Daily Comment (June 23, 2021)

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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with the latest developments regarding U.S. monetary and fiscal policy, followed by news that a socialist may be poised to become the mayor of a major U.S. city for the first time in decades.  Next, we cover international items ranging from U.S.-China tensions to more evidence of a global regulatory push against private cryptocurrencies.  We close with the latest news on the coronavirus pandemic.

U.S. Monetary Policy:  In testimony before Congress again yesterday, Federal Reserve Chair Powell admitted that price increases in the wake of the coronavirus pandemic have been larger than policymakers had expected and may prove more persistent.  He underscored his view that shortages—including used cars, computer chips, and workers—will fade over time, bringing inflation closer to the Fed’s 2% long-run target.  The comments show Powell continues to fight the good fight regarding his view that monetary policy should remain loose, even as it has become clear that multiple members of the policymaking committee are more concerned about inflation and would prefer to tighten policy earlier rather than later.  The more those inflation hawks make their views known, the more likely it is that the financial markets will price in at least some tightening, which will, in turn, keep real financial conditions tighter than they would be otherwise.

U.S. Fiscal Policy:  As White House officials and a bipartisan group of senators negotiated over their $1.2 trillion infrastructure proposal yesterday, it appears that the main sticking point was over ways to cover at least some of the cost.  Republicans continue to balk at the idea of raising income taxes, and Democrats reject increasing the gasoline tax or imposing a tax on electric vehicles.  It looks increasingly like the only significant revenue raiser that might come with the deal will be to boost funding for IRS enforcement programs.  In other words, most if not all of any spending that passes will likely be unfunded.  That may give a significant boost to the economy, although it’s probably also already priced into the markets.

U.S. Politics:  In New York’s primary elections yesterday, a former nurse and community activist running under the banner of the Democratic Socialists of America and the Working Families Party has unseated Buffalo’s four-term Democratic mayor.  If she wins the general election in November, she would be the first socialist mayor of a major U.S. city since 1960.

United States-China:  A long article in the Wall Street Journal yesterday highlighted China’s extensive use of a form of home imprisonment called “residential surveillance at a designated location.”  Authorities will hold a suspect for interrogation in a secret location for months at a time before any arrest or charge.  We suspect the program, which has even ensnared U.S. citizens, will become a new source of tension between the U.S. and China in the coming months.

  • In another development that will worsen U.S.-China relations, Hong Kong’s Apple Daily pro-democracy tabloid said it will be forced to close down after its assets were frozen and its journalists were arrested last week under the draconian new security law that Beijing imposed on the city.  The newspaper said its final edition would be printed on Thursday, and its website would stop being updated at midnight the same day.
  • Despite the accumulating concern about Chinese human rights abuses, reports overnight indicated the Biden administration is pushing to ramp up high-level engagement with the Chinese government.  The two sides are reportedly discussing a possible meeting between U.S. Secretary of State Blinken and Chinese Foreign Minister Wang at next week’s G20 meeting in Italy.  The Biden administration has also told Beijing it would like to send Deputy Secretary of State Sherman to China over the summer.
    • After months of pursuing an unexpectedly hardline approach to China, the administration’s apparent pivot toward talks may reflect its growing confidence after getting the coronavirus pandemic under control at home and making good gains on rebuilding U.S. alliances abroad.
    • All the same, it feels like any pivot to talks at this point may be premature.  Such a shift would also subject President Biden to criticism for being “soft on China.”  If the talks do happen, much will depend on how firmly the administration pushes and how much success it might have in curbing China’s geopolitical, economic, and technological aggressions.
    • As if to inoculate the administration from charges of being soft on China, the U.S. Navy conducted the sixth “freedom of navigation operation” of Biden’s presidency today, sending the guided-missile destroyer USS Curtis Wilbur on a pass through the Taiwan Strait.

United States-Iran:  The Department of Justice said it has seized dozens of U.S. websites linked to Iranian groups, including the Revolutionary Guard’s, because they were spreading misinformation and operating in the country without licenses.

United Kingdom-Russia:  The Russian military said one of its warships fired warning shots and a warplane dropped bombs to force the British destroyer HMS Defender from Russia’s waters near Crimea in the Black Sea.

Global Oil Market:  Global oil prices are now at their highest level in roughly two and a half years.  OPEC and its Russia-led allies are reportedly considering boosting their collective oil output by 500,000 barrels per day when they meet next week.  If the production hike is implemented, it would mean that almost half of the group’s massive, pandemic-inspired output cut last year was reversed.

Global Cryptocurrencies:  The Bank for International Settlements, often referred to as the central bank for central banks, today issued a report that essentially trashes private cryptocurrencies for overstated benefits and having the potential to undermine the public good provided by the current global payments system and central banks.  The report marks a continued push by central banks and financial regulators against private cryptocurrencies, even as many central banks work to develop their own digital currencies.

COVID-19:  Official data show confirmed cases have risen to 179,232,891 worldwide, with 3,884,162 deaths.  In the United States, confirmed cases rose to 33,566,075 with 602,465 deaths.  Vaccine doses delivered in the U.S. now total 379,446,660, while the number of people who have received at least their first shot totals 177,635,067.  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 the pandemic-induced online retailing surge continues apace and firms search for new distribution centers close to ports and population centers, rents are surging for industrial and warehouse space.
    • Demand for industrial real estate is so strong that taking rents—the initial base rent agreed on by a landlord and tenant—are rising faster than asking rents.
    • Industrial taking rents were up 9.7% in the first five months of 2021 compared with the same period last year, while industrial asking rents rose 7.1%.
  • Evidence continues to accumulate, showing that the economic reopening in Europe is likely to produce extraordinarily rapid economic growth and at least temporary inflation pressures.  The IHS Markit “flash” Purchasing Managers’ Index for June jumped to 59.2, beating expectations and marking its highest level in 15 years.  Like all major PMIs, the Market PMI is designed such that readings over 50 will point to expanding activity.

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