Daily Comment (April 13, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Today’s Comment opens with various items touching on the trajectory of U.S. fiscal and monetary policy. We next turn to key international news. Finally, we review the latest developments on the coronavirus pandemic and the U.S. economy. While news of a potential blood clotting issue with a major U.S. vaccine would be expected to weigh on risk assets today, investors seem to be looking past that issue because of continued fiscal and monetary stimulus and signs that inflation is not yet getting out of hand.
U.S. Fiscal Policy: In the latest meeting between President Biden and a bipartisan group of lawmakers regarding his proposed $2.3 trillion program of infrastructure and other economic initiatives, the president signaled openness to breaking up the package into smaller parts and considering different ways to pay for it. However, no final decisions were made about adjustments to the plan. Overall, the president’s flexibility may increase the odds that he can push a significant package through Congress. Even if it is scaled back, however, the new spending would likely be a noticeable addition to the fiscal stimulus already working its way through the economy. It would not only continue to buoy equities but would also keep alive concerns about higher inflation and bond yields.
U.S. Monetary Policy: In an interview with the Wall Street Journal, Boston FRB President Rosengren insisted that the Federal Reserve’s monetary policy is currently correct for the state of the U.S. economy, and that it would be two years before it even made sense to begin contemplating when to tighten policy. As with fiscal policy, all indications are that monetary policy will remain extraordinarily stimulative for some time to come.
Global Oil Market: In its monthly oil market report, OPEC boosted its forecast for global oil demand in 2021 by 190,000 barrels per day to an annual total of 96.27 mbpd. That figure would represent a 6.5% increase in demand compared with 2020. In the report, OPEC also boosted its forecast of global economic growth in 2021 to 5.4% from 5.1% previously, reflecting progress against the coronavirus pandemic and massive fiscal and monetary stimulus in key countries. Still, there is some controversy regarding whether the expected pickup in economic growth and oil demand will be enough to soak up today’s high inventories and a recent decision by OPEC and its allies to gradually ratchet up production.
United States-Taiwan: The Taiwanese dollar has fallen sharply on growing expectations that the Biden administration will name Taiwan as a currency manipulator in its semiannual bad-boy list later this month. However, given Biden’s effort to shore up Taiwan against Chinese pressure, many observers believe that even if Taiwan is designated a manipulator, the administration would soft-pedal any sanctions.
China: Bonds issued by China Huarong Asset Management, China’s largest manager of distressed debt, have fallen to record low values after its former chairman was executed for bribery, and the company said it would delay the release of its financial results.
- Lai Xiaomin, Huarong’s former chair, was executed in January after being found guilty of taking more than $250 million in bribes over a 10-year period. The sell-off in the company’s bonds reflects uncertainty among investors, including global fund managers, over assets that originated during his leadership.
- Although we have long warned about high Chinese debt levels, the situation at Huarong is a reminder that much of the debt problem also often reflects corruption and poor transparency.
Russia-Ukraine: In a news conference after meeting with Ukrainian Foreign Minister Kuleba, NATO General Secretary Stoltenberg urged Russia to end its military buildup around its border with Ukraine, calling the buildup “unjustified, unexplained, and deeply concerning.” Meanwhile, U.S. Secretary of State Blinken, also in Brussels for consultations with allies, warned of costs for Russia if it acts aggressively, without giving specifics. The statements underline the rising tensions and geopolitical risks in the region.
Japan: The government has approved releasing more than a million tons of contaminated water from the Fukushima Daiichi nuclear power plant into the Pacific Ocean, sparking condemnation from environmentalists, fishermen, and neighboring countries. Discharges will start in about two years, subject to final approval by nuclear regulators.
- The plant was damaged by a tsunami in 2011, leading to meltdowns in three of its reactors and forcing its decommissioning.
- Discharge of the water became necessary after storage space filled up.
Afghanistan: A peace conference scheduled for later this week in Turkey has been postponed after the Taliban backed out of the meeting. The Biden administration had hoped the Turkey talks would yield a cease-fire agreement and an interim government that include the Taliban, enabling U.S. and NATO allies to withdraw their troops after 20 years.
COVID-19: Official data show confirmed cases have risen to 136,799,174 worldwide, with 2,948,716 deaths. In the United States, confirmed cases rose to 31,268,952, with 562,608 deaths. Vaccine doses delivered in the U.S. now total 237,796,305, while the number of people who have received at least their first shot totals 120,848,490. Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- Newly confirmed U.S infections rose to approximately 69,000 yesterday, below the seven-day moving average of 70,040 but higher than the 14-day average of 66,766. On a brighter note, new deaths related to the virus came in at just 463. Meanwhile, vaccination efforts remain in place. The data show that approximately 36.4% of U.S. residents have now had at least one vaccine shot, while 22.3% are fully vaccinated.
- In a decision that could slow the U.S. vaccination program and rekindle vaccine reluctance among the population, the FDA and the CDC this morning called for an immediate pause in using the single-dose vaccine from Johnson & Johnson (JNJ, USD, 161.64) after six U.S. recipients developed a rare disorder involving blood clots within about two weeks of vaccination.
- All six recipients were women between the ages of 18 and 48. One woman died; a second woman in Nebraska was hospitalized and is in critical condition.
- While the move was framed as a recommendation to health practitioners in the states, the federal government will pause administration of the vaccine at all federally run vaccination sites. Federal officials expect state health officials to take that as a strong signal to do the same.
- The FDA and CDC now will jointly examine possible links between the vaccine and the disorder and determine whether to limit the authorization to use the shot. An emergency meeting of the CDC’s outside advisory committee has been scheduled for Wednesday.
- The potential problem with the vaccine could slow the country’s vaccination drive and make more people hesitant to get vaccinated. However, the federal government’s massive orders for competing vaccines from Pfizer (PFE, USD, 36.97) and Moderna (MRNA, USD, 139.40) may mean that overall supplies will still be sufficient, even with a pause in the use of the Johnson & Johnson shot.
- As new infections surge in Michigan, CDC Director Walensky urged Governor Whitmer to shut down the state again instead of asking for more vaccines. According to Walensky, an unscheduled increase in vaccine deliveries to Michigan would arrive too late to halt its uptick in cases.
- The third wave of the virus in Europe is having a particularly heavy impact on Poland, where conditions now are worse than any other time during the pandemic.
- A new study published in The Lancet found that the B.1.1.7 mutation first identified in the U.K. doesn’t lead to more severe disease among people who are hospitalized, even if it is more transmissible than earlier forms of the coronavirus. The finding is encouraging because the B.1.1.7 variant is now the dominant form of the virus in the U.S., the U.K., and some other countries.
- Separately, a new study found that an antibody drug from Regeneron (REGN, USD, 472.80) reduced the risk of developing symptomatic COVID-19 infection by 81% compared with a placebo in people living with someone infected by the new coronavirus.
- The results point to potential new preventive applications for the drug, which has already been used to treat earlier COVID-19 cases.
- Regeneron said it would ask the U.S. Food and Drug Administration to expand the drug’s authorization among people exposed to the virus who haven’t yet been vaccinated; it could provide temporary stopgap protection as people await vaccines.
Economic and Financial Market Impacts
- Italian General Claudio Graziano, chair of the EU Military Committee, warned that the pandemic is eroding European military capabilities, not only because of reduced training missions in the short term but also because of the chance that countries suffering a bigger economic hit would cut their defense budgets in future years.
- With the post-pandemic economic recovery already taking hold and government support putting a floor under the economy over the last year, major banks are expected to post healthy earnings growth starting tomorrow. They are expected to release some of the massive loan-loss reserves they recorded at the peak of the crisis last year.
- In addition to banks, advertising agencies are also expected to post a faster-than-expected recovery from the pandemic.