday’s attack on an Iraqi airbase hosting U.S. troops.
• U.S. and European powers are giving Iran a last chance to start cooperating with a United Nations atomic agency probe of Tehran’s nuclear activities, backing away from a formal censure of Iran in a bid to revive nuclear diplomacy between Washington and Tehran.
• The U.S. temporarily suspended tariffs on Scotch, cheese, cashmere sweaters and other consumer imports from the U.K. on Thursday as the nation’s work to resolve a longstanding trade dispute over commercial-aircraft subsidies.
• The EU plans to bring antitrust charges against Apple for the first time, putting more pressure on the iPhone maker to change the way it runs its App Store.
• Opec and Russia decided against unleashing a flood of crude on to the market after Saudi Arabia urged fellow oil producers to “keep our powder dry” in the face of persistent uncertainty linked to the pandemic.
• Bank of Japan Governor Haruhiko Kuroda said on Friday the central bank must ensure long-term interest rates are kept stably low as the coronavirus pandemic keeps the economic outlook highly uncertain.

 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 I of a 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.

Good morning.  U.S. equity futures are weaker this morning but off the worst levels of the session.  We start with comments on policy and the economy; we have had a number of Fed speakers this week, and Chair Powell will top the list.  Next up is China news as it prepares for CPC meetings and the next five-year plans.  International news follows, and we close with pandemic news.

Economics and policy:  We look at Fed speakers and the Beige Book.  There is some tweaking to the stimulus bill as it moves through the Senate.

• The Beige Book had an optimistic tone; although current conditions have not improved all that much, there are great hopes that vaccinations will open the economy. We continue to sift through comments from Fed officials, and there does appear to be an evolving narrative.  The FOMC members are watching the rise in Treasury yields.  But, for now, they are willing to allow the rates to rise because they are rising for the “right” reasons, namely, a better economy.  At the same time, they are in no hurry to raise rates because they don’t expect inflation to become a problem.  In addition, the patience on policy is part of the regime change where the Fed will no longer focus policy on inflation suppression.
  • As we suspect will be detailed in the full transcripts of the current FOMC meetings when they are released in 2026, there is likely a robust debate underway about interest rate increases and financial stability. One thing we are watching for is a return to “Operation Twist,” where the Fed skews its purchases to the long-duration Treasury curve in a bid to slow the rise in yields.
• On the fiscal and regulatory front, the stimulus bill is in the Senate. To make the bill more acceptable to centrist Democrats, eligibility for stimulus payments has been narrowed, giving less money to the more affluent.  The populist wing of the Democratic Party isn’t pleased but probably will go along.  It doesn’t appear that the overall size of the spending will decline, however.  The funds will shift to other parts of the bill.  In the end, we would not be surprised to see the overall bill fall to around $1.6 trillion.
  • An interesting sidelight has emerged on the state fiscal situation. In the last downturn, the recovery was hampered; state governments were forced to cut spending due to declines in tax revenues.  Politicians, like generals, tend to fight the last war.  There has been great concern that state governments would be forced to repeat the same pattern as seen in 2010-12.  However, so far, that isn’t the case.  For the most part, revenues have held up better than expected.  If the economy bounces back, it may turn out that these concerns over state cutbacks were overblown.
  • Political capital is being spent by the White House. We may be seeing the first casualty in policy triage. It looks like immigration policy is being shelved.  Although some hope that it can be revived later, in reality, there will be less political capital later on.  This looks like immigration is being sacrificed for pandemic stimulus.
  • The $15 minimum wage looks like it won’t make it either. But we would not be shocked to see a $12 level passed with some bipartisan support.
• One of the key goals of the Biden administration’s foreign policy is to rebuild coalitions. We have our doubts this goal will work for two reasons.  First, other nations have no idea whether this goal will last beyond the current administration, so committing to it may not make much sense.  Second, one of the primary reasons foreign governments accepted U.S. hegemony is that they derived economic benefits.  The U.S. accepted large current account deficits which supported foreign economies.  The Biden administration is talking about bringing manufacturing back to the U.S. and “buy American first.”  There isn’t much incentive to join a coalition with few economic benefits.  Still, the administration has issued a preliminary document on its policy goals.
• As we see a retreat from globalization, one glaring problem is semiconductors. We have been documenting for weeks the travails of the auto industry as it grapples with the lack of chips.  Large trucks are the latest victim of this shortage.  When one looks at the supply chain for semiconductors, one is struck by the geopolitical risk of having the world’s largest chip foundry in Taiwan.  The U.S. is talking about creating conditions to build capacity in the U.S., which is a wise move.  It will be a long-term process, one that will require the policy to remain in place for multiple administrations, something difficult to accomplish in the current political environment.
• We are seeing increased corporate interest in single-family home rentals.
• The Texas regulatory bodies are urged to suspend collections in the wake of the recent electricity crisis.

China:  CPC meetings dominate the news.

• Major CPC meetings will be held over the next two weeks. These meetings will confirm the politburo standing committee’s policy goals.  The broad goal, as part of the “dual circulation” narrative, is to create conditions of independence in key industries, primarily technology.  Part of this goal is the move to shift growth from investment to consumption.  Although this idea has been around for some time, it never gets executed because there are fears that the “handoff” won’t be smooth.  Environmental concerns should also be discussed.
  • New controls on Hong Kong are expected to be unveiled as Beijing steadily ends the separate nature of the former colony.
  • The U.S. is being singled out as Beijing’s most potent threat, a claim mirrored by American policymakers.
  • As part of meeting preparations, controls on dissidents are being increased.
• Non-performing debt is a persistent problem for China. This is mostly due to the fact that much of China’s growth is driven by investment which is funded by debt.  If the investment goes sour, the debt then becomes a problem.  For much of China’s development since the late 1970s, the debt was held internally.  But, as China has started to internationalize, some of the defaulting debt is held offshore, sometimes in foreign currencies.  China Fortune Land Development (600340, CNY, 7.7) is the most recent to default.  Property development is of particular concern.
• There are reports that General Secretary Xi is instigating a purge of domestic security agencies. This is a bit of a surprise given that Xi’s first term had numerous purges.  On the other hand, to maintain his position, periodic purges may be necessary.
• As the U.S. increases restrictions on technology exports and transfers, China has moved to importing earlier versions of chipmaking equipment. This pattern bears watching.  China may be opting for less cutting-edge technology that is easier to find and deciding that older technology may be “good enough.”  China is also taking added steps to avoid U.S. restrictions, primarily domestic production.
  • China has worked out a deal to buy second-generation chipmaking equipment from ASML (ASML, USD, 543.60). We will be watching to see if the U.S. tries to stop this sale.
  • There are reports that Jack Ma is defying government demands for customer data.
  • The new USTR appears to be maintaining pressure on China.
• Gallup reports that U.S. views of China are at historic lows.
• Lithuania is considering leaving China’s 17+1 forum and expanding links with Taiwan.
• There is a growing chorus of nations considering either boycotting or calling for the 2022 Winter Olympics to move away from China.
• If there was ever any doubt that the Belt and Road project is neo-colonization, this report on Pakistan tends to relieve those reservations.

International news:  The U.K. plans for the post pandemic economy, and the AfD is under investigation.

• The U.K. budget is the first major economy post-pandemic blueprint. In a clear departure from the Thatcher era of Tory policy, tax increases are the primary feature.  As we saw in the U.S. in the late 1980s, the GOP plan to narrow deficits was always about revenue and spending cuts in the future.  This budget is the same.  It remains to be seen if the policies will actually be enacted when the future becomes the present.
• The German government has opened surveillance on the AfD, the right-wing populist party. The concern is that elements of the party may be harboring neo-Nazi sympathizers.  This is the first time the German government has surveilled a sitting party in its legislature since WWII.
• OPEC+ continues to meet. Although the KSA and Russia appear to support a 1.0 mbpd increase in production, there is support for maintaining production discipline.
• Italy is opening a major trial where organized crime is engaged in massive corruption targeting agricultural support payments.
• Myanmar protests are becoming increasingly violent. Yesterday, 38 protesters were killed.  China is worried because it sources rare earths in Myanmar, and in the past, unrest has disrupted that supply chain.
• Another rocket attack hit a military base in Iraq that houses U.S. troops.
• It looks like North Korea may be ramping up its nuclear program again. Pyongyang often causes trouble for first-term presidents.

COVID-19:  The number of reported cases is 115,297,267 with 2,561,937 fatalities.  In the U.S., there are 28,760,267 confirmed cases with 519,867 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 107,028,890 doses of the vaccine have been distributed with 80,540,474 doses injected.  The number receiving a first dose is 52,855,579, while the number of second doses, which would grant the highest level of immunity, is 26,957,804.  The FT has a page on global vaccine distribution.  The Axios map shows some increases in infections.

Virology

• The Brazilian variant of COVID-19 shows signs of infecting those who have already contracted the disease.
• Those who have been vaccinated or infected have shown a strong T-cell response, which may offer hope that reinfections may not be significant.
• China and Russia have moved rapidly to provide vaccines to the emerging world. The West is starting its own program of supplying vaccines.
• India’s vaccine has been found effective.
• Egypt is charging so much for vaccinations that a large element of the population may not be able to afford it.
• Chinese and South African police have seized thousands of doses of fake vaccines.
• One outcome of the pandemic is an apparent baby bust; birthrates in the West are showing signs of falling.

 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 I of a 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.  The Weekly Energy Update is available.  You can find all this research and more on our website.

We open today’s Comment with the latest reassuring statements from policymakers at the Federal Reserve, who continue to stress that U.S. monetary policy won’t be tightened anytime soon.  In overseas news, we are noticing more evidence of pushback against right-wing populism, especially in Europe.  Finally, we cover the latest developments in the coronavirus pandemic.

U.S. Bond Market:  In a video speech yesterday, Fed Governor Brainard said the recent spike in longer-term bond yields caught her eye, but she didn’t see the kinds of disorderly movements or persistently tightening financial conditions that would require intervention.  Rather, she emphasized that even though the rollout of vaccines is likely to end the coronavirus pandemic and spur fast economic growth this year, the economy will remain far from the point where the Fed would start tightening policy.

• Separately, San Francisco FRB Chief Daly, who has a vote on the rate-setting Federal Open Market Committee this year, was similarly unworried by the rise in yields.  Echoing other Fed officials, she said the rise in yields is “a sign investors think the future is a little brighter than they thought,” and “in many ways, it’s a good piece of news.”
• Daly said monetary policy is “in a very good space” right now, and she didn’t see a need to push back against the bond market, although she noted the Fed retains the ability to push down long-term yields if it chooses to do so.
• Along with other recent statements by Fed officials, the comments by Brainard and Daly show monetary policymakers are still committed to keeping policy loose, even as the Biden administration pushes for $1.9 trillion in new fiscal relief and pandemic restrictions on economic activity are already being loosened.  In other words, the key equity drivers remain in place for the time being, which should be positive for stocks in the near term.
• All the same, there are still lingering concerns about liquidity conditions in the Treasury market, especially after weak demand at an auction of seven-year obligations last week forced primary dealers to pick up almost 40% of the sale.  That marked their highest share in seven years.  On top of that, a lot of the trading last week was consistent with some entity or entities rushing to raise cash, suggesting some stress in the system, with the non-bank sector being a key potential culprit.  Even though the debt markets have calmed considerably this week, we continue to watch developments closely.

U.S. Politics:  The White House announced it has withdrawn Neera Tanden’s nomination to lead the Office of Management and Budget amid opposition from Senate Republicans and a key Democrat.  The withdrawal marks the first failed confirmation push for one of President Biden’s cabinet picks.

• Shalanda Young, a longtime congressional staffer and Biden’s choice for deputy director of the budget office, is now seen as a leading contender to lead the OMB.
• During a confirmation hearing for her deputy director nomination on Tuesday, senators from both parties signaled they would support Ms. Young.

Germany:  Responding to an in-depth study by lawyers and experts on extremism, the country’s domestic intelligence agency has reportedly decided to designate the Alternative for Germany (AfD) as a suspected extreme right-wing organization and will start formally spying on the party.  The news could severely undermine the AfD’s chances in September’s Bundestag elections by damaging its credibility with conservative voters, especially civil servants fearful of the career implications of supporting a party seen by the authorities as disloyal to the German state.  The move would also be a sign that traditional establishment policymakers are becoming more confident about pushing back against right-wing populism.

• The AfD is the largest opposition party in the Bundestag and is now represented in all of Germany’s 16 regional parliaments.
• However, its poll ratings have sunk in recent months as the coronavirus pandemic boosts the standing of government parties.

Hungary-European Union:  Hungary’s right-wing populist Fidesz Party said it would withdraw from the European Parliament’s grouping of center-right parties known as the European People’s Party.  In more evidence of the pushback against Europe’s right-wing populism, the EPP has been pushing back against Hungary’s extreme policies and leader Viktor Orban’s aim to establish an “illiberal democracy” in the country.  The withdrawal by Fidesz follows an EPP decision, allowing the grouping to suspend a member party en masse.

United States-Saudi Arabia:  Prince Khalid bin Bandar, Saudi Arabia’s ambassador to London, told the Financial Times that the release of a U.S. intelligence report asserting that Crown Prince Mohammed bin Salman authorized the capture or killing of Saudi journalist Jamal Khashoggi was “an internal issue for the United States” and wouldn’t damage the relationship between the two countries.

United States-Iraq-Iran:  Just a week after the U.S. launched retaliatory airstrikes against Iranian-backed Iraqi militias in Syria, ten rockets struck a military base used by U.S. troops in Iraq’s Anbar province.  No injuries have been reported from the attack, and no group has claimed responsibility.  However, it continues to point to rising tensions in the region as Iran tests the new U.S. administration’s resolve and tries to force it into easing sanctions against it.

COVID-19:  Official data show confirmed cases have risen to 114,871,514 worldwide, with 2,551,338 deaths.  In the United States, confirmed cases rose to 28,719,860, with 516,616 deaths.  Vaccine doses delivered in the U.S. now total 102,353,940, while the number of people who have received at least their first shot totals 51,755,447.  Finally, here is the interactive chart from the Financial Times that allows one to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections fell to approximately 53,000 yesterday, well below the seven-day moving average of 67,760 and the 14-day moving average of 69,021.  Hospitalizations related to the virus also remain far below the critical levels reached in early January.  However, daily reported deaths have been climbing and reached more than 1,800 yesterday.  That may reflect some state and local governments catching up on a backlog of previously unreported deaths, but officials are watching closely to see if something else might be going on.
• Announcing a partnership in which Merck (MRK, 72.85) will help produce the newly approved vaccine from Johnson & Johnson (JNJ, 159.02), President Biden said the U.S. will have enough doses for every adult in the country by the end of May, two months earlier than previously anticipated.
  • In addition, the president called on states to give vaccine priority to teachers, school staff, and child-care workers in order to help get schools back to in-person teaching.
  • He also said the federal pharmacy program would give priority to teachers and set a goal for each educator to get at least one dose of the vaccine by the end of March.
• The U.S. is reportedly working with Japan, India, and Australia to develop a plan to distribute vaccines to countries in Asia as part of a broader strategy to counter China’s influence in the region.  Besides raising hopes for reduced infections in Asia, the plan underlines the Biden administration’s focus on reinvigorating U.S. alliances.
• In Cuba, the government is starting final-stage clinical trials on two indigenously developed vaccine candidates.
• The government has been rolling out vaccines aggressively in the U.K. and has already inoculated millions of people.  The evidence so far suggests the vaccines have few serious side effects in the real world.
  • According to a study by the U.K. Medicines and Healthcare Regulatory Authority, the “overwhelming majority” of adverse events were experienced shortly after the injection and were not associated with a “more serious or lasting illness.”
  • When side effects did show up, they were generally limited to sore arms, headaches, chills, fatigue, nausea, fever, dizziness, weakness, aching muscles, and rapid heartbeat, similar to the flu.
• Texas is the largest state so far to announce it is dropping its mask-wearing mandate.  Governor Abbott said the mandate would end on March 10, even though infection rates remain relatively high, and the state has one of the lowest rates of vaccinations in the country.
• In Japan, Prime Minister Suga announced that rebounding infections would require a two-week extension to the pandemic state of emergency and shutdowns in the greater Tokyo area.  The state of emergency was scheduled to end on Sunday.
• Despite the success in rolling out vaccines in many countries, the delayed lifting of Tokyo’s emergency, and the likelihood that the world will still be far from herd immunity this summer, have organizers of the Tokyo Olympic Games contemplating the possibility of banning overseas spectators from the event.
• Although there is good news on vaccines and economic reopening in the U.S., scientists continue to worry about the rise of new, more transmissible mutations of the virus.  Researchers and doctors are especially worried about the new, more aggressive strain from the Amazon area of Brazil.  They believe this strain is responsible for a recent rise in deaths, as well as infections in younger people, in parts of South America.

 Economic and Financial Market Impacts

• With so many people stuck without childcare because of the pandemic, a whopping 98% of employers now plan to expand their benefits, according to a survey of H.R. departments by Care.com.  About 66% are adding flexibility to help parents and other caretakers, and 63% are adding childcare benefits.

U.S. Policy Response

• President Biden held a strategy meeting with Senate Democrats yesterday to refine their approach to pushing Biden’s $1.9 trillion pandemic relief bill through the chamber.  Biden urged the lawmakers to pass the legislation quickly, but various Democratic factions continue to adjust a range of provisions in the bill.

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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 I of a 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.  The Weekly Energy Update is available.  You can find all this research and more on our website.

Turning to today’s Comment, we open with various news on the policy front as the Biden administration and the Democratic Congress start to take on more substantive decisions.  We also note some additional evidence of the frictions between the Chinese government and its technology entrepreneurs.  We wrap up with the latest coronavirus news, including many items related to vaccine distribution and the impact of new mutations.  Even though yesterday’s surge in the equity markets appears to have stemmed in large part from reduced concern about rising bond yields in the U.S., we note that investors in European bonds think the ECB will likely move faster than the Fed to impose a cap on longer-term yields.

U.S. Trade Policy:  In its official trade policy, issued yesterday, the Biden administration promised to prioritize the interests of U.S. workers and use “all available tools” to respond to unfair Chinese practices, such as subsidies to favored industries, forced technology transfers, and the use of forced labor.  While it continues to conduct a comprehensive review of its trade policy with China, the administration also pledged to take a broader approach and work more closely with allies to put pressure on the Chinese.

U.S. Banking Policy:  Senior Democratic Senators Elizabeth Warren and Sherrod Brown have warned the Federal Reserve and other U.S. regulators that it would be a “grave error” to extend the looser bank capital requirements that were introduced at the start of the pandemic.  Those rules are due to expire at the end of the month.  Republicans, banks, and industry executives are pushing for an extension of the measures.

U.S. Energy Industry:  The American Petroleum Institute, the country’s top oil industry lobbying group, is reportedly poised to endorse setting a price on carbon emissions, in what would be the strongest signal yet that oil and gas producers are ready to accept government efforts to confront climate change.  According to a draft of the statement, “API supports economy-wide carbon pricing as the primary government climate policy instrument to reduce CO2 emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action.”  As if more evidence was necessary, the move would underline how green policies have become increasingly accepted and assumed, even in the energy industry.

China:  As President Xi continues trying to rein in China’s powerful technology entrepreneurs, giant fintech firm Ant Group remains one of his key targets, but the company and its founder, Jack Ma, seem to be resisting.  In the latest development, Ant has apparently been slow-walking the transfer of its customers’ credit data to the People’s Bank of China, as it promised to do when its IPO was pulled by the government late last year.  According to the PBOC, credit data collected by internet platforms is a “public good” that should be shared and regulated more closely.

• Ant has blamed privacy laws for the slow data transfers, as users must give their approval before the company can send their information to the central bank, and only a fraction have agreed to do so.  China’s data protection standards require companies to obtain consumers’ consent regarding how they use their data, including passing it on to third parties.
• But the PBOC is pushing companies to find ways to share data, such as requiring consumers to agree to data-sharing as a condition of using their services — a measure Ant is loath to implement for fear of scaring off customers.
• The dispute between the government and Ant reflects a key contradiction in China’s economic model under Xi.  The Communist Party and the government want to maintain strict control over the private sector and the rest of society.  However, clamping down could make those firms less dynamic and innovative, which ultimately would impede Chinese economic growth and the improvement of living standards.  In addition, the clampdown on the private sector feeds into foreigners’ concern that Chinese telecom equipment and other technology will ultimately be used to funnel Western data and secrets to Beijing, while foreign investment in China will be at risk of compromise by the government.  From just about every perspective, the rift between the government and Ant is at least a longer-term negative for Chinese assets.
• Separately, China’s top banking and insurance regulator, Guo Shuqing, warned that bubbles forming in foreign financial markets would pose a risk for the Chinese financial system, given its increased integration with world markets and the large inflow of capital over the last year.  His statement came just weeks after Ma Jun, an adviser to the PBOC, said the risk of “bubbles” would increase if the central bank did not adjust its policy.  The statements point to a risk of tightened monetary policy and reduced liquidity in China, which has pushed the country’s stock markets lower today.

China-India:  Cyber investigators in the state of Maharashtra, where Mumbai is located, said an initial investigation indicates a major electricity blackout in October may have been an attack by China.  The announcement came on Sunday after U.S. cybersecurity firm Recorded Future published a report outlining what it said were China-linked attacks targeting India’s power infrastructure.  The attacks occurred at the height of last year’s China-India tensions over territory in the Himalayan mountains.

COVID-19:  Official data show confirmed cases have risen to 114,499,553 worldwide, with 2,540,340 deaths.  In the United States, confirmed cases rose to 28,664,604, with 514,660 deaths.  Vaccine doses delivered in the U.S. now total 96,402,490, while the number of people who have received at least their first shot totals 50,732,997.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose to approximately 57,000 yesterday, and deaths attributed to the virus rose to 1,400.  Both those figures were slightly higher than one week ago, probably reflecting the way that more contagious virus mutations have led to a stall in improvements.  On a more positive note, however, hospitalizations related to the virus fell to 46,700, near their level at the end of October.
• Trucks carrying the newly approved vaccine from Johnson & Johnson (JNJ, 159.32) began rolling out yesterday across the country. The shipments are expected to reach states and vaccination sites as early as today.
• In preliminary findings published yesterday, British researchers said a single dose of either of the first two Western vaccines reduced the risk of hospitalization among people over 70 years old by 80%, compared with those of a similar age who weren’t vaccinated.  The study adds to evidence from across the world that vaccines are broadly as effective in the real world as they were shown to be in clinical trials. This gives hope that mass rollouts can reduce the need for restrictive public-health measures and pave the way for economic reopening.
• The Biden administration said it wouldn’t consider sharing its vast vaccine supplies with Mexico until “every American is vaccinated,” despite a January request by the Mexican president for assistance.
• While Tokyo and three surrounding prefectures are due to have their pandemic states of emergency lifted on Sunday, officials in Tokyo now are warning that infection rates may not have come down enough for that to happen.  With that in mind, Prime Minister Suga said he won’t decide on the matter until the last possible moment.
• According to a new study, the P.1 variant of the virus that was identified in Brazil is about twice as transmissible as some other virus strains and more likely to evade the natural immunity usually conferred by prior infection.  In other words, people can still get infected with the variant, even if previously infected with a different variant of the coronavirus.

 Economic and Financial Market Impacts

• According to a joint study by the Chinese Academy of Sciences and the University of Kansas, the Chinese economy will continue to suffer significant damage from the pandemic in 2021.  The study shows sectors like coal, electricity, gas, and food producers will suffer lost sales equal to about 2.7% of GDP, even though overall GDP will likely grow more than 8%.

 Foreign Policy Response

Just as optimism over vaccines and economic reopening has driven longer-term bond yields higher in the U.S., it’s also driving yields higher in Europe.  However, with the European economic outlook still much more fragile than the U.S. outlook, investors are betting the ECB will move much more quickly to hike its asset purchases and put a lid on rates.  That expectation has reportedly already helped draw funds back into European bonds.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” has been published.  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.  The Weekly Energy Update is available.  You can find all this research and more on our website.

Good morning and happy Monday!  We leave February today with hints of spring in the air.  Spring training baseball is underway; if you want to test your knowledge of your favorite team, try to see how many of the players in after the fifth inning you recognize!  After a tumultuous week, risk markets are having a positive day so far.  There is a plethora of Fed speakers this week, culminating in the Chair on Thursday.  Our coverage this morning begins with international news, with our usual China news next.  Policy and economic news follow, and we close with the pandemic update.

International news:  In watching politics over the years, we note that every new president enters office with plans to make changes.  Often, the focus is on domestic policy; since foreigners don’t directly participate in U.S. elections, most platforms focus on the U.S.  However, it often happens that foreign problems intervene.  President Biden is dealing with a growing set of foreign concerns, which, at a minimum, will act as a distraction for his domestic policy.  The Kingdom of Saudi Arabia (KSA), Iran, Myanmar, and Europe are all in the mix this morning.

• Last week, the U.S. released the long-awaited report on the Khashoggi assassination. There were no real surprises in the report; CP Salman was implicated in the action as authorizing the assassination.  As a presidential candidate, Biden suggested harsh action against the KSA for the event.  However, as president, his restrictions on the KSA have garnered rebukes from his supporters.  In fact, it appears the U.S. is even backing away from what has already been proposed.  Conducting foreign policy is much more difficult than commenting on it.  Commentators don’t carry the costs of reactions.  The administration is attempting to sanction the KSA to show that it didn’t approve of the assassination while, at the same time, trying to maintain the anti-Iran coalition that includes the KSA.  One of the criticisms of not punishing the KSA hard is that the threat of oil supply disruptions is not as significant due to U.S. production.  However, the environmental policies of this administration are designed to reduce that output, meaning that the geopolitical power of the KSA to manipulate oil prices will likely increase in the coming years (although reductions in U.S. consumption should mitigate this in the long run).  The bottom line is that the administration is trying to weave a line between signaling to the KSA that behaviors like the Khashoggi assassination are not supported and not damage relations to the point where it would increase instability.  Such paths are nuanced and thus rarely popular.
• Iran has refused direct talks with the U.S. over the nuclear issue. With presidential elections due in Iran in June, there is no upside for the current Iranian administration to engage in talks.  The same sticking points exist; the U.S. wants Iran to back away from uranium enrichment as a condition of restarting talks.  Iran wants sanctions lifted as a precondition for talks.  Candidate Biden called for a return to the Obama-era nuclear deal, but conditions have changed, and a return to that agreement is unlikely.  Thus, tensions will remain elevated.
  • Israel has blamed Iran for an explosion suffered by an Israeli vessel in the Persian Gulf.
• Security forces in Myanmar used live ammunition on protestors over the weekend, killing at least 18. This attack was the first time security forces used deadly force against protestors, a move that suggests the coup leaders are becoming less tolerant of the unrest.  The new government has warned foreign embassies against contacting opposition parties.
• Protests in Spain intensified over the weekend. The catalyst was the arrest of Pablo Hasél, a local singer but evolved into an intergenerational protest against the pandemic lockdowns.  Young Spaniards, reflecting the sentiment of the younger generations across the West, are rebelling against lockdowns, arguing that the cost of economic collapse is born by young people who are at less risk from the virus, protecting older people who are at greater risk.  We will be watching to see if these protests spread.
• Treasury Secretary Yellen signaled that the new administration is planning to drop the “safe harbor” provisions of a digital services tax. Previously, the U.S. insisted on a safe harbor provision that would allow tech companies, who are overwhelming America, from being forced to comply with EU taxes.  This change could be significant.  It appears to indicate the U.S. will not only stop protecting tech firms but potentially could cooperate with the EU on taxing and regulating them.  Although the U.S. may not directly participate in a tax (getting tax increases through Congress can be a challenge), it is worth noting that opposing technology firms is one of the few bipartisan issues in the U.S. legislature.  In addition, giving up the safe harbor will give the U.S. some degree of leverage in bringing the EU along to oppose China’s designs on dominating technology.
• The Italian 5Star movement is in disarray and has asked former PM Conte to try to unify the party.
• BREAKING—a French court has convicted President Sarkozy of corruption and sentenced him to a year in prison.

China:  Hong Kong and babies are in the news.

• Nearly 50 democracy activists protested at various police stations across Hong Kong. There were arrested quickly and were charged with conspiracy to commit subversion, which could carry a life sentence.    We suspect the protestors are hoping that Beijing won’t severely punish such a large number of protestors; this may be a false hope.
• The U.K. has offered a route to citizenship to Hong Kongers that could bring 300,000 people to Britain. It doesn’t look as if the government is prepared for this influx.  If it turns out that the U.K. can’t accommodate these people, it will remove an important backstop from Hong Kongers who oppose Beijing’s crackdown.
• China’s population issues are nothing new. The “one-child” policy of the past supported China’s development by reducing its dependency ratio, the ratio of working-age to non-working-age citizens.  But, as the population ages with fewer children, China is seeing a rise in the dependency ratio with little hope of improvement other than the demise of the elderly.  China’s labor force aged population should shrink by mid-decade.  It seems 2020 was a particularly lean year for new births in China.  One way China could address its population issue is by reforming Hukou laws that restrict immigration within China.  In practice, rural Chinese move to cities all the time, but they don’t get full government support if they leave their cities of origin without permission.  This gives Chinese companies a more compliant workforce,  but a workforce that sometimes returns home due to family issues.  Allowing free movement would give China one more boost before population declines start to hit growth, but free movement undermines CPC control.
• China is seeing an explosion of fintech; regulators are working furiously to corral the expansion of credit.

Economics and policy:  Financial markets remain on tenterhooks, watching the bond market.  Negative rates in Europe are starting to affect retail depositors.

• The BOJ came out and made it clear it will not tolerate any increase in 10-year JGB’s above 0%. The Reserve Bank of Australia has directly intervened in longer-duration government bonds.  In the U.S., we see a standoff developing, one that harkens back to the “bond vigilante” days of the early 1980s.  Essentially, long-duration Treasury interest rates have been rising for weeks, currently reaching a point where the rest of the financial markets have taken notice.  There are a number of worries emerging.
  • One issue, in particular, is the “behind the curve” argument. The Fed is at risk of allowing inflation to rise enough to build inflation expectations, and once that occurs, a repeat of Volcker will be necessary.  Is this possible?  Yes, but it’s probably farther off than generally appreciated.  Memory tends to compress time.  Financial repression during WWII mostly stayed in place for 25 years.  It was only in the last 15 years that inflation expectations became a serious problem.  For baby boomers, the inflation years of the 1970s marked their economic experience, but there is less recognition of how long reflationary policies were in place before they went off the rails.

This chart shows the generation experience of inflation.  For the most part, the experience of high inflation is restricted to the over 50 years of age group, so the reaction to reflation will likely be less for those younger, meaning that it will take a while for inflation expectations to take hold.

• In the end, as long as the Fed is willing to expand its balance sheet without limit, the Fed can fix the yield curve wherever it wants. We suspect the FOMC loathes to do this because once it does, its independence is lost.  Don’t believe the Fed can’t set the rate; it can, as long as it can live with the consequences.  But, before we get to full yield curve control, we suspect there will be a series of intermediate steps.  For one, we could see the Fed extend rules on bank Treasury buying, which are set to expire at the end of March.  We may also need a crisis to trigger yield curve control.  But, if the government is going to adopt MMT, yield curve control is probably necessary.

• The use of tax policy to achieve the $15 per hour minimum wage has been abandoned.
• Banks in Germany are starting to apply fees to retail deposits, in effect implementing a negative rate on deposits. The fees apply mostly to large deposits (>€100,000); depositors in Germany are moving deposits to other banks in the Eurozone to avoid the negative deposit rate.
• Congress has approved $25 billion for rental assistance and will add another $20 billion if the current stimulus bill passes. It is unclear if (a) local governments have the staffing to distribute the funding and (b) how much is actually in arrears.
• Automakers are expecting a prolonged chip shortage.
• More department stores are essentially extending credit at zero rates to buyers on “buy now, pay later” plans.

COVID-19:  The number of reported cases is 114,217,365 with 2,533,014 fatalities.  In the U.S., there are 28,606,224 confirmed cases with 513,092 deaths.  In the U.S., deaths, hospitalizations, and infection rates continue to decline.  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 96,402,490 doses of the vaccine have been distributed with 75,236,003 doses injected.    The number receiving a first dose is 49,772,180, while the number of second doses, which would grant the highest level of immunity, is 24,779,920.  The FT has a page on global vaccine distribution.

Virology

• On Saturday, as expected, the Johnson & Johnson (JNJ, USD, 158.46) vaccine was approved for emergency use.  This is a single-shot vaccine with easier distribution characteristics, which should increase vaccinations.
• As research on the origins of COVID-19 continues, the growing consensus is that it came from a mutation in wildlife.
• The U.K. has identified six cases of the Brazilian strain of COVID-19 in the country.
• Russia has introduced its Sputnik V vaccine in areas it controls in Ukraine and Georgia, undermining the sovereignty of these nations.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” is now published.  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.  Being Friday, a new Asset Allocation Weekly, chart book, and podcast are also available.  The Weekly Energy Update is available. You can find all this research and more on our website.

Good morning and happy Friday!  Although U.S. equity futures are stabilizing this morning, the overall market action looks like a flight to safety.  Treasury yields are dropping, but the dollar is up sharply, emerging markets are lower, and commodity prices are off hard.  We begin today with market comments.  Policy and economics come next; the minimum wage hike looks to be in danger.  International news is next.  We close with the pandemic roundup.

Financial Markets:  This looks like a market tantrum, and rising interest rates, coming mostly from Treasuries, are the primary culprit.  In our analysis, the 10-year T-note yield is about in line with fair value.  Given market conditions, yields have been unusually low.  At least some of the rise in yields is probably a function of improving growth prospects.  That appears to be how the Fed is viewing it.  Two concerns are surrounding this rise.  First, the lift in yields will adversely affect interest-rate-sensitive parts of the economy and markets.  Residential real estate will likely be the first to suffer, but other areas will eventually cool due to the rise.  Second, and perhaps the most worrisome, is that we live in a shadow banking world where leverage is a key characteristic.  Since the 1990s, every rate increase has eventually led to a financial hiccup.  By itself, this shouldn’t be a big deal; it’s called “risk” for a reason.  But, the pattern since the late 1990s is that these hiccups tend to go systemic quickly.  From LTCM to the mortgage crisis, to the repo meltdown from August 2019 through March 2020, even modest rate hikes tend to expose not only excessive leverage but conditions that threaten market stability.  Unfortunately, it is tough to tell in advance where the problem lies and when it becomes critical.  Our current situation is no different, but the pattern of the past 25 years suggests that there is the potential for another systemic problem lurking, and that will likely also raise fears in the market.

So, what will policymakers do?  We already saw the Reserve Bank of Australia make a surprise bond purchase today.  ECB President Lagarde noted that the bank was “closely monitoring” bond yields.  We haven’t seen anything similar from the Fed, at least nothing in addition to what is already being done.  We do anticipate that, at some point, the Fed will opt for yield curve control.  If it decides against that action, economic growth will be crimped by rising interest rates.  There is nothing wrong with that decision; in fact, that’s allowing the markets to work.  However, that outcome flies in the face of Fed promises to allow the economy to “run hot” to improve the labor markets.  Perhaps the most pertinent question isn’t if the Fed will engage in yield curve control, but what is the path to reach that point.  History would suggest a crisis may be necessary to trigger that action.  For now, we think the FOMC would prefer to let Treasury yields stabilize on their own and allow the financial markets to adjust to a new equilibrium.  It remains to be seen whether that option is available to the FOMC.

Economics and policy:  The parliamentarian rules, the Texas energy crisis evolves, farmers react to high crop prices.

• Congressional Democrats wanted to put the minimum wage hike in the budget resolution bill. That would allow it to pass outside of filibuster rules.  This tactic was a bit of a stretch.  It is hard to see how exactly a rise in the minimum wage is part of the budget process.  The parliamentarian apparently concluded that the minimum wage isn’t a budget item and must be passed separately.  Although there is some talk about overruling her decision, or firing her, we suspect that the Biden administration, preferring to get its stimulus passed, will move on.  This setback doesn’t mean the action is dead.  As we noted yesterday, Sen. Hawley offered a different proposal that could become the basis for a compromise measure.
• In the aftermath of the Texas energy crisis, the situation is evolving from an energy problem to a financial one. One of the theories underlying Texas energy markets was that if conditions deteriorated and generators were allowed to increase prices, more electricity would be produced.  Instead, the market failed; prices rose, but no appreciable supply emerged, meaning customers simply got stuck with high bills.  Ranchers and farmers are steadily calculating their losses.  Chickens died in the cold, citrus was frozen, and milk cows were hurt.  This is what we don’t know yet—winter wheat germinates in the fall and then goes dormant in winter.  Although wheat (which is grass, after all) is a tough plant, the deep cold may have harmed the crop, and we won’t know the extent of the damage until dormancy ends in the spring.
• Farmers, looking to take advantage of high prices, are planning to increase acreage under cultivation this year.
• Global trade is recovering rapidly, but most of the recovery is occurring in Asia.
• Nigeria has seen a rapid increase in cryptocurrency trading.
• Yes, ‘there gr-r-reat’ but apparently scarce!

 International news:  Syria, Armenia, northeastern Africa, and the EU are in the news.

• S. forces carried out airstrikes against Iran-affiliated militias in eastern Syria who attacked coalition forces stationed in Iraq. This is the Biden administration’s first military action.
• There was an apparent coup attempt in Armenia. PM Pashinyan has seen his popularity plummet after he agreed to harsh terms in last year’s ceasefire that ended the conflict between Armenia and Azerbaijan.  It doesn’t appear that the coup was successful, and several military leaders were fired.
• One of the issues we monitor is the Grand Ethiopian Renaissance Dam project, which is designed to bring electricity to the country but will have the potential to reduce water flow on the Nile, depriving downstream nations of water. Egypt is calling on international help to ensure it receives flows; Ethiopia is reluctant to accept any such intervention.
• Iran will hold elections in June. Sanctions have crippled the Iranian economy and will be an important issue in the campaign.  Unrest, tied to the depressed economy, erupted in the southeastern city of Saravan.
• The Biden administration is expected to release a declassified report on the Khashoggi assassination today. President Biden did talk to King Salman yesterday; we suspect the report was delayed until after the call.
• The EU is expected to use a new human rights mechanism to sanction Russia over the Navalny situation.

China:  The U.S. is engaging in talks with Taiwan to secure semiconductors.  This action will likely upset China.  China is allowing the CNY to appreciate, despite the impact on exporters.  We suspect some of the tolerance is an attempt to control commodity prices (since commodities are priced in dollars, a stronger CNY lowers the relative cost) and to show the currency should be internationalized.

COVID-19:  The number of reported cases is 113,111,157 with 2,509,729 fatalities.  In the U.S., there are 28,413,949 confirmed cases with 508,314 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 91,673,010 doses of the vaccine have been distributed with 68,274,117 doses injected.  The number receiving a first dose is 46,074,392, while the number of second doses, which would grant the highest level of immunity, is 21,555,117.  The FT has a page on global vaccine distribution.

Virology

• • The EU continues to stumble with vaccine distribution, and leaders are getting nervous. One issue is that some Europeans are being picky about which vaccine they prefer.
  • The single does Johnson and Johnson (JNN, USD, 162.76) vaccine is being reviewed by the FDA advisory panel, the last step before approval.
  • Although the overall infection data has been positive, we are seeing an uptick in cases. This bears watching because it coincides with an easing of lockdown restrictions.
  • One item being considered is a “vaccine passport.” Although this document could foster the recovery of travel and tourism, there are concerns regarding who would issue such a document, and the security could become difficult to manage.

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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” is now published.  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.  The most recent Asset Allocation Weekly, chart book, and podcast are also available.  Being Thursday, the Weekly Energy Update is available. You can find all this research and more on our website.

Good morning on the day after the Fed’s financial plumbing had a clog!  The market news this morning is that 10-year T-note yields are now above 1.4% (and, as we speak, above our fair value yield of 1.42%).  Equity futures, which were higher most of the night, have turned negative.  This decline is, of course, on the back of a significant rally yesterday, where the Dow Jones Industrials hit a new record.  Our coverage begins with the financial, followed by economic and policy news.  China coverage is next, with a pandemic update afterward.  We close with our international news roundup.

 Financial Markets:  As the year started, there was one clear “known unknown,” using Rumsfeld’s taxonomy.  We knew the economy and markets are awash in liquidity; the unknown was where it would go.  If it went to goods and services, we were likely to see higher inflation.  If it went to financial assets, we could see an epic runup in financial assets.  At the same time, faced with this uncertainty, investors had to position themselves.  Thus, we have seen what appear to be hedging activities.  Bitcoin, gold, and residential real estate saw inflows.  Over the past six months, though, we have seen a steady rise in interest rates.  On August 4, the 10-year constant maturity T-note fell to 52 bps.  It is over 140 bps this morning.  Essentially, bond investors are indicating they need higher yields to compensate for inflation and growth.

This situation puts the FOMC in a difficult spot.  If it allows the long end to continue to rise, real estate, the most important asset for the bottom 90% of households, will start to suffer.  At some point, equity markets will come under strain as well.  At the same time, the beleaguered financial sector, which had something of a lost decade from 2010-19, could benefit from the steepening yield curve.  In addition, higher long-duration rates might take some of the froth out of equities.  After all, the major indices have stalled recently, but that hasn’t hurt cyclical sectors or small caps.  And, as Chair Powell stressed over the past two days, the economy, although clearly recovering, is still in a fragile state.  He left no doubt—policy rates won’t change anytime soon, and the balance sheet will continue to expand.  However, those policies may simply not be enough.  We suspect the FOMC views yield curve control as a last-ditch policy tool.  Fixing the yield curve’s rates could have adverse effects that are hard to predict and potentially difficult to fix.  After all, monetary policy has traditionally allowed the financial markets to set longer-term interest rates.  QE was an attempt to guide longer duration rates, but it’s hard to make the case that it worked very well.

So, where does this leave us?  Our take is that, without intervention, the 10-year is on its way to 2.00%.  The Fed probably lets it go there as long as financial stress doesn’t rise.  In other words, help probably isn’t on the way until there is a crisis.  That doesn’t necessarily mean we will get one, but we think the odds favor the idea that the FOMC won’t move preemptively to cap the long end.  That doesn’t mean equities won’t continue to move higher.  After all, earnings have recovered remarkably well.  It does mean that the path higher will likely become more volatile.

Economics and policy:  CEOs back fiscal support, anti-trust, the minimum wage, and semiconductors dominate the news.

• Major company CEOs have come out in support of fiscal stimulus.
• Since the mid-1980s, the “Bork standard” on antitrust has dominated. Essentially, this standard argues that as long as consumers are not harmed, the size of a business doesn’t matter.  This was a reversal of the “Brandeis standard,” which argued that size alone was the standard for determining antitrust issues.  The Bork standard has been good for consumers, but it has led to two concerns.  First, although consumers have been taken care of, workers have not.  There is evidence to suggest that large companies have tended to maintain margins through wage suppression.  Second, large companies can have outsized political influence.  There is a growing movement to return to the Brandeis standard.  If the legal system does move that way, large tech companies would be vulnerable.
• As the Senate Parliamentarian decides whether the minimum wage hike can be part of the reconciliation bill, Hawley (R-MO) is considering introducing legislation that would be an alternative to the current idea of a national minimum wage of $15. Although the proposal is still evolving, Hawley hits on a key issue; if the goal is to boost incomes for the less affluent, who should bear the burden of the policy?  A pure minimum wage hike puts the burden on businesses.  That incidence might be justifiable.  The problem is that a wage of that level may push some businesses into closing and may raise geographic inequities.  An alternative is to have taxpayers bear part of the burden, which is what Hawley’s bill would do.  For large companies, getting taxpayer aid to pay workers more doesn’t seem reasonable, but for smaller companies, it may.  That is what Hawley’s bill attempts to accomplish.
• The pandemic and the recent cold snap have put the downsides of efficiency and just-in-time inventory methods in focus. Automakers are dealing with a severe shortage of semiconductor chips, one that, in part, was their own fault.  When the economy collapsed last year due to the pandemic, automakers feared that car sales were about to collapse.  In response, they canceled their orders for semiconductors.  This sort of action is standard under conditions of efficiency and just in time inventories.  At the same time, their actions made sense given the history of car sales and the business cycle.  As the chart below shows, sales tend to recover slowly after recessions, but the pandemic recession was clearly unique.  So, much to the surprise of automakers, car sales recovered quickly, meaning that car production needed to resume.

Production is slowing as critical material shortages bite.

President Biden signed an executive order calling for a review of supply chains not just for semiconductors but other critical supplies as well.  A study is one thing, but making changes to supply chains, especially from on high, is another.  We have been expecting that as the U.S. withdraws from its superpower role, supply chains would shorten.  That process will reduce the chances of shortages but increase costs, possibly significantly.

• Perhaps highlighting the problem, Taiwan, home of Taiwan Semiconductor (TMSC, USD, 132.30), is dealing with a drought of such proportions that the company is trucking in water to maintain production.
• Supply constraints are starting to lift European prices as manufacturers are passing costs onto clients.

China:  China is taking an aggressive stance on redefining human rights.

• China continues to use the pandemic to further its geopolitical goals.
  • The WHO continues to investigate the potential for COVID-19 traveling on frozen food. However, the possibility that the virus emerged from a biolab has been deeply discounted.  No other nation seems to have seen virus transmission from food imports; although the odds of a lab leak leading to the virus emerging on the world is small, it isn’t zero.  So far, China has been able to steer the WHO in the direction of its policy goals.
  • China is using vaccine distribution to the developing world to build its soft power.
• Former SoS Pompeo has penned an op-ed in the WSJ returning to the idea that COIVD-19 escaped from a Chinese biolab due to lax safety standards. Chinese media has reacted angrily.
• Katherine Tai is the nominee for USTR. She has been making the rounds, talking to senators and business leaders.  If China had any hopes that tariffs would be lifted soon, Tai is making it clear that is unlikely.  Her stance reflects an often-underestimated fact that presidents face; although they usually win office by promising to be different from their predecessors, they also inherit conditions and constraints that force them into following similar policies.  The framing and commentary might change, but direction tends to be hard-wired.  Simply put, China is a strategic threat regardless of who is in office.
• Western nations have generally agreed on human rights. Genocide is wrong.  Systemic oppression isn’t good either.  That isn’t to say that Western nations always live up to these standards.  But, for the most part, the content of human rights is mostly standard.  China is taking a different posture, arguing that economic prosperity and overall happiness are more important than religious freedom or racial or gender equality.  Security and stability are also high on China’s “list” of human rights.  Such a change in definitions certainly suits authoritarian regimes.  After all, if humans don’t have certain rights merely for being human, the state is the grantor, and thus the definer, of the content of human rights.  However, there is probably a deeper-seated issue operating as well.  A history professor we knew argued that nations invaded by Genghis Khan tended to place a lower value on human life; it also seems they put a higher value on stability.  Both Russia and China have had historical experience with invasions and periods of uncertain governance.  Putting a higher value on stability after those experiences may be part of this condition.
  • Canada has approved a non-binding resolution recognizing China’s treatment of the Uighurs as genocide.
  • Global Times, considered a “mouthpiece” of the CPC, called the “five-eyes” alliance racist.
• China has attempted to cultivate Eastern European nations with investment and trade. If Beijing can acquire allies in the EU, it can likely sway overall EU policy towards China.  It’s a classic “divide and conquer” strategy.  It appears some Eastern European nations have become jaded with China and are starting to build roadblocks against further relations with China.
• China’s crackdown on fintech continues. Essentially, fintech firms are going to face higher capital requirements on the loans they make.  China has been trying to bring lending under control to maintain systemic stability.  Increasing reserves on loans is a step in that direction, but it will also reduce tech firm profitability.
• Industrial metals prices, including copper, have been very strong recently. Factors behind the rise include expectations of higher demand due to the electrification of automobiles, homebuilding, supply constraints, and economic recovery.  It is not uncommon during periods of rising commodity prices to see a single, or a few, major buyers.  Apparently, a Chinese broker, Shanghai Dalu, has been an aggressive buyer recently.
• Chinese financial regulators are pushing home prices lower in Shanghai. Over the past two years, prices in the city are up over 48%.  History shows that these measures don’t last because efforts to cool the froth lead to debt defaults and financial stress.

COVID-19:  The number of reported cases is 112,660,503 with 2,499,552 fatalities.  In the U.S., there are 28,336,780 confirmed cases with 505,944 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 88,204,035 doses of the vaccine have been distributed with 66,464,947 doses injected.  The number receiving a first dose is 45,237,143, while the number of second doses, which would grant the highest level of immunity, is 20,607,261.  The FT has a page on global vaccine distribution.  And the Axios map shows a dramatic decline in infections.

Virology

• Nursing homes in the West have been an area of high fatalities. COVID-19 is especially deadly with the elderly, and the concentration of old people in nursing homes makes them particularly vulnerable.  At the same time, nursing homes become a good signal to the efficacy of vaccines.  U.S. data confirms that the vaccines work.
• There have been some interesting positive effects from measures deployed to contain the spread of COVID-19. Deaths in Japan, for example, have fallen for the first time in over a decade.  And, for the most part, this has been a winter without the flu in the U.S.
• Although children tend to be mostly spared from the worst of the virus, it is notable that hospitalizations of children from COVID-19 remain steady while adult hospitalizations are falling rapidly. A study in Israel shows that the Pfizer (PFE, USD, 33.75) vaccine is effective for both the young and old.
• Ghana is the first African nation to receive COVID-19 vaccines from the COVAX system.

International news:  The KSA, Georgia, Syria, and Europe are all in our roundup.

• The U.S. will release a declassified report on the slaying of Jamal Khashoggi It will indicate that Crown Prince Salman likely ordered the assassination.
• The KSA sold EUR bonds at a negative interest rate.
• Protests in Georgia have erupted after the government arrested an opposition leader. There are fears that the Georgian government is bowing to pressure from Moscow to curtail its democracy.  About 20% of the country is occupied by Russian-aligned military forces, a residual from the 2008 invasion.
• Although President Assad of Syria did remain in power and has essentially won the civil war, in the aftermath, he controls a state with a ruptured economy. He doesn’t appear to have any ideas on how to foster a recovery.
• Andrew Bailey, the Governor of the BoE, warned the EU of “serious escalation” if Brussels continues to encourage banks to move their operations to the continent to maintain operations. Despite the threats, we don’t see how the U.K. has much leverage to prevent the loss of business.  At the same time, we also doubt the operations in the EU will be as efficient, which could mean New York gains market share.
• Border controls within the EU, put in place to slow the spread of COVID-19, are creating logistical snarls.

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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” is now published.  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.  The most recent Asset Allocation Weekly, chart book, and podcast are also available.  You can find all this research and more on our website.

In our Comment today, we open with our thoughts on Federal Reserve Chair Powell’s testimony before Congress yesterday.  The bottom line:  Monetary policy in the U.S. is likely to remain extraordinarily easy for the foreseeable future.  Next, we cover key domestic and foreign news.  We wrap up with the latest developments on the coronavirus pandemic.

U.S. Monetary Policy:  On the first day of his semiannual testimony before Congress yesterday, Federal Reserve Chair Powell continued to signal that the central bank will maintain its easy-money policies well into the future, as expected.  Specifically, he said the economy remains “a long way” from the Fed’s employment and inflation goals, so the policymakers will maintain their current near-zero interest rates and large asset purchases until “substantial further [economic] progress has been made,” a standard that he said “is likely to take some time” to achieve.  Powell will continue his testimony today.

• According to Powell, inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens.  However, rather than showing concern, Powell said the prospect of higher inflation would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.
• Importantly, Powell also suggested that even if inflation does start to rise again, the Fed would be able to get ahead of the problem.  For example, he said, “Inflation dynamics do change over time, but they don’t change on a dime, so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.”  Given the strong downward pressure on inflation from problems like slower population growth, there’s probably some truth to that.  On the other hand, the statement also could be taken as the hubris of economic policymakers who are overly confident about their ability to manage the economy.
• Powell’s dovish statements helped turn the equity markets around dramatically.  For example, the NASDAQ Composite closed down only 0.5%, after being down as much as 4% earlier in the day.  Going forward, we continue to believe that expansive monetary and fiscal policies will probably continue to buoy risk markets for some time to come.

Global Semiconductor Shortage:  The White House plans to hold a meeting with lawmakers today to discuss supply chain issues, including a global chip shortage that is hurting U.S. automakers.  As previously reported, President Biden is also prepared to sign an executive order that would involve a comprehensive review of supply chains for critical goods, actions to improve production in the U.S., and working with allies to address bottlenecks.

Texas Winter Storms:  Even though the bitter cold winter storm that hit Texas last week is now over, concerns are growing about the large utility bills that Texas consumers are likely to get hit with over the coming months.  The huge spikes in spot prices for natural gas and other energy forms will likely be passed on to consumers, resulting in either huge bills or the need for utilities to spread them out over future months.  Either way, the result will likely be to shift consumer spending toward utility bills and away from discretionary consumption.  Texas is a big enough state that that shift could distort some economic data for February and beyond.

Australia:  The legislation effectively requiring social media firms like Facebook (FB, 265.86) and Google (GOOG, 2,070.86) to pay news outlets for content cleared its last parliamentary hurdle.  The new law, which aims to set a precedent for regulating technology and social media firms’ relations with publishers, will compel the companies and news outlets to submit to binding arbitration if they can’t reach a deal on payment.  As we’ve discussed previously, the legislation is just one instance of the broader regulatory risks that are accumulating for technology firms around the globe.

China:  Beijing has joined Hong Kong, Thailand, and the United Arab Emirates, along with the Bank of International Settlements, to explore cross-border payments for digital currencies.  This move could potentially create a new path for China to promote the use of yuan in global payments and weaken the U.S. dollar’s position as the world’s dominant reserve currency.

Hong Kong:  Against the backdrop of a boom in stock trading in Hong Kong, the city’s finance director proposed increasing the city’s “stamp duty” on stock trades from 0.10% to 0.13%.  As expected, the increase weighed heavily on Hong Kong stocks yesterday and will likely weigh on the market in the near term.  Along with China’s clampdown on democratic freedoms in the city, the tax hike will also feed into questions about Hong Kong’s competitiveness as a financial center in the longer term.

Mexico:  The lower house of Mexico’s congress passed a controversial bill that gives priority to the state-owned power utility over private generators, threatening to overturn the electricity market and putting billions of dollars of private investments in jeopardy.  The bill will now go to the Senate, where passage is virtually guaranteed, although it is likely to face legal challenges before it is implemented.

COVID-19:  Official data show confirmed cases have risen to 112,222,290 worldwide, with 2,487,766 deaths.  In the United States, confirmed cases rose to 28,261,979, with 502,698 deaths.  Vaccine doses delivered in the U.S. now total 82,114,370, while the number of people who have received at least their first shot totals 44,544,969.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose to approximately 69,000 yesterday, although the figure was still far below the numbers posted early in the year.  Hospitalizations related to the virus came in at approximately 55,000, including 11,300 in intensive care.  New deaths topped 2,200.
  • As of early today, 13.4% of the U.S. population has been given at least one dose of a COVID-19 vaccine.
  • Vaccination levels vary by state, with 21.1% of Alaska residents having received one dose, while 11.1% of Utah residents have received a single dose.
• The FDA today plans to release its detailed analysis of the one-dose vaccine developed by Johnson & Johnson (JNJ, 160.44).  The FDA has been reviewing data from the company’s large late-stage study that found the vaccine was overall 66% effective in protecting people from COVID-19 and 85% effective against severe disease.
  • A committee of outside medical specialists convenes Friday to evaluate the analyses by both the FDA and the company.
  • The advisory committee is expected to recommend the FDA authorize the J&J vaccine, and the agency should make its decision soon afterward.
• Israel has joined the club of countries using vaccine aid for diplomatic purposes.  The government announced it will ship some of its excess vaccine doses to Honduras, Guatemala, and the Czech Republic, apparently to reward them for recently strengthening their diplomatic presence in Jerusalem and thereby bolstering Israel’s claim to the contested city.  Other countries taking a similar tack include China and Russia.  In fact, reports indicate the Turkish government, which relies on Chinese vaccines, has recently clamped down on ethnic Uighurs protesting against the repression of their kinsmen in China’s Xinjiang province.
• Meanwhile, Ghana has become the first country in the world to receive coronavirus vaccines under the World Health Organization-backed Covax facility for low- and middle-income countries.  The delivery marks the beginning of what has been called the largest vaccine procurement program in history.
• Despite the overall good news regarding reduced infection rates and wider vaccine rollouts in key countries, some areas aren’t enjoying those benefits yet.  For example, officials in the Czech Republic have warned that the country’s health system is on the brink of “absolute exhaustion” and may need help from abroad, as central Europe braces for a third wave of the coronavirus pandemic.  Over the past two weeks, the country has recorded 968 new cases of coronavirus per 100,000 people, the EU’s highest infection rate in per-capita terms, forcing many hospitals to delay non-COVID-related treatment.
• New mutations of the virus also remain a threat.  Now, scientists have even discovered a new, more contagious variant in California, designated CAL.20C.  However, it still is not clear how it stacks up against mutations like those recently discovered in the U.K. and South Africa.

 Economic and Financial Market Impacts

• As state officials across the U.S. continue to grapple with the budgetary effects of the pandemic, some governors are proposing tax increases.  Prominent proposals include calls to raise billions of dollars across several states through taxes on the income and capital gains of higher earners.  At the federal level, there is still a lot of pushback against tax hikes on the rich, regardless of growing populist sentiment on both the left and the right.  However, if the dam starts to break at the state level, it could potentially produce momentum for higher-income tax hikes at the federal level as well.

 U.S. Policy Response

• Staff for several Senate Democrats and Republicans are meeting today with Senate parliamentarian Elizabeth MacDonough regarding whether a proposed hike in the federal minimum wage can be included in President Biden’s $1.9 trillion pandemic relief package that is set to be passed using the “reconciliation” process.  Only items directly linked to the budget can be passed via reconciliation.
  • The parliamentarian’s decision is expected either today or tomorrow.
  • Even if the parliamentarian rules that the minimum wage hike can’t be passed by reconciliation, Democrats could still try to override the decision.

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