Daily Comment (July 28, 2021)

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

[Posted: 9:30 AM EDT] | PDF

We begin today’s Comment with several items related to U.S. fiscal, monetary, and regulatory policy.  We next turn to a range of international developments that highlight the growing risks of great-power military conflict in the future.  We end with the latest news on the coronavirus pandemic.

U.S. Fiscal Policy:  Lawmakers negotiating over the bipartisan “hard” infrastructure bill totaling approximately $1 trillion said yesterday they were approaching a resolution to some of the issues that had bogged down the final stretch of talks.  However, partisan sniping continues over a few final disputes.  As of last night, the key remaining issues included how much money to allocate to public transit facilities and how to pay for the proposal.  We expect the negotiators will agree on a deal soon, although the impact on the economy and the financial markets will depend on the details.

U.S. Monetary Policy:  The Federal Reserve will finish its latest two-day policy meeting today, with a decision and a press conference by Chair Powell this afternoon.  We expect no change to the Fed’s benchmark fed funds interest rate or its bond-buying program.  However, with multiple renegades on the policymaking committee calling for tighter monetary policy sooner rather than later, the officials may signal intensified discussion about the timing of an asset-purchase taper later in the year.

U.S. Regulatory Policy:  To bolster his “Buy American” program and help address international supply chain vulnerabilities, President Biden is preparing a new executive order that would sharply increase the domestic content requirement for products sold to the federal government.  The order would lift the current 55% requirement to 60% and phase in further increases to 75% over the next eight years.

  • Since the order could encourage additional domestic manufacturing, it may help reduce U.S. dependence on foreign goods over time.  However, since domestic products are often more expensive than foreign ones, it could raise costs for the government.
  • The order would also risk unnerving international suppliers to the government and could raise tensions with allies in Canada and Europe that have long resisted Washington’s attempts to tighten procurement rules.

United States-China-Russia:  In a speech at the Office of the Director of National Intelligence, President Biden warned that cyberattacks would be the most likely cause of any shooting war between the U.S. and China or Russia.  According to Biden, “If we end up in a war, a real shooting war with a major power, it’s going to be as a consequence of a cyber breach.”

  • Biden’s remark is at odds with the views of many national security analysts and observers, who are more concerned about a potential Chinese takeover of Taiwan.  The remark may, therefore, be a deliberate attempt to express the administration’s frustration over continued Chinese and Russian cyberattacks and warn off any further attacks.  The prepared nature of the statement and the venue at the ODNI would be consistent with that hypothesis.  The remarks did not appear to be off-the-cuff.
  • Given that Biden also stressed the burdens and disruptions of cyberattacks in his speech, we think it’s an important reminder that a lot of tension between the U.S. and its great-power rivals is probably building up unseen by the public in the realm of cyberwarfare, intelligence operations, and secret weapons developments.  Although we still subscribe to the idea that Taiwan is probably “the most dangerous place in the world,” geopolitical risks are probably also rising well beyond the shores of that island.

China:  The Federation of American Scientists yesterday issued a report saying China has begun building out a second network of nuclear missile silos in the far west of the country.  According to the report, based on commercial satellite imagery, the site near the city of Hami in Xinjiang province could eventually include about 110 silos, making it similar in size to the network that a separate think tank identified earlier this year near the city of Yumen in Gansu province.

  • The U.S. still has approximately ten times as many warheads as China’s 400 or so, with a similar advantage in delivery systems.  However, China is rapidly building out its strategic forces with a focus on survivability.  It is working to complete a full “triad” of basing options, including air-, sea-, and land-based missiles (which include mobile systems deployed on rails in deep underground tunnels).
  • The more missiles China can deploy in hardened or difficult-to-target launching systems, the more likely at least some of its weapons could survive a U.S. first strike.  The possibility of some missiles surviving would act as a powerful deterrent against U.S. forces.

Russia-Afghanistan:  As the U.S. completes its military withdrawal from Afghanistan and Taliban forces continue to seize territory, Russia is building ties with Taliban leaders to ensure it can influence future developments in the region.

U.K. Industrial Policy:  The Ministry of Defense has agreed to buy Sheffield Forgemasters, one of Britain’s oldest steelmakers, for £2.5 million. The deal paves the way for the ministry to invest up to £400 million in new equipment and infrastructure at the steelmaker’s facilities over the next 10 years, intending to ensure the company can continue to produce key components for the Royal Navy’s nuclear submarines.

  • After three decades in which politicians and business leaders across the world emphasized building hyper-efficient, global supply chains, and just-in-time inventory systems, we are seeing increased signs that the ideal is being reversed.  One reason is that the pandemic-related supply disruptions have exposed the commercial, economic, and social vulnerabilities produced by such a production system. The global shortage of semiconductors has become the world’s poster child for that issue.
  • In addition, however, we also see signs that great-power geopolitical rivalries are also undermining the efficiency focus.  As the U.S. and its allies confront a world of threats from great powers like China and Russia, they put more emphasis on old-fashioned concerns like mobilization capacity in the defense industry and ensuring they can make critical defense goods at home.

U.K.-Brexit:  Despite the government’s program to grant secure immigration status to European citizens living long term in the U.K. after Brexit, many people who experienced the enforcement of the rules complain they are applied in a harsh and inflexible way.  The tough enforcement not only affects millions of foreigners living and working in the U.K., but it also endangers the country’s aspiration to be a “global Britain.”

European Union-Serbia-Albania-North Macedonia:  The leaders of Serbia, Albania, and North Macedonia have hit out at Brussels over the slow pace of EU enlargement, vowing to press ahead with their own border-free travel and business zone as they wait for the bloc to admit them.

COVID-19:  Official data show confirmed cases have risen to 195,498,370 worldwide, with 4,180,770 deaths.  In the United States, confirmed cases rose to 34,606,631, with 611,304 deaths.  Vaccine doses delivered in the U.S. now total 395,460,845, while the number of people who have received at least their first shot totals 188,996,475.  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

  • The IMF issued updated economic forecasts showing that while overall global growth is still expected to be 6.0% in 2021, but only because a downward revision in the growth forecast for developing countries was offset by an upward revision in the forecast for developed nations.
    • The IMF now sees the developing countries growing just 6.3% this year, largely because of resurgent infections from the Delta mutation and slow progress in their mass vaccination campaigns.
    • In contrast, the organization now expects economic growth in the developed countries to reach 5.6%, based on positive progress regarding vaccinations and large spending packages designed to support their recoveries.

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