Daily Comment (January 11, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
We open today’s Comment with a preview of Federal Reserve Chair Powell’s testimony before Congress today. We also cover other U.S. news, including the U.S.-Russia meeting yesterday over Eastern European security issues. We next review several international items that could affect the financial markets today. We close with the latest developments related to the coronavirus pandemic.
U.S. Monetary Policy: Federal Reserve Chair Powell today faces a Senate confirmation hearing for his second term leading the central bank. Although his confirmation isn’t in doubt, Powell will probably face a grilling over the Fed’s recent shift toward tighter monetary policy to fight inflation after insisting just months ago that the current fast price rises would be transitory.
- In his written introductory comments released yesterday, Powell justified the abrupt shift on grounds that, “We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account.”
- The coronavirus pandemic that prompted today’s ultra-loose monetary policy was truly novel, but Powell’s “this time is different” statement sounds more than a bit like cover for the monetary officials’ apparent panic over inflation. That panic raises the prospect of a policy mistake in which the Fed tightens policy too sharply and causes a slowdown in the economy or undermines its own credibility by having to walk back its inflation concerns after just a few months.
- Despite the sharp runup in bond yields and some modest steepening of the yield curve over the last two weeks, the bond market still seems to be pricing in just such a monetary policy mistake or, at the very least, a modest amount of policy tightening that quickly succeeds in capping inflation, albeit at the expense of slower economic growth.
- Bolstering expectations for a rate hike as early as March, Atlanta FRB President Bostic said he is “totally open” to the central bank raising the benchmark fed funds rate at its March policy meeting, adding he expects the Fed will likely raise its interest rate target three times over the course of the year.
- Despite the risk that tighter monetary policy could spark a slowdown in the economy, the prospect of near-term rate hikes continues to bolster bank equities.
U.S. Energy Industry: Citing environment protection goals, the Interior Department yesterday said it plans to block oil and gas leasing on about 11 million acres on Alaska’s North Slope, reversing an effort by the Trump administration to expand oil exploration in Alaska. The move will likely boost concerns that environmental restrictions on the oil and gas industry and efforts to favor green energy will crimp overall energy supplies and boost energy prices for years into the future.
- Separately, market intelligence firm Kpler said China doubled down on imports of Iranian and Venezuelan crude in 2021, taking the most U.S.-sanctioned oil in three years as refiners brushed off the risk of penalties to scoop up supplies at low prices.
- According to Kpler, crude processors in China bought 324 million barrels from Iran and Venezuela in 2021, about 53% more than the year before. That’s the most since 2018, when China took 352 million barrels from the two nations.
United States-Russia: At their meeting in Geneva yesterday to soothe tensions over Ukraine, U.S. and Russian officials apparently failed to narrow their differences, although they later signaled there would be more U.S.-Russia talks in the future. On Wednesday, the Russian delegation will meet in Brussels with all NATO members, and on Thursday, they will meet in Vienna with the Organization for Security and Cooperation in Europe, which includes Ukraine.
- As we discussed in our Comment yesterday, Putin’s key demands include a commitment from NATO that it will not admit Ukraine or other new Eastern European members into the defense alliance, and it rolls back its military infrastructure and deployments in the former Soviet states.
- The U.S. and its European allies have rejected Putin’s demands out of hand, but reports over the weekend said the Biden administration is prepared to discuss reciprocal limits on intermediate-range missiles in Europe, as well as mutual restrictions on the scope of military exercises on the continent.
- If no agreement is reached and Russia does invade Ukraine, the U.S. has threatened massive economic sanctions, including possibly cutting Russia off from the SWIFT system of international dollar payments. U.S. officials have also discussed more targeted measures, including erecting export barriers to block international sales to Russia of products with a certain percentage of American content, as well as preventing Moscow from getting access to cutting-edge microchips used in everything from aircraft to consumer electronics. Those options would likely impose steep costs on the Russian economy and financial assets.
Kazakhstan: President Tokayev today said the Russian “peacekeeping” troops that entered the country at his request to help quell antigovernment protests would depart within ten days. Tolkayev asserted that the situation in the country is already calming down, and press reports say businesses and people are getting back to normal in Almaty, the largest city.
- Even if the situation is calming, the political dimension is still evolving. After forcing the prime minister and his government to resign as the protests erupted last week, Tolkayev said he would bring back former Finance Minister Alikhan Smailov to be prime minister over a new government.
- Tolkayev has also used the unrest to sideline Kazakhstan’s previous president, Nursultan Nazarbayev, who built up a cult of personality and strenuously guarded the country’s independence in the nearly 30 years he was in power. Since stepping down in 2019, Nazarbayev had retained significant power as head of the nation’s security council.
- It’s unclear whether Tolkayev instigated the unrest to justify pushing out Nazarbayev or whether he merely took advantage of the protests. In any case, the protests allowed Tolkayev to push Nazarbayev off the security council and into full retirement.
- By calling in Russian troops to support him, Tolkayev has also shown that he is willing to trade off much of Kazakhstan’s independence in return for Russian protection. That will strengthen Russian influence over the former Soviet republics in the region and help build the sphere of influence Russian President Putin is trying to establish.
Argentina: In a meeting with state governors last week, Finance Minister Guzmán admitted the government is still at loggerheads with the IMF over the terms of a debt restructuring, just weeks ahead of a March debt payment the country can’t make. The key sticking point is the government’s refusal to balance its budget as rapidly as the IMF wants.
Venezuela: Opposition candidate Sergio Garrido has dealt an embarrassing blow to President Maduro’s ruling Socialist Party by winning an election in the state where former President Chávez was born and nurtured his “Bolivarian revolution.” The result vindicates those within the opposition who argue that they should take part in elections, even if they are skewed towards the Socialists.
COVID-19: Official data show confirmed cases have risen to 310,645,175 worldwide, with 5,497,215 deaths. In the U.S., confirmed cases rose to 61,558,507, with 839,500 deaths. (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.) Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 247,051,363. The data show that 74.4% of the U.S. population has now received at least one dose of a vaccine, and 62.6% of the population is fully vaccinated.
- Much of the Biden administration’s vaccination mandate for larger employers went into effect yesterday. The Supreme Court could halt the rule, but as of now, all employers with more than 100 employees must have a procedure in place to ensure employees are vaccinated and keep track of workers’ vaccination status.
- Employers must also track whether their workers are infected and keep those who test positive away from work. Workers who aren’t vaccinated must wear a mask while indoors.
- In December, the Labor Department gave employers an extra month to require that unvaccinated employees take weekly COVID-19 tests. That part of the policy goes into effect on February 9.
- In Chicago, city officials and the teacher’s union have resolved a walkout by educators over COVID-19 protocols. According to Mayor Lightfoot, the key to the agreement was setting a metric for how many infections would be needed to trigger a move to online instruction at individual schools. With the deal, Chicago students will be back in the classroom on Wednesday.
- In Japan, the government said it would extend its near-total ban on foreigners entering the country until at least the end of February, citing the risk of the Omicron variant.
- In Mexico, President Andrés Manuel López Obrador yesterday announced he has contracted COVID-19 a second time, making him one of the first major world leaders to contract the virus twice. Earlier in the day, he had held a two-hour press conference without a mask, despite saying he had cold-like symptoms and a cough. During the press conference, he talked about the importance of people assuming they were sick with COVID-19 if they had cold-like symptoms.
Economic and Financial Market Impacts
- Faced with the new wave of fast-spreading Omicron infections, a wide range of companies is once again postponing the date when they expect their workers to return to the office. Although Omicron is expected to have a much less negative impact on the economy than earlier waves with their mass lockdowns, delayed back-to-office dates will cause further pain in certain areas, especially downtowns or office parks with many restaurants and other businesses geared toward serving office employees.