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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with the latest on the situation in Afghanistan, with an interesting satellite view of the chaos at Kabul’s airport yesterday.  We then turn to U.S. news, including the latest warning sign that the Federal Reserve is coming under increasing pressure to tighten monetary policy earlier rather than later.  Next, we cover a range of international developments, and we close with the latest news on the coronavirus pandemic.

Afghanistan:  In a statement yesterday, President Biden said he stands “squarely behind” his decision to withdraw U.S. troops from the country despite the bipartisan criticism he’s taking over the resulting chaos, collapse of the country’s government, and failure of the country’s armed forces to put up a fight.  In Biden’s judgment, “If anything, the developments in the past week reinforced that ending U.S. military involvement in Afghanistan now was the right decision . . .. American troops cannot and should not be fighting in a war, and dying in a war, that Afghan forces are not willing to fight for themselves.”  Much less reported, former President George W. Bush, who launched the war in 2001, expressed his distress at the fall of Afghanistan but defended his decision to invade the country after 9/11.

• Reports suggest the Taliban so far have refrained from mass detentions or violence in Kabul.  Taliban leaders have also pledged a general amnesty for all in order to encourage government workers to return to their jobs, and some vestiges of normal life have already returned in Kabul.
• However, based on Taliban behavior after taking over other Afghan cities in recent weeks, it would be no surprise if mass detentions and persecutions begin before long.
• Even more important, there have already been stirrings of potential armed resistance to the militants. Amrullah Saleh, former President Ghani’s vice-president, has traveled to the mountainous Panjshir region, a bastion of Taliban opposition, and allied himself with Ahmad Massoud, the son of a charismatic warlord assassinated by al-Qaeda days before the terror attacks of September 11, 2001.  If the situation evolves into a civil war, and some observers expect, many of the worst security and diplomatic implications for regional countries would likely arise.
• In terms of financial market reactions, the threat of refugees, spillover violence, and political instability has already driven down the value of dollar bonds issued by both Pakistan and Uzbekistan.
• Finally, here’s a satellite view of the chaos at Kabul’s airport yesterday.  All those little black dots on the runway?  Those are Afghans storming the tarmac in an effort to get a flight out of the country:

U.S. Monetary Policy:  Boston FRB President Rosengren said his outlook for the U.S. economy improved this year despite the recent COVID-19 outbreaks associated with the Delta variant.  He expects strong hiring to allow the central bank to soon begin reversing the extremely accommodative monetary policy adopted at the height of the pandemic.

• According to Rosengren, the Fed could be in a position to start reducing its $120 billion in monthly asset purchases this fall and, if strong economic growth continues, the Fed might be able to end those purchases toward the middle of 2022.
• Coupled with the extraordinary strength of the post-pandemic economic recovery, Rosengren’s statement adds to the evidence that Fed policymakers may tighten monetary policy sooner than currently anticipated.  If so, the markets could be in for a period of volatility as investors adjust their expectations.

U.S. Fiscal Policy:  After a review of food costs, the Department of Agriculture announced that those eligible for food stamps would see their benefit rise approximately 25% to an average of $169 per month.  The increase would be the biggest ever in the history of the program.

U.S. Water Supply:  For the first time, the Bureau of Reclamation yesterday declared a water shortage in the Colorado River basin.  As a result, several states that depend on the Colorado will see their allocations from the river cut by as much as 18% next year.  For Arizona, which gets approximately 40% of its water from the Colorado, that will mean losing more than 7% of its total water supply—a move that will probably be especially painful for its agriculture sector.

China:  The State Administration for Market Regulation, the government’s antitrust watchdog, released draft rules today banning unfair competition among internet companies.   These rules, which could come into force later this year, would crack down on major platforms using their market dominance to suppress small and medium businesses.

• The draft rules contain a long list of practices that would be banned, many of which are ubiquitous in China.  For example, the measures target practices such as false advertising, fraudulent online reviews, unfair competition, interoperability issues, data protection, and consumer privacy issues.
• In response to this further example of the Chinese government’s effort to bring leading companies to heel, many of China’s top internet-related firms have seen their stock prices drop precipitously again today.  We continue to emphasize that large, fast-growing Chinese technology companies face increasing regulatory risks related to both the Chinese government’s actions and clampdowns by the U.S. related to its geopolitical pushback against China.

COVID-19:  Official data show confirmed cases have risen to 208,044,254 worldwide, with 4,375,086 deaths.  In the United States, confirmed cases rose to 36,891,023, with 622,437 deaths.  Vaccine doses delivered in the U.S. now total 415,958,305, while the number of people who have received at least their first shot totals 198,595,349.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 59.8% of the U.S. population has now received at least one dose of a vaccine, and 50.8% of the population is fully vaccinated.
• After their mass vaccination programs lagged through most of the pandemic, many countries in Latin America have finally hit their stride and are now vaccinating people at a faster rate than in many developed countries.  The improved vaccination performance reflects the high demand for the shots and the fact that supply constraints have finally been overcome.
• Seeking approval from the FDA to use their COVID-19 vaccine as a booster shot for the general public, Pfizer (PFE, $48.91) and BioNTech (BNTX, $343.10) submitted data from a small, early-stage study showing a third dose of the vaccine generated higher levels of neutralizing antibodies against the original virus and against the Beta and Delta variants than the standard two-dose regimen.  The preliminary data also suggested the third dose was safe.
• Meanwhile, health officials in the Biden administration are reportedly nearing a decision to recommend that fully vaccinated people get a booster shot eight months after their last injection.  Besides the application for booster authorization from Pfizer and BioNTech, Moderna (MRNA, $373.86) has said it plans to ask regulators next month to authorize its booster shots.  Johnson & Johnson (JNJ, $177.84) expects to release data about the efficacy of two doses of its single-shot vaccine later this month.
• In a new analysis by the Wall Street Journal, the Delta variant appears to be breaking through the protection vaccines provide at a higher rate than previous strains.  However, infections among the fully inoculated remain a tiny fraction of overall cases, and symptoms tend to be milder.
• In New Zealand, Prime Minister Ardern announced a new, three-day national lockdown after an Auckland man became the country’s first resident to test positive for the virus since February.
  • The news came just one day before the Reserve Bank of New Zealand was expected to become the first central bank in the developed world to raise interest rates since the onset of the coronavirus pandemic.
  • In response to the news, the New Zealand dollar fell 1.3% to $0.693, its lowest level in nine months.
• In fact, governments across the Asia-Pacific region are tightening restrictions on daily life and travel as slow vaccination campaigns have failed to halt the spread of infections with the Delta variant.  Concern about the widening restrictions at some point could become a bigger headwind for global financial markets.
• In Japan, what began in late June as a pandemic rebound in Tokyo has escalated within weeks into a nationwide surge, forcing the central government to enact the country’s strictest measures in more than a dozen of its largest prefectures.  The government now plans to expand the country’s state of emergency from six to 13 prefectures and extend it from the end of August until mid-September.  Some analysts believe the expanded measures will keep the economy growing weakly through September.

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