Daily Comment (July 12, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  The All-Star break is upon us, the unofficial marking of midsummer.  U.S. equity futures are mixed this morning, with the S&P 500 lower but the NASDAQ higher.  Another heat dome has emerged for the western third of the U.S.; Death Valley reached a high of 130o over the weekend (we are aware it’s a dry heat…).  And, congratulations to Italy and Argentina for their wins in regional soccer tournaments.  Our coverage begins with comments on the international tax meetings.  We then discuss economic and market news.  The international roundup is next, followed by China news.  We close with the pandemic update.

The global tax meetings:  Finance ministers from the G20 met in Venice over the weekend to discuss a minimum global corporate tax of 15%.  The G20 all agreed to the measure and, so far, 130 nations have signed up for the pact.  There are several nations, all considered tax havens, that have refused to join.  Ireland is the most notable.  An enforced minimum tax would reduce the practice of firms moving profits to tax havens to reduce their tax bills.  Although the Biden administration has championed the measure, it faces an uncertain path in Congress.  The U.S. did get one item in the negotiations; agreeing to the corporate minimum has led the EU to delay digital service taxes, which would have targeted American tech firms.

Economics and policy:  Inflation forecasts rise, a budget compromise is brewing, and immigration is rising.

  • It’s a busy week ahead. CPI data is out on Tuesday, and Chair Powell testifies before Congress on Wednesday and Thursday.
  • A WSJ survey of economists shows their forecasts are suggesting an upward and more lasting shift to inflation. We tend to agree with this view.  At the same time, it is important to note that inflation running in a range of 2% to 3% isn’t 1970s inflation.  There is a tendency among some investors to see any backsliding as a return to the inflation crisis of that decade.  There is a chance of that occurring at some point in the future, but it could be over a decade away.
    • One generational pattern to watch is to see whether baby boomers still have the “muscle memory” of how to adapt to higher prices. Buying in bulk and doing more of the work within the household, whether it’s cooking, cleaning, or gardening, is part of the routine.  For generations that have lived in a low inflation environment for most of their lives, paying others for these things made perfect sense.  It may not be the case going forward.
  • Senator Sanders (I-VT) has apparently caved on his insistence for a $6.0 trillion budget. According to reports, it looks like the starting point will be $3.5 trillion, and that will likely be trimmed through the process.  To paraphrase Hamilton, Sanders didn’t have the votes.
  • As workers start returning to the office, clothing manufactures are reporting a rise in sales as the returnees deal with their post-pandemic bodies. Although some are buying smaller sizes, most are having to “upsize.”
  • The U.S. labor markets have been both loose and tight, according to former NY FRB President Bill Dudley. There are widespread reports of firms being forced to pay signing bonuses and higher wages to fill positions.  An interesting development is that in response, we are starting to see a rise in immigration.

International roundup:  Cuba is facing widespread protests, and the outcome of the Bulgarian elections is unclear.

China:  China tech firms continue to face listing restrictions, Beijing prepares to retaliate against a U.S. blacklist, and China’s South China Sea claims are rejected.

COVID-19:  The number of reported cases is 186,902,683 with 4,033,883 fatalities.  In the U.S., there are 33,854,127 confirmed cases with 607,157 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 387,006,120 doses of the vaccine have been distributed, with 334,151,648 doses injected.  The number receiving at least one dose is 184,132,768, while the number of second doses, which would grant the highest level of immunity, is 159,266,536.  The FT has a page on global vaccine distribution.

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