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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Employment Friday!  We examine the data in detail below, but the quick take is that the data was weaker than expected.  U.S. equity futures are moving higher this morning.  We lead off with pandemic news.  OPEC comes next, followed by an update on China.  The EU and Brexit are the next up.  We close with a roundup of economic news.  Being Friday, we have a new Asset Allocation Weekly, but due to the holiday, the podcast and chart book that usually accompany the report won’t be available this week.  Starting in January, in a bid to shorten this report, we will no longer publish the AAW at the bottom of the Daily.  It will be available only as a stand-alone report but will be linked within the Daily Comment.  Let’s get to it!

COVID-19:  The number of reported cases is 65,323,809 with 1,508,906 fatalities.  In the U.S., there are 14,147,754 confirmed cases with 276,401 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.  U.S. infection levels, hospitalizations, and deaths hit record highs yesterday.  The R_t data is showing some improvement; 10 states now have a reading of <1, meaning a decline in the spread of the virus.  With respect to the virus, the worst state is Oregon, and the best is Iowa.

Virology:

• Yesterday we got an insight into the sensitivity of equities to adverse vaccine news. Pfizer (PFE, USD, 40.09) announced that it would only ship about 50% of the vaccines it had originally planned this year due to problems tied to scaling up production and logistics.  Equities took a dip on that news, although did manage to right themselves before the close.  Since the pandemic began, we have been discussing the tenuous logistics of the supply chain for vaccine distribution.  Vial glass, dry ice, special trucks, freezing, and refrigeration at the retail level are all part of what goes into moving the vaccine to the injection site.  And, that says nothing about ramping up actual vaccine production.  Here is a recent podcast highlighting some of the issues.
  • The development of the vaccine has been unprecedented in human history. The fastest vaccine development prior to COVID-19 was for mumps, and that took four years.  There is a lot of optimism building in financial markets; although we don’t think it is misplaced, we should be reminded that getting a vaccine out won’t immediately lead to a return to pre-virus conditions. 
• Cyber security experts and Homeland Security report that cyberattackers, most likely state-sponsored, have been trying to crack into the “cold chain” logistics of vaccine distribution. It isn’t clear if the goal is to gain the secrets of distribution, or more ominously, to disrupt it.  However, given that the hackers didn’t try to create a ransom situation, it leads researchers to suspect a state was behind the hacking.  Most of the attacks were “spear phishing” where a specific individual was targeted, often with an illicit order for products.
  • Although this attack was likely state-sponsored, organized crime is interested in getting involved in vaccines. We would anticipate a black market to develop as those with money attempt to “jump the queue.”  We could also see the proliferation of fake vaccines, especially in lesser developed countries.
• Pandemic response in the U.S. has become politicized. The political class has not helped the cause by flouting the rules with their own behavior.  These actions make it difficult to enforce new restrictions.
• Hospital capacity is becoming stretched; not only is there a scramble for beds, but getting and maintaining staffing is also a concern. Hospitals are luring retired nurses back to work and are putting students on the front lines.
• Social isolation appears to be part of an upswing in opioid overdoses.

OPEC:  OPEC+ was unable to hold the line on production restrictions.  Quotas will be expanded by 0.5 mbpd starting in January.  We expected a contentious meeting, but we also thought the cartel would hold the line on output.  However, the fact that the Saudis are not moving to recapture market share is a favorable sign, and prices have worked higher despite the news.

China:  Here is the latest.

• As we noted yesterday, Director of National Intelligence Ratcliffe made a public declaration that China is the largest national security threat facing the U.S. Such a public display will certainly harden positions and reduce the incoming Biden administration’s flexibility in dealing with China.  At the same time, opposition to China is now bipartisan, so there probably wasn’t much room anyway.
• The U.S. has tightened visa rules on Chinese nationals who are CPC members. It will limit these persons to 30-day, single-entry visas.
• The Chinese audit bill goes to the White House, where President Trump is expected to sign the measure. We note that the bill won’t have any legal effect until April 30, 2023.  Although this measure, if fully implemented, could push Chinese firms off U.S. exchanges, we expect a workaround to be created.  At the same time, Chinese firms are hedging their bets by listing in Hong Kong.
• Remember ByteDance? Today is the deadline day for TikTok.  We will be watching to see if there is another extension.
• Australia has passed new legislation that will give the federal government authority to limit the ability of bodies, including states or cities, to make independent deals with China.
• Chinese criminal gangs are bringing technology to the money laundering business.
• Chinese financial regulators are warning state and local governments that they should not expect bailouts from the central government for the dodgy debt of SOEs. It is looking like there will be a deal with Huawei’s (002502, CNY, 2.95) CFO Meng Wanzhou that will allow her to return to China with an admission of guilt.  We would expect two Canadian nationals that are being held to be released.
• It will be quite difficult to isolate China; an example is the comment from Daimler (DMLRY, USD, 17.10) CEO Kallenius, who touted his company’s sales growth of 24% at the end of September.

Brexit and the EU:  Brexit negotiations are getting testy, and Poland is backing down.

• Michel Barnier is facing pressure from EU countries, mostly France, that worry he will give away too much to make a deal with the U.K. We note that Germany appears to support making arrangements with Westminster, but France is less keen.  We still expect a deal to be made, but not until the second half of this month.
• As we noted yesterday, the EU was threatening to cut off Poland and Hungary for bailout funds if they tried to veto the budget. It appears that Poland is backing off its hardline stance, apparently needing the funding more than its judicial independence.

Economics and Policy:  Movies may never be the same.

• The stall in the labor force in November is confirmed with a report from the WSJ on how the pandemic is reducing employment for older workers and women. At the same time, retailers are paying bonuses to their workers to keep them around for the holiday rush.
• Although talks continue on another round of stimulus, the usual sticking points remain. The GOP loathes to help state and local governments, while Democrats don’t want to give businesses liability protection.  Still, moderates in Congress are pressing the leadership to make a deal.
• There are some experiences that fade by generation. For example, baby boomers remember snow tires, drive-in movies, carburetors, etc.  We may be on the way to ending the movie theater experience.  Warner Brothers, a studio owned by AT&T (T, USD, 29.23), announced it will not release movies first to theaters and then to streaming.  Instead, the releases will be simultaneous.  Although the policy may change when the pandemic fades, it may also become permanent, which would likely end public movie theaters.
• We are in a La Niña year, which usually means mild winters and dry conditions for crops. This weather event has boosted grain prices.
• Chris Waller was confirmed by the Senate, but just barely. He made it by one vote, 48 to 47, with no support from Democrats.  This is a sad commentary.  Waller is about as mainstream as one can find, and by all accounts he will be a reliable dove.  Clearly some of this is partisanship; the Democrats will lose the chance to fill a spot on the FOMC.  At the same time, it is hard to see how they could argue that Waller is unqualified.  The fact that no Democrat voted for him, even though some did in committee in February, suggests that either (a) this is pure hardball politics, or (b) the “Overton window” has now shifted so much that a mainstream dove isn’t good enough for the extreme wings of either party.  We fully expect the Fed to become increasingly politicized over time and eventually become a funding arm of the Treasury.  We would view the partisan nature of this vote as further evidence of this trend.

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