Daily Comment (July 21, 2021)

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we begin with a preview of today’s procedural vote in the Senate on the bipartisan “hard” infrastructure bill.  We follow that with a range of U.S. and international news, focusing on the increasing regulatory risks facing the technology sector.  We wrap up with the latest developments regarding the coronavirus pandemic.

U.S. Fiscal Policy:  The Senate today is scheduled to hold a procedural vote on the bipartisan “hard” infrastructure bill totaling approximately $1 trillion, but Republicans are threatening it because the continuing negotiations on the proposal leave too many details up in the air.  Senate Majority Leader Schumer is also pushing for all 50 members of the Democratic caucus to agree today to a $3.5 trillion outline for a broad antipoverty and climate package they are pursuing parallel with the bipartisan infrastructure talks.

  • Failure of the hard infrastructure vote wouldn’t necessarily kill the bill since it could be brought up again.
  • There is still some chance that Schumer could delay the hard infrastructure bill until later in the week when some Republicans suggest they would likely have final details and could vote for it.

United States-Germany-Russia:  Washington and Berlin have reportedly reached an agreement allowing completion of the Nord Stream 2 natural gas pipeline from Russia to Germany.  Under the deal, the U.S. will end its opposition to the pipeline, which was based on its view that the line would boost Russia’s leverage over Europe and weaken Ukraine by draining shipments away from its major Russia-Europe pipeline.  In turn, with the threat of U.S. sanctions over the pipeline lifted, Germany would help Ukraine develop its energy independence and back it diplomatically.  The U.S. would retain the right to levy future pipeline sanctions in the case of actions deemed to represent Russian energy coercion.

  • Resolving the pipeline dispute will open President Biden to allegations of being soft on Russia and unsupportive of Ukraine.  However, it also plays into Biden’s focus on improving U.S.-Europe relations so they can together focus on the geopolitical competition with China.
  • Indeed, resolving the dispute could even help ease U.S. tensions with Russia, which the Biden administration has also sought to achieve in order to allow it to focus more fully on the competition with China.  As one sign of the effort to cool tensions, the U.S. and Russia will launch new arms-control talks next week.  The talks, which were agreed to by President Biden and Russian President Putin at a summit last month, would seek to build on the New START nuclear arms treaty.
  • Finally, the pipeline was approximately 90% complete when Biden took office, and administration officials saw little hope of derailing the project at such a late stage.  Resolving the disagreement is a relatively inexpensive way to “throw a bone” to Germany and Russia.

United States-Somalia:  U.S. forces have conducted an airstrike targeting al-Shabab fighters in Somalia, marking the first such strike under President Biden.  The strike, which comes after most U.S. troops have left the country, supported partner Somali forces under attack in the vicinity of Galkayo.

Global Technology Industry Regulation:  The Chinese government has opened yet another new front in its battle to get control over its burgeoning technology companies.  This time, the Cyberspace Administration of China has fined and warned several big companies, including Alibaba (BABA, $210.59) and Tencent (TCEHY, $69.85), over explicit material and exploitation of children on their platforms.  We continue to believe major technology firms worldwide are facing increased regulatory risks, especially those that could be caught up in the U.S.-China geopolitical competition or in Beijing’s effort to clamp down on rich and powerful tech firms.

  • The technology sector is also facing increased regulatory risks in the U.S.  President Biden yesterday said he would nominate Jonathan Kanter to run the Justice Department’s antitrust division.
  • Kanter has been a vocal critic of Google (GOOG, $2,622.03), so the nomination provides further evidence that the administration will take an aggressive posture on enforcing antitrust laws, not just in the technology sector but across industries.

China Demographic Policy:  Following up on its May decision to allow couples to have up to three children, the government launched several new initiatives to boost the country’s birth rate and stave off population decline by making it cheaper and easier to raise kids.  Under the guidelines, provincial and local governments will be encouraged to increase the number of daycare slots, give preferential treatment to parents looking for housing, and offer tax breaks to parents for their childrearing costs.

  • We note, however, that similar efforts by other demographically challenged countries have done relatively little to reverse their falling birth rates.  Once the process of population decline has started, it can be very difficult to reverse.
  • Over the longer term, falling birth rates will lead to further population aging, slower economic growth, and less economic dynamism in China.  Over time, that will likely have a negative impact on Chinese economic and financial prospects.  It could also put President Xi under even more pressure to boost Chinese geopolitical power as soon as possible before the negative impact of its demographics really starts to take hold.

China Flooding:  Severe flooding has killed at least a dozen people in Zhengzhou, the central Chinese city that is home to the world’s largest iPhone assembly plant, and record rainfall is threatening to burst through nearby dams.

  • The torrential rain was described by meteorologists as a “once in a millennium” event that surpassed anything recorded since 1951.
  • Coupled with Europe’s “once in a millennium” flooding over the last week, the catastrophe is likely to feed into calls for stricter climate-change policies in advanced countries.

Iran:  Angry demonstrations calling for better access to electricity, water, and other public services have broken out all over Iran during the last week, posing an immediate challenge for incoming president Ebrahim Raisi when he is inaugurated on August 4.

Olympic Games:  Strict quarantine and self-isolation rules are sparking intense anger among athletes, staff, and media professionals at the Tokyo Olympics.  For example, athletes who have come into contact with a person who has tested positive have been told to quarantine and train alone under strict rules.  They will still be allowed to participate as long as they continue to pass daily tests.  Stricter rules apply to media and other delegates, who have been forced to quarantine for two weeks in cramped hotel rooms.

COVID-19:  Official data show confirmed cases have risen to 191,549,981 worldwide, with 4,121,042 deaths.  In the United States, confirmed cases rose to 34,177,406, with 609,536 deaths.  Vaccine doses delivered in the U.S. now total 390,735,975, while the number of people who have received at least their first shot totals 186,474,836.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic and Financial Market Impacts

  • As rebounding demand and supply disruptions continue to buoy prices, increased housing costs are getting more focus as a source of inflation, not only among investors and economists but also among policymakers at the Fed.
  • On a related note, new data shows that as remote work became more common, home buyers have started to put much less emphasis on the length of a commute.  In some of the nation’s most expensive metro areas, home prices rose faster during the pandemic in areas with longer morning commutes to business districts versus neighborhoods with short commutes.

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