Daily Comment (June 28, 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 mixed and trading quietly as we close out the second quarter this week.  We lead off today with the Western heat wave.  Up next, we discuss U.S. airstrikes in the Syrian/Iranian region.  Economics and policy news begin our regular coverage, followed by China news.  The international news roundup is next, and we close with the pandemic update.

Western heat wave:  The Western U.S. is suffering through a drought and heat wave.  Droughts for the Southwest are clearly nothing new, but triple-digit temperatures in the usually temperate Northwest are something differentPortland hit 112o and Seattle 104o.  The Canadian city of Lytton hit 116o, a new record for the country.  Areas that frequently get hot have adapted.  Air conditioning is common, and officials have experience in opening cooling centers.  However, the Northwest does not have the same level of experience with intense heat, and thus, will struggle to cope with the temps.  What is occurring is a classic heat dome; these are often seen in the Midwest.  The jet stream cuts off weather systems that could bring rain and cooler temperatures.  Such events in the nation’s midsection usually touch off grain rallies as drought fears trigger worries about corn and soybean crops being adversely affected.  These domes are hard to shift.  It often takes a major cold front to break them up (in the Midwest, a dissipating tropical storm can do the trick).  Not only do the temperatures stress people, but they can put pressure on electrical grids that lead to brownouts and outages.   High temperatures can also boost natural gas demand to meet the rise in electricity production.

Airstrikes:  The U.S. conducted airstrikes against Iranian-backed militia groups in the border region of Syria and Iraq.  The U.S. is accusing these groups of launching drone strikes against U.S. troops in the region.  The targets were weapons storage and operational facilities.  Although negotiations to return to the 2015 nuclear deal continue, the war conducted by Iranian proxies will make the talks difficult.  We expect a return to the deal, but there won’t be much progress beyond these talks.

Economics and policy:  The White House continues to balance its interests for infrastructure spending, the labor market remains unsettled, and Fed officials continue to make hawkish statements.

  • After a dustup last week, when President Biden linked passing the bipartisan infrastructure package with the broader budget bill, the White House appears to have smoothed over the dispute. The president actively worked to overcome the apparent mistake of linking the two measures.  Although the pundits slammed the “own goal” of linking the budget bill and the infrastructure package, the reality is that the White House is trying to keep a shaky coalition together.  If it leans toward the bipartisan measure, the LWP might withdraw support.  We note that Manchin (D-WV) has essentially scotched Sen. Sanders’s (I-VT) $6.0 trillion budget plan.
  • The turmoil in the labor markets continues. The latest is the issue regarding unemployment insurance.  The concern is that generous benefits may be keeping workers away from jobs.  Although we don’t doubt there is some effect, our suspicion is that the issue is more complicated than just income support.  The history of pandemics suggests that in their wake, labor power increases; there was a notable increase in real wages after the Black Death to the point where the English Crown tried to force workers to accept jobs (it didn’t work).  We are watching the media framing of the issue.  The WSJ is touting that initial claims are falling faster in states where benefits have been cut.  At the same time, the NYT reports that even in states where benefits have been reduced, recruiters are still struggling to fill jobs.  We suspect that underlying these reports is that the pandemic has encouraged workers to rethink their career choices.  The surge in new business formation may be a clue.  If this is the case, jobs in leisure and hospitality may only be filled at higher wages.
    • A side note to this issue is immigration. We note a story from Oregon about an asparagus farm being unable to source foreign workers and opening up the farm to locals to pick for free.  It details the impact of immigration policy.
  • We continue to monitor comments from Fed officials about policy. Although the leadership remains strongly committed to continued stimulus, there is clear dissension in the ranks, especially among the regional bank presidents.  The most recent to chime in has been Boston FRB President Rosengren, who commented that policymakers need to avoid a “boom/bust” cycle in residential real estate.  We characterize Rosengren as a “financial sensitive,” meaning that he thinks monetary policy should also, in part, be conducted to prevent asset bubbles.  This position, in our opinion, is theoretically justifiable but politically impossible.  Imagine a Fed Chair trying to explain to Congress that the Fed raised rates to bring down market P/E’s.  Greenspan took heat for his “irrational exuberance” comments in 1996.  Still, this means Rosengren is probably supporting some level of stimulus withdrawal.  We note he votes in 2022.

China:  There are renewed tensions on the India/China border, and internationalizing the CNY will require difficult choices.

International roundup:   Sweden may be facing elections, and Minsk blinks.

COVID-19:  The number of reported cases is 181,167,056, with 3,924,865 fatalities.  In the U.S., there are 33,625,392 confirmed cases with 603,967 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 381,282,720 doses of the vaccine have been distributed with 323,327,328 doses injected.  The number receiving at least one dose is 179,261,269, while the number of second doses, which would grant the highest level of immunity, is 153,028,665.  The FT has a page on global vaccine distribution.

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