by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
Good morning! Today’s report begins with a discussion about the Federal Reserve meeting on Wednesday. Next, we discuss U.S. economics and policy news with an update on the Ukraine situation. We then turn to China-related stories. International news follows, and we end with our pandemic coverage.
The Federal Reserve signaled that it expects to begin raising rates soon and start shrinking its balance sheets soon after. During a press conference, Chair Jerome Powell stated he believes the labor market and the economy are strong enough to withstand a series of rate hikes. When pressed about whether there could be a rate hike after every meeting, Powell did not rule out the possibility. Based on his comments, interest rates on the two-year deferred Eurodollar futures contracts rose to 2.00%, signaling the possibility of the Fed raising rates four times this year and next. The hawkish tone by the Fed led to a sell-off in equities and Treasuries.
The chart above shows the spread between the 10-year and 2-year Treasuries. Following Powell’s press conference, the spread narrowed 8 bps to its flattest level since 2020. The yield curve flattening likely signals growing pessimism about GDP growth expectations as the Fed attempts to contain inflation.
Economics and policy:
- Supreme Court Justice Stephen Breyer is planning to retire. The vacancy will give President Biden a chance to select his first Supreme Justice since taking office. The circuit judge of the United States Court of Appeals for the District of Columbia, Kentaji Brown Jackson, appears to be the frontrunner to fill the seat. She was confirmed to the appeals court last year by a 53-to-44 vote, thus making her ascension to the Supreme Court even more likely.
- The U.S. and NATO delivered Russia a written response to its demands that NATO withdraws its troops from Eastern Europe and ban Ukraine from joining the military alliance. In response to the letter, Moscow stated it does not feel its concerns were fully addressed. That being said, it also said that Moscow was still open to further discussions on the matter. In the letter, NATO stated it was willing to be more transparent about its military exercises and would consider not deploying intermediate-range missiles or troops in Ukraine in exchange for a drawdown of troops along the Ukraine border. The stand-off between the two sides has increased concerns of conflict in Europe and pushed up commodity prices, most notably Palladium.
- In a virtual summit, Beijing showed its support for Russia in its escalating conflict with Ukraine by stating Moscow “had reasonable security concerns.” Although Beijing’s support does not come as a surprise, it shows that China appears to have a vested interest in the outcome. Beijing may have used the event as a blueprint for getting the West to withdraw its support from Taiwan.
- On Wednesday, the WTO ruled in favor of China in its dispute with the U.S. The ruling authorizes China to impose $645 billion in tariffs on U.S. goods and services.
- China is considering a proposal to sell off most of the assets owned by Evergrande (EGRNF, USD, 0.22). In the proposal, the company would get rid of all its assets except for its separately listed property management and electric vehicles unit. A state-owned bad debt manager, Cinda Asset Management (1359 HK, HKD, 1.40), would take over the assets with the proceeds of the sale going to repay creditors.
- The EU filed a complaint against China to the WTO on Wednesday. The group alleged China has been discriminating against Lithuania and other exporters from member states in an attempt to pressure countries to disassociate from Taiwan. Earlier this year, Lithuania opened diplomatic ties with Taiwan and allowed the region to open an office in its capital city of Vilnius. Following this decision, Beijing has prevented Lithuanian exports from entering China and has told other exporters to remove any inputs from its goods that come from Lithuania. Although China has denied imposing a ban on Lithuanian goods, Lithuanian exports to China fell in December 90% from the prior year.
- The European Central Bank issued a warning to financial institutions with exposure to Russia. The central bank warned it is prepared to impose international sanctions on Moscow if it invades Ukraine. The central bank has also asked the institutions to explain how they would handle different sanctions scenarios. For example, if Russia is removed from the SWIFT international payments system, how would these institutions deal with Russian transactions? The warning comes as the ECB looks to tie up loose ends if it is forced to punish Russia if an invasion of Ukraine occurs.
- The Argentine government has asked China to expand its currency swaps in yuan ahead of its payments due to the International Monetary Fund.
- Mexican President Andres Manuel Lopez Obrador’s decision to have the state take over the country’s electricity sector has potentially scared away green investors. The country needs an additional $10 billion to meet its clean energy goal by 2024. However, the pace of investment has slowed dramatically while investors await the outcome of the power control bill, which is currently being debated in Congress.
- Inflation in New Zealand rose to its fastest pace in more than 31 years. The latest reports showed that inflation rose 5.9% from the prior year, up from the previous quarter reading of 4.9%. The increase in inflation suggests the Reserve Bank of New Zealand will raise rates for the third time in five months at its February 23 meeting.
COVID-19: The number of reported cases is 362,947,159, with 5,628,271 fatalities. In the U.S., there are 72,910,879 confirmed cases with 876,066 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 662,359,855 doses of the vaccine have been distributed, with 537,171,553 doses injected. The number receiving at least one dose is 251,518,114, the number of second doses is 210,850,212, and the number of the third dose, the highest level of immunity, is 85,218,657. The FT has a page on global vaccine distribution.
- Hong Kong plans to cut its 21-day quarantine to 14 days starting February 4. It will also extend a ban on flights from eight different countries.
- A study has shown that six months after the Moderna (MRNA, $154.26) shot was administered, antibody levels fell.
COVID-19 cases in Germany surpassed 200,000 for the first time. The rise in cases has led to staff shortages.