Daily Comment (June 14, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, and happy Monday!  U.S. equity futures are mostly flat this morning.  We are seeing sharply lower gold prices, most likely because cryptocurrencies have stopped declining.  Our coverage begins with the FOMC, which holds a policy meeting this week.  The international roundup follows.  China news is next, followed by economics and policy news.  We close with the pandemic update.

The Fed:  The FOMC meets this week, a meeting that will have new economic and policy projections.  There is growing speculation that the committee will move up the beginning of policy tightening in their projections.  It is certainly possible that some of the more hawkish members could move their dots higher, but we doubt the consensus will move to lift rates or taper them in the near term.  Among the orthodox economists, there are persistent calls to signal policy tightening.  Although we understand the sentiment, what they are missing is that the FOMC has clearly signaled a regime change.  Most significant is that the focus on policy is not inflation but employment.  There are risks to this policy, especially for financial markets.  Multiple contraction in equities is possible, not just from higher inflation but also from rising inflation volatility.  We suspect that is one reason why equity momentum has slowed recently.

International roundup:  It was a busy weekend.  The G-7 wrapped up, President Biden talks to NATO today and meets with Turkey’s President Erdogan and Russian President Putin later.  There is a new government in Israel and K-pop comes under fire.

China:  There were two items that caught our attention this weekend.  First, there are reports of a radioactive leak at a Chinese nuclear power plant.  Detectors recorded higher than acceptable levels of radiation at the Taishan Nuclear Power Plant, which is in the Guangdong province.  The level would have triggered a shutdown, but officials raised the acceptable limit.  The plant is jointly operated by China and France, and the latter has contacted U.S. officials for assistance.  Second, the senior editor of the Global Times is coming under social media pressure from ultra-nationalists.  This development is quite unusual.  The Global Times is a CPC mouthpiece. The idea that the publication or one of its editors isn’t Chinese enough is an indication that years of patriotic education may be creating conditions similar to the Cultural Revolution.  This development may make it difficult for Xi to manage policy, especially foreign policy.

Economics and policy:  The pandemic has distorted labor markets, and LIBOR is coming to an end.

  • The pandemic and recovery have created one of the most unique sets of economic conditions. As we noted in the above Fed commentary, the FOMC is facing pressure to tighten policy, but there are indications from the labor market that the economy is far from back to normal.  At the same time, there is no doubt that the pandemic has distorted the labor markets, making it hard to discern what is actually happening.  For example, we have seen a jump in baby boomer retirements, which will tighten labor markets.  Another new development has been that workers, facing the unusual circumstance of the pandemic, may have adjusted their goals for work.  Some may want an employer who has few office restrictions.  Others may prefer to continue to work from home.  There has been a surge in quits, which may lead to a period of re-assorting and could distort labor market indicators.  Disruptions in travel are keeping foreign workers from coming to the U.S. and further tightening labor markets.  Policymakers will need to exercise care in interpreting the data.  Simply put, we may never see a full recovery in labor markets, and therefore, the need to raise rates may occur sooner than expected.
  • S. regulators are pressing banks and other financial firms to end the use of LIBOR. The problem is that there is no generally accepted alternative.

COVID-19:  The number of reported cases is 176,011,118 with 3,805,212 fatalities.  In the U.S., there are 33,462,286 confirmed cases with 599,769 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 374,398,105 doses of the vaccine have been distributed with 309,322,545 doses injected.  The number receiving at least one dose is 173,840,483, while the number of second doses, which would grant the highest level of immunity, is 143,921,222.  The FT has a page on global vaccine distribution.

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