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 130^o 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.

• Cuba is facing widespread protests as the economy falters. The pandemic weakened tourism in particular, and the collapse of the Venezuelan economy has hurt the Cuban economy as well.  Overall, Cuba has a two-sector economy, one for those with hard currencies and the other using pesos.  Like protestors everywhere, actions were organized over social media.  What makes these protests interesting is that the Castro family is no longer running the country.  Fidel and Raul had the revolutionary credibility to keep most citizens pacified.  It is unclear whether President Miguel Díaz-Canel has the same ability to sway.  Of course, he blamed the island’s economic woes on the U.S. embargo.  Although the embargo plays a role, it has been in place for decades, and it is hard to make the argument that the current problems are caused by the U.S.
• North Korea is intimated because international aid groups are interfering in the country’s internal affairs. That position does not bode well for North Koreans.
• Bulgaria held elections over the weekend. There does not appear to be a clear outcome to the vote, which may lead to instability.
• Three years ago, the EU launched the Permanent Structured Cooperation (PESCO) program, which promised to be a platform for European defense. A leaked report suggests that there has been little progress in achieving the program’s goals.
• International piracy is at its lowest level in 27 years.

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.

• Beijing regulators have been actively restricting Chinese tech company’s ability to list in the U.S. ByteDance is the latest firm to shelve its U.S. IPO.
• The U.S. recently blacklisted Chinese firms with ties to Xinjiang. China says it will retaliate, although nothing specific has emerged.
• Maintaining Trump policy, the Biden administration has rejected China’s South China Sea claims. The U.S. also reiterated its support for the Philippines in its ongoing tensions with China.

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.

• As the Delta variant spreads in Europe, the reopening to tourism is in doubt. Increased infection rates are raising concerns about the path of the EU economic recovery.
• Malta becomes the first EU nation to ban all unvaccinated visitors.
• France, facing a rise in infections, is considering mandatory vaccination for health care workers and the wider use of vaccine passports.
• Taiwan’s tech giants are working to acquire vaccines for the island.

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