Daily Comment (December 17, 2021)

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

[Posted: 9:30 AM EST] | PDF

Note to readers: The Daily Comment will go on holiday after Friday’s comment and return on January 3, 2022. From all of us at Confluence Investment Management, have a Merry Christmas and Happy New Year!

Good morning! U.S. equity futures are signaling a lower open. Today’s report begins with U.S. economic and policy news, followed by China-related stories. International news is next, and we end with our pandemic coverage.

Economics and policy:

  • President Biden announced on Thursday that a vote on the $1.75 trillion Build Back Better bill will be delayed for several weeks. The pushback was likely due to resistance from West Virginia Senator Joe Manchin, who has expressed concern that the bill could contribute to inflationary pressures.
  • The market has downplayed the possibility that the Fed could raise rates three times in 2022. On Thursday, trading in futures markets showed investors expect the U.S. central bank overnight rate to be 1.27% in 2023, down 11 bps from the previous day. The decrease in expectations is related to investors’ concern that the economy has still not fully recovered from the pandemic and that too many rate hikes could hurt growth.
  • Driven primarily by India and China, coal power generation is expected to hit a record high by the end of 2021. The steep rise in coal power production shows how difficult it will be for the world to move away from fossil fuels as it tries to reduce carbon emissions. A faster than expected recovery this year has made cleaner sources of fuel scarce, thus leaving countries with no other choice but to use more coal. The lack of alternatives, especially during times of crisis, suggests that countries will likely be hesitant to reduce the production of these resources in the future.


  • The U.S. placed China’s Academy of Military Medical Sciences as well as 12 affiliated research institutions on its blacklist. The institute has been accused of helping the Chinese government to develop brain-control technology. By being placed on the black-list, U.S. companies will be banned from selling these institutions’ technology.
  • Chinese real estate developing company Evergrande (EGRNF, USD, 0.20) was labeled a defaulter by S&P Global Ratings. The rating agency had downgraded Evergrande’s credit rating from SD to CC but withdrew the rating at the company’s request. The designation comes a week after Fitch Ratings had declared the company a defaulter.
  • The U.S. is considering imposing more sanctions on China’s largest chipmaker, Semiconductor Manufacturing International Corp ( 981 HK, HKD,18.68), in order to limit China’s access to technology that could be used for military purposes.

International news: 

  • A new wave of COVID cases weighed on business sentiment in Germany, according to the IFO institute. The main business confidence indicator fell from 96.5 to 94.7 in December, its lowest level since February of this year. It is the sixth consecutive month the indicator has fallen and has led to concerns that Germany could be heading for recession next year.
  • The chip shortage has impacted car sales in Europe. Car registrations in the EU fell for the fifth consecutive month in November, as automakers continue to struggle to find the chips needed to make new vehicles. Germany and Italy, which rank 1 and 3 respectively in EU car exports, saw the steepest declines in registrations. The weakening in car sales suggests that the EU could possibly see sluggish growth going into the next year.
  • Russia’s central bank has decided to raise its key interest rate by 100 bps to help tackle rising inflation. It is the seventh time Russia has raised its key interest rate this year, and it has not ruled out another rate hike in February.
  • The Bank of Japan signaled it does not expect to raise rates in 2022. While other countries have seen multi-decade highs in inflation, Japan has only had a modest rise in inflation.
  • The British government has softened its stance concerning the North Ireland issue. The U.K. would like to establish an interim agreement on the most critical issues of the arrangement. It would deal with reducing the number of custom checks as well as decreasing the bureaucratic burden faced by traders. Talks between the U.K. and EU are expected to continue in 2022.

COVID-19:  The number of reported cases is 273,058,583, with 5,340,088 fatalities.  In the U.S., there are 50,513,437 confirmed cases with 803,652 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 602,523,315 doses of the vaccine have been distributed, with 490,030,849 doses injected.  The number receiving at least one dose is 240,321,022, the number of second doses is 203,159,327, and the number of the third dose, the highest level of immunity, is 57,101,568. The FT has a page on global vaccine distribution.

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