Daily Comment (December 2, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Our Daily Comment today opens with a discussion of President-elect Biden’s economic team, which was formally introduced yesterday. We then cover developments related to Brexit, the EU’s proposed coronavirus recovery fund, mutualized debt, and other international issues. We end with our usual review of the latest pandemic developments, including the important news that the U.K. has granted the first approval for a vaccine in Western industrialized countries, and lawmakers in the U.S. have resumed their discussions about a new pandemic relief bill.
U.S. Presidential Transition: President-elect Biden formally introduced his picks for key economic positions yesterday, emphasizing their experience and diverse backgrounds. He announced that the team was working on a plan to revitalize the U.S. economy and help the nation recover from the coronavirus crisis. This article provides a useful overview of the general mindset of the new economic team. Importantly, interviews and a review of their recent statements suggest the team members have no predisposition to go back to the full-bodied embrace of globalism that was so prevalent among Democrats and Republicans in the 1990s and early 2000s. The team, which is heavily populated by labor economists, appears to have fully internalized the damage globalization inflicted on U.S. manufacturing and factory workers, even as it brought benefits like lower inflation. It therefore appears that the thrust of Biden’s international economic policy, especially given the likely constraints imposed by Congress, will be to adjust and soften some of the harder edges of Trumpian deglobalization but not to go back to full globalization. In addition, the Biden team will likely focus its protectionist measures against Chinese economic cheating, while easing tariffs and other measures aimed at traditional U.S. allies, in order to present a united front against Beijing.
- Biden also called on Congress to pass a robust coronavirus relief bill as soon as possible.
- However, he said a larger stimulus effort would be necessary during his administration to address the long-term impact of the pandemic.
Brexit: The EU’s top Brexit negotiator, Michel Barnier, said he is working on “creative” compromises with the U.K. in order to strike a trade deal before the year-end deadline. According to Barnier, the next 36 hours will be critical to deciding whether or not there will be a hard Brexit. In fact, he stressed that by the end of the week Brussels and London need to assess whether an agreement is possible.
- In a closed-door briefing for EU lawmakers, Barnier said key sticking points remain in the areas of “level playing field” conditions for businesses, EU fishing rights in British waters, and how any trade deal might be implemented.
- Barnier said the compromises being considered include a transitional period for fishing rights and a broader review clause for the trade deal.
European Union: As Poland and Hungary continue to block the EU’s long-term budget, pandemic recovery fund, and mutual EU debt proposal, an official at the European Commission said EU leaders are considering ways to push ahead without them. One idea being considered is to set up the recovery fund as a temporary “bridge” until Poland and Hungary come around to supporting it. By demonstrating the determination of EU leaders to get the fund and mutual debt program in place, and by increasing the pressure on Poland and Hungary to back down, the move is probably a modest positive for European equities and the Euro.
China-Hong Kong: In Hong Kong, pro-democracy activist Joshua Wong was sentenced to 13 and a half months in prison after pleading guilty to charges of organizing, participating in, and inciting others to take part in an unauthorized assembly when protesters surrounded police headquarters last summer. Several other anti-China activists were also sentenced in connection with the protest. Although China’s clampdown on Hong Kong’s freedoms was not a major focus of the Trump administration, it’s likely to get much more attention from the incoming Biden team and will likely keep U.S.-China tensions high. In turn, that will keep alive political risks related to Chinese assets trading in the U.S.
COVID-19: Official data show confirmed cases have risen to 64,015,351 worldwide, with 1,483,676 deaths. In the United States, confirmed cases rose to 13,728,154 with 270,691 deaths. 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 topped 180,000 yesterday, and coronavirus-related hospitalizations rose to yet another record of 98,691. Of those hospitalized, 19,035 were in intensive care, setting another record. California and Texas continue to see extremely high infection rates, but in reality, the resurgence of the disease is widely spread throughout the country.
- In the first approval of a coronavirus vaccine among the Western developed countries, the U.K. has authorized use of the compound developed by Pfizer (PFE, 39.41) and BioNTech (BNTX, 114.01). According to the British government, initial doses of the shot will be available in the U.K. within days. Under provisional plans released by the government last month, the vaccine will first be made available to nursing home residents and staff. It will then be administered to those over the age of 80 and to frontline healthcare workers.
- As expected, a panel of experts advising the Centers for Disease Control and Prevention yesterday voted 13-1 in favor of reserving the first available coronavirus vaccine doses for healthcare workers and residents of long-term care facilities. Other high-risk populations – including essential workers such as teachers, police, adults with underlying health conditions, and people ages 65 and over who aren’t in communal settings – are expected to be next in line, although the panel didn’t set recommendations for them yet.
- The CDC usually follows the recommendation of its advisory panel. If they are accepted by the agency’s director and Secretary of Health and Human Services Alex Azar, they will become official CDC policy. A spokeswoman said CDC Director Robert Redfield will likely make his decision on Wednesday.
- States wouldn’t have to follow the CDC recommendations, but state and local authorities are expected to rely on them as guideposts for deciding who gets the vaccine first. States have until Friday to indicate to the federal government where they want their initial doses sent.
- According to a survey by the National Retail Federation and Prosper Insights & Analytics, U.S shoppers spent an average of just under $312 on holiday-related purchases from Thanksgiving to Cyber Monday, down 14% from 2019. The decline reflected a huge drop in in-store purchases because of the pandemic, which was only partially offset by online purchases.
- In a sign that inflation expectations are rising with the prospects for safe and effective vaccines and a likely economic recovery, the break-even rate on 10-year TIPS hit 1.83% yesterday, reaching its highest point since May of last year. A swap rate that measures expectations for the average level of inflation over five years, five years from now, has jumped to 2.25%, exceeding the 2.0% inflation target that the Fed has for years persistently failed to achieve.
- In another sign that vaccine progress and an impending economic recovery are impacting the markets, investors have backed off from bets on sub-zero interest rates in the U.K. According to derivative contracts linked to the key British bank rate, the Bank of England’s main interest rate is now expected to trough at roughly zero percent in late 2022.
U.S. Policy Response
- At a Senate Banking Committee hearing yesterday, Treasury Secretary Mnuchin defended his decision last month not to renew a suite of emergency Federal Reserve lending programs propping up various financial markets, while Fed Chair Powell called the move “premature.” As might be expected, Republicans on the panel generally supported Mnuchin, while Democrats supported Powell’s position. Although we suspect the economy and markets can get by when the programs expire at the end of December, they will be operating with significantly less insurance than they would have otherwise, raising risks if the pandemic or other crisis intensifies again.
- Meanwhile, lawmakers refocusing after the drama of the elections have launched a number of new initiatives aimed at another pandemic relief bill. House Speaker Pelosi and Treasury Secretary Mnuchin spoke by telephone about a new coronavirus relief bill yesterday, and a bipartisan group of House and Senate lawmakers unveiled a $908 billion aid proposal seeking a middle ground between Democratic and Republican leaders’ stances. Republican and Democratic leaders also traded new offers, as the looming expiration of some relief measures intensified the pace of year-end negotiations.
- Janet Yellen warned of “more devastation” if the country fails to address the economic fallout from the coronavirus pandemic and its disproportionate toll on low-income families, as she was introduced yesterday by Joe Biden as the next Treasury secretary.
- In monetary policy, some investors are betting the Fed could start buying more long-term U.S. Treasury securities as soon as its next policy meeting, a trend that has helped temper some recent selling and kept yields from rising higher.