Daily Comment (August 23, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  Schools are reopening, and it’s a risk-on day today.  U.S. equity futures are higher, and gold and oil are rebounding as well.  The Fed’s meeting at Jackson Hole is this week, but like last year, the meeting will be virtual.  Our coverage begins with an active weekend for the weather.  Tennessee had heavy rain, and there was a tropical storm in New England.  An update on Afghanistan is next, followed by China news and the international roundup.  We then discuss economics and policy, and we close with pandemic coverage.

Climate:  It was a busy weekend for extreme weather events.  Tennessee was hit with torrential rain over the weekend, with reports of 15” to 20” in some areas.  Flooding was widespread, as was the damage.  At least 22 people have died, and many more are missing.  Tropical Storm Henri slammed Rhode Island and other parts of New England over the weekend.  Hurricane Grace made landfall in Mexico as a category 3 storm; the storm caused at least eight fatalities.

China:  Taiwan’s reliance on the U.S. for defense is a concern.

  • Lithuania has faced the ire of Beijing for allowing Taiwan to open a diplomatic mission in Vilnius. China has retaliated by banning new food imports from Lithuania.
  • One worry for U.S. military planners is that Taiwan isn’t really preparing to resist a Chinese invasion. Although the country has bought flashy military hardware from the U.S., it hasn’t actually hardened itself to make an invasion difficult.  Taiwan needs to build shore barriers, lay sea mines, and take similar measures to make an amphibious assault difficult.  Complicating matters is that Taiwan has gone to a volunteer military and is struggling to find recruits.  Taipei’s plan appears to be hoping the U.S. intervenes.  Although we think the U.S. would (and we feel quite certain Japan would) take military action to defend Taiwan, it’s hard to sell that to the U.S. when Taiwan doesn’t appear willing to defend itself.
  • As China’s economy slows, iron ore prices are falling fast. Not only does a slowing economy need less iron, but Beijing is also pushing steel producers to use electric arc furnaces to make steel.  The feedstock is scrap and is less polluting.
  • As bitcoin mining leaves China, miners are returning to the U.S.

Afghanistan:  Here is what we are following:

Economics and policy:  Budget and infrastructure start to move through the House, and fears of peak growth are upon us.

  • Speaker Pelosi is preparing to move both the budget bills and the bipartisan infrastructure package. A moderate bloc of nine representatives is demanding the bipartisan bill go first; this plan is opposed by the populists, who fear that the budget will fail to pass in its current form, and thus, spending goals will fail.  Pelosi usually wins out on these things, but so far, the moderates are holding tight.  Our expectation is that both will eventually pass, but the current budget of $3.5 trillion won’t make it through in its current form; we expect something closer to $2.0 trillion.
  • Economic data continue to come in strong but are weaker than expected. This development is leading economists and strategists to suggest we have already seen peak growth.
  • Logistical snarls continue, and there are growing worries that there may not be enough container ships to meet demand. Supply constraints tend to trigger inflation, and this sort of inflation is difficult to address.  Policymakers, in the short run, can usually only affect demand, so they are forced to tighten policy, effectively taking spending power away from firms and households as prices rise.  In the longer run, deregulation can increase available supply, but with a rather long lag.
  • The Arizona election audit is due today. Although we expect it to generate a lot of headlines, any real action (recalls, new elections) must first pass through the courts, where the veracity of the audit will face tests.

International roundup:  Sweden’s PM is stepping down, and Merkel met with the leader of Ukraine.

COVID-19:  The number of reported cases is 211,925,410, with 4,433,615 fatalities.  In the U.S., there are 37,711,989 confirmed cases with 628,504 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 428,531,345 doses of the vaccine have been distributed, with 362,657,771 doses injected.  The number receiving at least one dose is 201,425,785, while the number receiving second doses, which would grant the highest level of immunity, is 170,821,621.  For the population older than 18, 62.4% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

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