Daily Comment (February 24, 2021)

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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” is now published.  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is the latest Confluence of Ideas podcast.  The most recent Asset Allocation Weekly, chart book, and podcast are also available.  You can find all this research and more on our website.

In our Comment today, we open with our thoughts on Federal Reserve Chair Powell’s testimony before Congress yesterday.  The bottom line:  Monetary policy in the U.S. is likely to remain extraordinarily easy for the foreseeable future.  Next, we cover key domestic and foreign news.  We wrap up with the latest developments on the coronavirus pandemic.

U.S. Monetary Policy:  On the first day of his semiannual testimony before Congress yesterday, Federal Reserve Chair Powell continued to signal that the central bank will maintain its easy-money policies well into the future, as expected.  Specifically, he said the economy remains “a long way” from the Fed’s employment and inflation goals, so the policymakers will maintain their current near-zero interest rates and large asset purchases until “substantial further [economic] progress has been made,” a standard that he said “is likely to take some time” to achieve.  Powell will continue his testimony today.

  • According to Powell, inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens.  However, rather than showing concern, Powell said the prospect of higher inflation would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.
  • Importantly, Powell also suggested that even if inflation does start to rise again, the Fed would be able to get ahead of the problem.  For example, he said, “Inflation dynamics do change over time, but they don’t change on a dime, so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.”  Given the strong downward pressure on inflation from problems like slower population growth, there’s probably some truth to that.  On the other hand, the statement also could be taken as the hubris of economic policymakers who are overly confident about their ability to manage the economy.
  • Powell’s dovish statements helped turn the equity markets around dramatically.  For example, the NASDAQ Composite closed down only 0.5%, after being down as much as 4% earlier in the day.  Going forward, we continue to believe that expansive monetary and fiscal policies will probably continue to buoy risk markets for some time to come.

Global Semiconductor Shortage:  The White House plans to hold a meeting with lawmakers today to discuss supply chain issues, including a global chip shortage that is hurting U.S. automakers.  As previously reported, President Biden is also prepared to sign an executive order that would involve a comprehensive review of supply chains for critical goods, actions to improve production in the U.S., and working with allies to address bottlenecks.

Texas Winter Storms:  Even though the bitter cold winter storm that hit Texas last week is now over, concerns are growing about the large utility bills that Texas consumers are likely to get hit with over the coming months.  The huge spikes in spot prices for natural gas and other energy forms will likely be passed on to consumers, resulting in either huge bills or the need for utilities to spread them out over future months.  Either way, the result will likely be to shift consumer spending toward utility bills and away from discretionary consumption.  Texas is a big enough state that that shift could distort some economic data for February and beyond.

Australia:  The legislation effectively requiring social media firms like Facebook (FB, 265.86) and Google (GOOG, 2,070.86) to pay news outlets for content cleared its last parliamentary hurdle.  The new law, which aims to set a precedent for regulating technology and social media firms’ relations with publishers, will compel the companies and news outlets to submit to binding arbitration if they can’t reach a deal on payment.  As we’ve discussed previously, the legislation is just one instance of the broader regulatory risks that are accumulating for technology firms around the globe.

China:  Beijing has joined Hong Kong, Thailand, and the United Arab Emirates, along with the Bank of International Settlements, to explore cross-border payments for digital currencies.  This move could potentially create a new path for China to promote the use of yuan in global payments and weaken the U.S. dollar’s position as the world’s dominant reserve currency.

Hong Kong:  Against the backdrop of a boom in stock trading in Hong Kong, the city’s finance director proposed increasing the city’s “stamp duty” on stock trades from 0.10% to 0.13%.  As expected, the increase weighed heavily on Hong Kong stocks yesterday and will likely weigh on the market in the near term.  Along with China’s clampdown on democratic freedoms in the city, the tax hike will also feed into questions about Hong Kong’s competitiveness as a financial center in the longer term.

Mexico:  The lower house of Mexico’s congress passed a controversial bill that gives priority to the state-owned power utility over private generators, threatening to overturn the electricity market and putting billions of dollars of private investments in jeopardy.  The bill will now go to the Senate, where passage is virtually guaranteed, although it is likely to face legal challenges before it is implemented.

COVID-19:  Official data show confirmed cases have risen to 112,222,290 worldwide, with 2,487,766 deaths.  In the United States, confirmed cases rose to 28,261,979, with 502,698 deaths.  Vaccine doses delivered in the U.S. now total 82,114,370, while the number of people who have received at least their first shot totals 44,544,969.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic and Financial Market Impacts

  • As state officials across the U.S. continue to grapple with the budgetary effects of the pandemic, some governors are proposing tax increases.  Prominent proposals include calls to raise billions of dollars across several states through taxes on the income and capital gains of higher earners.  At the federal level, there is still a lot of pushback against tax hikes on the rich, regardless of growing populist sentiment on both the left and the right.  However, if the dam starts to break at the state level, it could potentially produce momentum for higher-income tax hikes at the federal level as well.

 U.S. Policy Response

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