Daily Comment (July 8, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning. The Ever Given, the ship that blocked the Suez Canal, has finally been allowed to set sail! U.S. equity futures are sharply lower this morning. There doesn’t appear to be an exact cause, but equities have been strong recently, and with uncertainty on the rise surrounding monetary and fiscal policy, some degree of caution makes sense. As stocks decline, long-duration Treasury yields continue their path lower. Our coverage today begins with a recap of the Fed minutes. There is an update on the situation in Haiti. We also take a look at the U.S. response to the recent hacking events. China news is up next, followed by the international roundup. Economics and policy follow, with a tech discussion next, and we close with the pandemic update.
The Fed: The Fed minutes didn’t contain any major surprises. But that doesn’t mean the report didn’t detail concerns. There is a group on the FOMC that is pushing for removing stimulus. Throughout the report, there were comments from “district sources” that detailed the problems of hiring, supply bottlenecks, and other inflationary issues. The regional presidents are hearing from their local boards that there are concerns about inflation pressures. At the same time, members did note that the overall labor market has not fully recovered and questioned the idea of tightening. To some extent, the Fed is dealing with the Tinbergen problem; it has one policy tool and divergent problems. The inflation data and supply issues do support tightening, but the overall labor markets would argue for continued stimulus. The issue probably comes down to the assessment of the future. If the current bottleneck problems are temporary, the Fed should do nothing. In other words, if logistical problems will be fixed with time, and if the labor markets become less strained as schools reopen and income support is withdrawn, tightening now would be like raising the policy rate due to the inflation caused by a weather event. On the other hand, if the current logistical issues will be long-lasting, the Fed should tighten. Housing is a good example; logic would suggest the problem in housing is on the supply side. The industry, due to the disruption triggered by the Great Financial Crisis, has probably under built new housing units by 500,000 per year since 2008. Removing stimulus to dampen home prices by reducing demand doesn’t solve the under-building problem. If the Fed tightens by tapering, it runs the risk of a policy error and recent market action, especially the decline being seen in long-duration Treasuries, suggests worries of premature policy tightening.
Haiti: The turmoil continues. As we noted yesterday, Haitian President Jovenel Moise was assassinated by unknown gunmen. Security forces have killed four of the assailants and have arrested two others. The country is currently being run by interim PM Claude Joseph, although it is unclear how much authority he has. A state of emergency is in place. It is still unclear who was behind the assassination. There is a growing risk of civil unrest, which may lead to increased emigration.
The hack: The problem with red lines is that if they are crossed, one must either respond or look weak. Although there is no evidence that the Russian government was behind the recent Kaseya hack, it’s also obvious that these firms operate within Russia because they feel they are being protected. President Biden threatened Russia if such support continued, and the recent hack is challenging that threat. The president has been meeting with advisors to determine a response. It is uncertain what the U.S. will do. One area that clearly needs to be addressed is the paying of ransoms. If the action did not involve money, the attacks would be less likely. But as far as doing something against the Russian state, the actions are less obvious. However, if something isn’t done, the president will look weak.
China: The U.S. confirms Taiwan policy, China cracks down on foreign IPOs, and LGBT groups are being restricted.
- Kurt Campbell, the U.S. coordinator for the Indo-Pacific, recently participated in an Asia Society Policy Institute event. A couple of notable comments emerged. First, Campbell indicated the U.S. did not support Taiwan’s independence. Second, he warned China against using force to unify the island with the mainland. No big surprises here—this is an expression of U.S. policy since the late 1970s. Recently, Japan warned that it would go to war against China if Beijing invaded Taiwan to reunify the island with the mainland. As our recent WGR noted, China’s control of Taiwan is a significant geopolitical threat to Japan. The Global Times warned Japan against such actions.
- The recent decision by Chinese regulators to interfere with Chinese firms launching IPOs in the U.S. continues to reverberate. Regulatory authority over Chinese companies that list in the U.S. has been given to the Cyberspace Administration, a group created by General Secretary Xi. The appointment will undermine the Chinese firms’ ability to use a decentralized regulatory structure to list in the U.S. Firms tended to “regulator shop” to get favorable outcomes. That path appears to have been cut off by this action. Regulators are also moving to end a practice where firms use Variable Interest Entities to list outside of China.
- The Xi government is moving to restrict social media accounts of LGBT groups. We suspect much of this is due to the usual Chinese worry about any organizing that occurs outside the scope of the CPC. However, this action could trigger a response from the U.S. on the grounds of opposing discrimination.
- As the Chinese economy slows, we are starting to see calls for stimulus in the form of reserve requirement cuts.
International roundup: The ECB loosens inflation policy, Zuma goes to jail, and Modi changes his government.
- The results of the ECB policy review have been announced, and, no surprise, the bank will no longer look to keep inflation at 2% or below, but will tolerate some deviation above 2%. The policy is a bit vague but looks similar to what the Fed did last year.
- Former South African president Jacob Zuma has been taken into custody for refusing to appear before a corruption commission. He will serve a 15-month sentence for contempt of court.
- As India struggles with COVID-19 and threats to its northern border, PM Modi announced a massive cabinet reshuffle. The new cabinet will expand to 77 ministers, up from the current 52.
- Sweden avoided elections as Stefan Lofven has put together another majority, but only one with a margin of three seats.
- Lithuania has reduced its diplomatic staff in Belarus, reflecting increased tensions.
- Despite international protests, Nicaraguan authorities arrested more opposition figures in the runup to November’s elections.
- As the U.S. withdrawals from Afghanistan, the professional class is starting to flee.
Economics and policy: New York considers changes to labor laws, and the corporate minimum tax may not pass Congress.
- New York state is moving to weaken the rules regarding at-will employees. The action would make it more difficult to fire workers. Such rules usually end up discouraging hiring.
- Although there has been progress on a global corporate minimum tax, it is still not certain that the proposal will pass the Senate. Meanwhile, the U.S. is using the tax proposal to get EU nations to drop proposed digital services taxes, which targeted U.S. tech firms.
- The Biden administration is preparing to issue an executive order to address industry consolidation in railroads and shipping. This action is another element of the changing environment for antitrust.
- The EU has lifted its economic forecasts as vaccinations expand. The EU expects 8% real GDP growth in 2021.
- Although it hasn’t shown up in the official data yet, industry reports suggest that household borrowing is rising. If rising borrowing becomes a trend, it will argue for tighter monetary policy.
- A study in Iceland suggests that a four-day workweek did not adversely affect productivity.
Technology: Thirty-six states are suing Google (GOOG, USD, 2529.48) for anti-competitive practices tied to its app store. This action is another element of the broader antitrust actions being taken against the tech industry.
COVID-19: The number of reported cases is 185,206,396 with 4,004,305 fatalities. In the U.S., there are 33,771,942 confirmed cases with 606,220 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 383,068,740 doses of the vaccine have been distributed, with 331,651,464 doses injected. The number receiving at least one dose is 182,896,080, while the number of second doses, which would grant the highest level of immunity, is 157,908,171. The FT has a page on global vaccine distribution.
- The Chinese city of Ruili, which is on the border of Myanmar, has implemented lockdowns due to a rise in infections.
- The CDC reports that the Delta variant is now dominant in the U.S. This variant, which is more transmissible than earlier forms, has led Israel, which led the world in vaccinations, to re-institute some restrictions, such as requiring masks on public transportation.
- Hospitals are increasingly mandating vaccinations and are facing resistance from employees.
- Japan announced that the current state of emergency related to COVID-19 will be in place during the Olympics. This action will likely restrict attendance at events.
 Jens Tinbergen argued that a policy body needs an equal number of policy tools for each concern. The problem develops when there are fewer tools than issues.