by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
Good morning! We begin today’s report with news from the Fed followed by China-related stories, including the latest on the real estate situation. Next is an update on the protests in Kazakhstan and various other international news. We conclude with our pandemic coverage.
Economics and policy:
- Federal Reserve Vice Chair Richard Clarida admitted he failed to disclose fully the financial trades he made in 2020. Clarida, whose term expires at the end of the month, attributed the lack of disclosure to an “inadvertent error.” The new disclosures showed Clarida sold his stock fund as the market plummeted and then repurchased the fund a day before Fed Chair Powell announced the Fed would act to protect financial markets. Initially, the Fed described Clarida’s decision to purchase the stock fund as a portfolio rebalancing; however, the additional disclosure suggests he may have repurchased the stock fund based on insider information. The new disclosure will likely put the Federal Reserve under additional scrutiny as policymakers look to restrict Fed officials’ ability to benefit from the decisions it makes.
- Treasury yields on long-duration bonds continue to rise as fears of an economic setback due to Omicron subside and the Fed signals tighter monetary policy. The 30-year Treasury yield has risen to its highest level since October, while the 10-year Treasury yield rose more than 20 bps just this week. Although some of the sell-off in treasuries may be related to traders returning to work this week, there is some fear that the rise in rates could remain elevated for longer than previous peaks in the cycle. In October, when rates were last this high, concerns that the Fed would raise rates were waved off as being a far-out event, thus allowing rates to fall over time. However, the recent Fed minutes indicate that the central bank may be more aggressive in tightening policy than investors originally anticipated. The weak payroll numbers have likely added to those concerns. The rise in bond yields pushed mortgage rates higher than at any time in 2021, and if rates continue on that path, it could lead to a reduction in residential investment spending in 2022, thus slowing GDP growth. If tightening leads to financial instability, we expect the Fed could dampen expectations.
- Rising rates have had a detrimental impact on tech stocks. They are down 50% from their 52-week high and are close to hitting a record. The sharp drop in tech stocks has drawn parallels to the dotcom crash.
- Adverse weather conditions in the eastern United States, from Tennessee to New York, could contribute to a surge in energy prices. The White House is expected to provide low-income households with additional funding from the American Recovery Plan to help offset the rise in costs.
- Contagion from China’s real estate crisis may have spread into investment-grade companies. On Friday, Chinese property developer Shimao Group Holdings (0831 HK, HKD, 4.7) failed to make a debt payment leading to a selloff of its bonds. The Shanghai Stock exchange suspended trading of several of the company’s bonds due to this rapid selling. The missed payments highlight the pressure Chinese real estate companies are facing following defaults from Kaisa Property Holdings (HKG 1638, HKD, 0.81) and Evergrande (EGRNF, USD, 0.21). The real estate crisis has led to a decline in housing prices and investor confidence.
- The recent spread of the Omicron variant may slow economic growth in China. The country is expected to reimpose more COVID-related restrictions as it looks to contain the spread of the virus. Restrictions will likely lead to a slowdown in consumption.
- A rise in COVID cases led to a suspension of trucking services in several parts of East China’s Zhejiang province. The slowdown in the transportation of goods could hurt suppliers that rely on parts from China to boost their inventory.
- Kazakhstan President Kassym-Jomart Tokayev has ordered authorities to shoot without warning, as the government attempts to end violent protests in the country’s major cities. The move by the president signals a steep escalation by the government as it tries to contain protests due to the rise in fuel prices. Afterward, the president claimed that order has been restored to most of the country, but military operations would remain in effect until forces are able to completely remove violent protesters.
There is speculation that the outbreak in Kazakhstan may have altered Russian President Vladimir Putin’s desire to invade Ukraine. He is getting a firsthand look at the level of instability within Eastern Europe. Although it may not deter him from invading, it could sway him to reconsider the scale of such an invasion if it were to take place.
- Nigerian manufacturers have asked the government to reverse a tax on sugary drinks that is due to go into effect this month. The country has struggled to generate government revenue following the drop in the price of oil in 2020. Although oil prices rebounded in 2021, the country’s weak infrastructure has made it difficult for it to deliver cargo out of its ports.
COVID-19: The number of reported cases is 297,997,595 with 5,467,568 fatalities. In the U.S., there are 57,762,144 confirmed cases with 832,148 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 618,076,045 doses of the vaccine have been distributed, with 513,839,973 doses injected. The number receiving at least one dose is 245,278,020, the number of second doses is 206,797,799, and the number of the third dose, the highest level of immunity, is 72,262,703. The FT has a page on global vaccine distribution.
- A U.K. study showed there is not enough conclusive evidence that masks in schools prevent the spread of COVID.
- Moderna (MRNA, USD, 215.23) CEO Stéphane Bancel has stated there may be a need for a fourth shot of the coronavirus vaccine in the Fall. However, he added that he would not know for sure until additional data is released in the coming weeks.