Daily Comment (June 25, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities appear to be headed for a higher open this morning. We begin with a discussion about the impact that transitory effects may have on the global economy.  International news follows, with reports on India restoring autonomy to Kashmir and Russia threatening to bomb ships entering its waters.  U.S. Economics and policy news are next, including the bipartisan infrastructure package and large banks passing the Fed’s stress tests.  China news follows, and we end with our pandemic coverage.

As inflation begins to rise across the world, central banks are now mulling when to begin raising interest rates.  Central banks in emerging markets have already started. Brazil, the first of the major economies to raise rates, has increased its policy rate three times this year.  Although developing countries are still wary of raising rates prematurely, it does seem that the spend-and-see approach may no longer be in vogue.  Given the extreme measures governments have taken to shield their economies from the pandemic, we are not surprised by the change of heart.  That said, we do have some concerns that inflation may not be the only statistic impacted by transitory effects. One statistic that we are closely monitoring is the unemployment rate of each country. The pandemic has caused significant disruption of the labor markets.  Workers have received unusually large unemployment benefits, and clearly, some of them are considering new career options.  Yesterday, we noted the surge in new business startups.  Capturing these new businesses in the employment statistics could be difficult.  In addition, a large number of older workers in the developed world appear to have concluded that retirement is a better option…for now.  Investors should be prepared for noisy employment data, which may include unexpected increases in the unemployment rate both here and abroad.  The increases probably don’t mean a slowdown but a churn.

International news:  Russia warns of targeting foreign warships, Modi reaches out to Kashmir, and EU members rebuff Putin’s invite.

  • A day after Russia allegedly fired shots and dropped bombs in the path of the British destroyer, HMS Defender, a Russian diplomat warned that next time Russia might attempt to hit the target. The attack represents an escalation in tensions between Russia and the West.
  • India’s Prime Minister Narendra Modi has held talks with Kashmiri politicians about restoring the region’s democracy. In 2019, the Indian government removed a constitutional provision that granted political autonomy to Kashmir.  The move to reconcile with Kashmir appears to be in response to concerns about the U.S. withdrawal from Afghanistan and its growing feud with China.  The decision is intended to reduce tensions with Pakistan as the two sides attempt to normalize ties.
  • A request by Germany and France to consider inviting Russian Vladimir Putin to the EU summit was rebuffed by other EU members. Those in opposition stated that inviting Putin would send the wrong message to the Kremlin regarding the EU’s stance about its previous abuses.

Economics and policy: A bipartisan infrastructure plan, the extension of the eviction moratorium, and banks can return to buying back shares.

  • President Biden has backed a bipartisan infrastructure package. The bill would include $1.2 trillion in infrastructure spending, which includes more than $550 billion of new spending on roads, bridges, and other projects. There appear to be some obstacles that could prevent the bill from becoming law.  On Thursday, House Speaker Nancy Pelosi (D- CA) said that the House would not support a bipartisan infrastructure bill until the Senate passes a bill that includes pieces of the $4 trillion proposal.  Additionally, President Biden has stated that he does not plan to sign the bipartisan bill into law without a reconciliation bill.  This likely means that the Democrats will try to push a second infrastructure package through Congress.  However, it isn’t clear whether it will have the necessary votes to make it law.  Noticeable holdouts Joe Manchin (D-WV) and Krysten Sinema (D-AZ) have yet to comment regarding whether they would support a reconciliation bill.  There is still a chance that the administration overreaches, and nothing gets done.
  • The Center for Disease Control and Prevention announced the extension of the eviction moratorium to July 31. The moratorium allows individuals who have lost income during the pandemic to protect themselves from eviction by declaring under penalty of perjury that they have made their best effort to pay rent and could face homelessness if evicted. In the meantime, the Biden administration is working with state and local governments to distribute $46 billion in rental assistance and other programs to prevent a wave of evictions when the moratorium ends.
  • The Senate approved a bill that would allow landowners—particularly farmers, ranchers, and foresters—to sell carbon credits. The bill will encourage them to change their operations to cut emissions so they can sell these carbon credits to companies.
  • The Federal Reserve has lifted pandemic-related restrictions on large banks following the latest stress test results. The test revealed that in a hypothetical downturn, 23 of the largest banks would lose a combined $474 billion, which still leaves banks twice the amount of capital required under Fed rules. As a result of the test, large banks will now be able to buy back shares and issue dividends.
  • On Thursday, a residential building in Surfside, Florida partially collapsed. It is unclear what caused the building to collapse, although the building did show signs of sinking in the 1990s, which may have been a contributing factor.

China: The U.S. bans Hoshine’s products and a NATO official’s warning.

  • The U.S. announced a ban on silica-based products made by Hoshine Silicon Industry Company ( 603260.SS, CNY, 60.21) as well as goods made using those products. The ban comes as part of the Biden administration’s goal of cracking down on forced labor used in supply chains.
  • A NATO senior official warned that China’s military has modernized at an unprecedented rate. Additionally, he claimed that China’s expansive military and diplomatic presence poses a risk to the international rules-based order. The concern highlights the alliance’s growing focus shift away from Russia and toward China. So far, NATO has struggled to counter a strengthening China, as the group has been unable to get all its members to agree on a plan of action.

COVID-19:  The number of reported cases is 180,036,101 with 3,901,300 fatalities.  In the U.S., there are 33,590,550 confirmed cases with 603,178 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 379,248,700 doses of the vaccine have been distributed, with 320,687,205 doses injected.  The number receiving at least one dose is 178,331,677, while the number of second doses, which would grant the highest level of immunity, is 151,252,034.  The FT has a page on global vaccine distribution.

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