by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
We open today’s Comment with loads of U.S. policy news, followed by remarks on today’s U.S.-Russia summit meeting. We next discuss a wide range of international developments. We close with the latest news about the coronavirus pandemic. Finally, with the summer holidays upon us, we should mention that the Senate yesterday unanimously approved a bipartisan bill making Juneteenth a national holiday. If passed by the House, the end of slavery in the U.S. will be celebrated every June 19. In the coming years, it should be fascinating to see what traditions develop around this new holiday (already this Saturday, yours truly will be attending this Africa-inspired fashion show in St. Louis).
U.S. Monetary Policy: The Fed yesterday kicked off its latest policy meeting, with a decision scheduled to be released at its conclusion this afternoon. The officials are widely expected to leave their benchmark interest rate unchanged at essentially 0% and make no immediate adjustment to their asset purchase program. However, investors will be looking for any hint that policymakers might bring forward their plans for policy tightening.
- Importantly, the officials will release an update of the “dot chart,” laying out when policy changes may have to be implemented in the coming few years. The last update, in March, showed the policymakers expected to hold policy steady through 2023. The update will probably show they now expect to lift interest rates somewhat earlier.
- Naturally, equity and bond markets could face a bout of volatility if investors get confirmation that the policymakers may now hike interest rates and cut their bond purchases earlier than expected. Nevertheless, we still expect the officials to stay on the sidelines for some time. For the time being, monetary policy will remain loose, which should tend to support risk assets.
U.S. Fiscal Policy: To appease progressives unhappy with the ongoing bipartisan negotiations over a slimmed-down version of President Biden’s proposed infrastructure spending program, Democratic leaders in Congress have begun to discuss the contours of a broad-ranging spending package on child care, climate, and education that would require just 50 votes in the Senate in order to pass.
- The progressive package would have to pass separately from the $974 billion infrastructure deal agreed to last week by a bipartisan group of ten Senators. About half of that spending would be new money over and above current spending projections. It would be financed by indexing the gas tax to inflation, increasing enforcement at the Internal Revenue Service, creating public-private partnerships, repurposing existing federal funds, and collecting fees from electric vehicles. That proposal was discussed by the Senate GOP conference at a lunch meeting yesterday.
- Despite the effort to appease progressives, it is unclear whether they will sign off on the two-bill plan unless they get an ironclad guarantee that Democratic leaders will push through the liberal second bill. As things stand now, discussions on the bills are likely to continue until there is some determination of what can and will pass Congress. As they say, politics is the art of the possible.
U.S. Housing Market: The National Association of Realtors has issued a report claiming U.S. home construction over the last two decades has been far weaker than needed. The report argues that funds for housing construction should be included in the big infrastructure program being discussed in Congress. On a related note, real estate investment trusts (REITs) have been on a tear this quarter as investors look to the property-owning companies and their ability to raise rents as a hedge against inflation.
United States-Russia: In Geneva this morning, President Biden will have his first summit meeting with Russian President Putin. Backed up by the unity he achieved through his summits this week with the G7, NATO, and the EU, Biden will try to convince Putin to rein in his aggressive behavior in areas such as election interference and cyberattacks so the U.S. can focus its energy on the rising threat from China.
- Intriguingly, the European Commission this morning released a statement accusing Putin of deploying “aggressive actions” and warning that the EU must “prepare for a further downturn of its relations with Russia as the most realistic outlook for the time being.” The statement also called for tougher EU action against Russian malign behavior.
- The 14-page statement, available here, was almost surely drafted ahead of President Biden’s summits in Europe over the last week. However, it was likely at least tweaked to reflect any consensus gained between Biden and the EU leaders. Its tough language on Russia, therefore, could be a harbinger of friction at the Biden-Putin meeting.
- Separately, it’s also important to keep an eye on growing European skepticism about China and the economic impact that could have. For example, consultants at the Rhodium Group have issued a report showing Chinese investment in Europe hit a ten-year low in 2020, reflecting not only the pandemic but also political tensions.
Global Copper Market: After our comment yesterday on the pullback in lumber prices, copper prices fell yesterday to their lowest level in eight weeks in anticipation of today’s move by Chinese authorities to tamp down on rising commodity prices. Following up on official statements from the State Council last month, China’s National Food and Strategic Reserves Administration said it would hold a series of public auctions offering copper, aluminum, zinc, and other metals to domestic processors and manufacturers. Copper prices are again softer today, but whether it and other metals prices keep softening will likely depend in large part on the volumes of metals that China ultimately releases onto the market.
Israel-Hamas: Violence has once again broken out between Israel and Hamas. Israeli police fired rubber bullets at Palestinians trying to disrupt a right-wing nationalist march in Jerusalem, and Hamas militants launched incendiary balloons into Israel. In response, the Israeli military launched airstrikes in the Gaza Strip, raising the specter of renewed warfare in the region and testing whether Prime Minister Bennett’s two-day-old coalition government can prevent the violence from escalating into a new war.
Colombia: The National Strike Committee, which has been leading a series of nationwide demonstrations and blockades over various economic and social issues since late April, announced that it would suspend its protests until July in order to reduce violence and help arrest the country’s new COVID-19 surge. However, reports indicate that protesters in multiple locations refuse to dismantle their barricades, raising concerns that the protests’ economic damage will continue.
Peru: Right-wing presidential candidate Keiko Fujimori, who received 49.9% of the votes against 50.1% for her far-left rival Pedro Castillo in the elections held early this month, is calling for an audit after alleging “grave irregularities.” Election officials have rejected her fraud claims, and international election observers say the vote was transparent and clean, yet, the election remains up in the air as the election board decides whether to accept Fujimori’s appeal.
COVID-19: Official data show confirmed cases have risen to 176,703,553 worldwide, with 3,824,115 deaths. In the United States, confirmed cases rose to 33,486,925 with 600,287 deaths. Vaccine doses delivered in the U.S. now total 374,865,165, while the number of people who have received at least their first shot totals 174,674,144. Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- According to the latest CDC data, 52.6% of the U.S. population has now received at least one dose of a vaccine, and 43.9% of the population is fully vaccinated.
- A clinical trial run by Oxford University in the U.K. showed that an antiviral cocktail from Regeneron (REGN, $527.49) significantly reduces the risk of death among hospitalized COVID-19 patients whose own immune systems have failed to fight the virus. The combination of drugs cuts mortality by one-fifth among patients who did not mount an antibody response of their own.
- Also in Britain, the government is considering requiring nursing home staff who work with elderly patients to be vaccinated against COVID-19 and potentially against the flu. Those who refuse to get vaccinated would risk losing their jobs.
Economic and Financial Market Impacts
- The benefits of economic reopening and federal fiscal stimulus in the U.S. are now spilling across the border into Mexico, providing hopes for at least a temporary boost to economic growth. In fact, consultancy Oxford Economics says Mexico is now recovering from the pandemic faster than any other country in Latin America.
- In North Korea, things evidently aren’t going quite as well. Leader Kim Jong Un has warned of food shortages and urged officials to boost agricultural production as the country struggles with pandemic-related border closures, crippling economic sanctions, and a series of typhoons and floods.
Foreign Policy Response
- European Commission chief Ursula von der Leyen will travel to Spain, Portugal, and Italy over the coming days to formally approve those countries’ spending plans under the EU’s massive, €750 billion “Next Generation EU” pandemic recovery program.