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

[Posted: 9:30 AM EDT] | PDF

Good morning all, and Happy Monday!  U.S. equity futures are lower this morning, pausing to refresh after a series of new highs.  Our coverage begins with economics and policy.  Amazon (AMZN, USD, 3372.22) avoided a unionization vote in Alabama, and real estate remains hot.  Next up is international news, including an explosion in Iran.  China news follows with new information about Alibaba (BABA, USD, 223.31), and we close with the pandemic update.

Economics and policy:  Amazon prevails; Powell is bullish on the economy, and worries about the labor force continue.

• Workers at the Amazon Bessemer, AL warehouse facility overwhelmingly decided against joining a union. Although we do expect the union to file a challenge to the vote, it was so overwhelming (71% opposed joining) that we doubt the challenge will stick.  The fact that the clear majority of workers opposed joining the union in a company that has faced concerns about the treatment of its workforce may say more about the disenchantment with unions than the working conditions at the company.  We doubt this will be the last attempt the company faces, but without a change in perception about unions, the chances of success for the labor movement remain small.
• Chair Powell on “60 Minutes” last night gave an upbeat view of the economy, saying we were near an “inflection point” in growth. Despite this optimism, the Chair maintains his dovish policy stance.
• In addition to the recent stimulus package and the proposed infrastructure bill, the White House offered an outline of its budget proposals. Although the plan lacked details, overall, the proposed spending continues.
  • One factor the Democrats appear to be banking on is that corporate taxes are so complicated that few on Capitol Hill understand it. This is an underlying complaint from populists; the establishment uses complication to mask its proposals that favor them.
  • At the same time, the business sector is coming out firmly against the proposed corporate tax measures. This opposition will complicate the goal of raising corporate taxes.
• Despite rising vaccination rates, one of the problems in the labor market is the continued slow expansion of the labor force. The JOLTS data show robust job openings, but much slower hires.  Fears of COVID-19 are playing a role in keeping workers home; stimulus checks and generous unemployment insurance are also likely contributing to this trend.
• Housing continues to be a bright spot in the economy, but the sector isn’t without its problems. High demand has hit tight supply, sending home prices soaring.  The best outcome (and the one we expect over time) is a lift in building activity.
  • Millennials are entering the market in large numbers. Like earlier generations, they are moving away from the Northeast and California to the Southwest and Southeast.
• Senator Hawley (R-MO) is out with his trust busting proposals.

International news:  Iran suffers an explosion at a nuclear facility, Brazil is in a difficult situation, and German conservatives are in a political fight.

• Iran’s Natanz facility, where much of its uranium enrichment occurs, was hit with an explosion over the weekend. Although no one has claimed responsibility for the event, it is widely thought that Israel was behind the bombing.  The fact that the attack occurred while discussions surrounding a return to the nuclear deal is probably not just a coincidence.
• The situation in Brazil is deteriorating rapidly. The country has been rocked by new variants of COVID-19, which has increased hospitalizations.  The combination of economic disruption caused by the pandemic and a weaker currency is pushing inflation higher, especially for food.  Inflation is harming the less affluent.
• In Germany, the CDU/CSU coalition is preparing for the autumn elections with new leadership. Chancellor Merkel has anointed Armin Laschet for party leader.  He is considered a rather colorless figure, raising doubts he can carry the party to victory.  Over the weekend, the PM of Bavaria, Markus Söder, declared his candidacy.  He is the leader of the smaller CSU wing of the coalition.  So far, the CDU leadership, loyal to Merkel, has continued to support Laschet to succeed Merkel.  But, CDU polling is weak, and Söder is no doubt a stronger candidate.  If he does get control of the coalition, it would be a clear signal that the Merkel era has ended.
• The U.S. is considering sending warships to the Black Sea in a period of heightened tensions in Ukraine.
  • The U.S. military is growing increasingly worried about the lack of direction from the White House on Afghanistan.
• As protests continue unabated, the Myanmar economy has ground to a halt.
• Amid rising tensions in Northern Ireland, the U.K. and EU report that progress is being made on trade rules.

China:  Regulators corral Alibaba, and more on Taiwan.

• Last year, Ant Financial’s IPO was postponed. Slowly the dust is clearing.  First, the parent of Ant, Alibaba, was hit with a massive fine for antitrust violations.  Perhaps even more important, Ant will be regulated as a financial firm which will severely weaken its profit potential.
• The concerns over human rights issues in Xinjiang have hit textiles; next up may be solar power. The industry is apparently dependent on components from this disputed region.  A key reason for the broader adoption of solar power has been low-cost components from China; if they are restricted, expansion will be adversely affected.
• China’s credit growth fell in March compared to a year ago. Bank loan growth fell from 12.9% to 12.6%.  The PBOC is trying to curtail credit expansion; given the U.S. fiscal expansion, if China is putting on the monetary brakes, it is highly likely the trade deficit with China will expand.
• Research from Australia shows that China’s trade measures have had less effect than expected. Essentially, China is avoiding taking steps that would severely harm economic growth.
• With the EU/China investment pact hanging in the balance, one might expect China’s foreign policy apparatus to take a conciliatory position. That hasn’t been the case, suggesting Beijing either (a) expects the EU to back down or (b) doesn’t care all that much either way.
• New administration guidelines will make it easier for U.S. and Taiwan officials to meet, a measure that will not go over well in Beijing.

COVID-19:  The number of reported cases is 136,141,318 with 2,938,439 fatalities.  In the U.S., there are 31,198,230 confirmed cases with 562,066 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 237,796,105 doses of the vaccine have been distributed with 187,047,131 doses injected.  The number receiving at least one dose is 119242,902, while the number of second doses, which would grant the highest level of immunity, is 72,630,892.  The FT has a page on global vaccine distribution.

Virology

• Although the vaccination data in the U.S. show continued progress, there are growing concerns that, due to vaccine hesitancy, further progress may slow. Essentially, those who were inclined to take the vaccine have mostly been vaccinated.  Those who are reluctant may be the majority of Americans that remain without the vaccine.  If this group remains reluctant, progress will stall, and a vulnerable population will remain, thwarting potential herd immunity.
  • If this is the case, then the most likely outcome is that COVID-19 will remain endemic. That doesn’t mean conditions won’t normalize to some degree.  Vaccinations will probably mean fewer serious cases of the disease.  Progress on anti-viral treatments will reduce the impact too.  And, there is a history of coronaviruses mutating to a less virulent form over time.  However, if this is correct, the odds that we will ever be fully “rid” of COVID-19 are probably low, meaning that we won’t fully return to a pre-COVID world.
• China is finally admitting that its vaccine just isn’t that good. Chinese officials are considering mixing its vaccines with Western ones to improve efficacy.  What is concerning is that Brazil and Chile have been deploying China’s vaccines, and both are facing a resurgence in cases.  If the Chinese vaccine is ineffective, these vaccination efforts have been futile.

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