by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Good morning! Today’s Comment will start with a discussion about remarks made by central bank officials during the ECB forum. Next, the reports will provide the latest update on the Russia-Ukraine war. Afterward, we provide a summary of international news from China, Israel, and OPEC+, and briefly summarize the latest developments in the Democrats’ spending bill. The report concludes with our daily COVID coverage.
Note: Because COVID-19 has become more endemic and in most countries isn’t disrupting the economy or politics as much as it did previously, we will drop our dedicated COVID-19 section beginning July 1. We will continue to cover pandemic news as needed within our main text.
Central Bank News: Several central bank leaders met in Sintra, Portugal, for an annual conference to discuss the difficulties of containing rising inflation. Fed Reserve Chair Jerome Powell and ECB President Christine Lagarde warned that the low inflation era was likely not coming back soon. Powell explained that “different forces” prevent globalization, aging demographics, and technological advancement from bringing down inflation. Lagarde added that the war in Ukraine has also created a massive geopolitical shock, making it difficult to contain inflation in Europe. Despite their concerns, Powell and Lagarde maintained that they were ready to tighten monetary policy to restore price stability. Initially, equities were little changed following the comments from central bank officials; however, this morning stocks sold off and bond prices rose over renewed recession fears.
- BOE Governor Andrew Bailey also attended the conference and warned that the U.K. will have elevated inflation longer than other developed countries. He added that the bank expects inflation to rise as high as 11% in the fall. His comments suggest that the bank may prepare to take more aggressive action to contain inflation. In May, inflation hit 9.1%.
- Sweden’s central bank is set to take more aggressive monetary action to combat soaring inflation. The bank announced that it plans to hike rates by an additional 50 bps and wind down its balance quicker than it signaled in April.
Russia-Ukraine: Russian forces continue to make incremental advances in eastern Ukraine; however, there are doubts whether it will sustain this momentum. Despite its military superiority, Russia still lacks the modern precision weapons to maintain a sophisticated campaign. As a result, Russia has been willing to launch attacks even if it killed innocent civilians. There is speculation that the missile strike that hit a mall was intended to hit a nearby infrastructure target. So far, Russia has taken over about 20% of Ukraine and is now looking to annex certain areas into its territory. Reports from Ukraine show that Moscow is preparing to set up a pseudo-referendum under the template of “Tavriia Gubernia.” Under this scenario, the left bank of Kherson Oblast and part of Zaporizhia Oblast would likely be combined and join the Russian Federation as a single territory. The move to acquire parts of Ukraine reinforces the notion that Russia is looking to control the entire country.
- Moscow is positioning itself to become India’s largest supplier of oil. Meanwhile, Indian firms have explored setting up operations in Russia. India risks drawing the ire of the U.S. as it seeks to build closer ties with Russia. As mentioned in previous reports, the U.S. has refrained from clamping down on India; however, we don’t expect this to last. Although India has consistently maintained that it would like to remain neutral in its position on the Ukraine conflict, the Biden administration is slowly signaling that India will eventually be forced to choose a side.
- Russia has withdrawn its troops from Snake Island, a strategic outpost in the Black Sea. The retreat of Russian forces could make it easier for Ukraine to deliver commodities such as wheat to other countries.
- After being hit with another round of sanctions on Wednesday, the Kremlin rebuked the West. Russia’s Deputy Security Council Chairman Dmitry Medvedev warned that international sanctions could justify war.
- The German government is mulling a bailout for Uniper (UPKF, $16.50), one of Europe’s largest utilities companies. Russia has reduced its deliveries of natural gas to Germany making it more difficult for firms to meet demand. To help deal with the rising costs, energy companies are asking the government to help pass on rising prices to consumers. As Germany struggles to secure alternative sources of fuel to help wean itself from Russian energy, there will be a greater push to delay some of the climate change initiatives; as a result, this could be bullish for hard commodities like coal.
China: To boost economic growth and consumer sentiment, China has implemented measures to help stimulate the economy. Beijing has offered subsidies to oil refiners for as long as two months if crude prices surge above $130 billion a barrel. Meanwhile, the PBOC has pledged to provide more financial support for smaller firms. Growing the economy by 5.5% remains a core objective of Beijing. However, this target will be hard to achieve after the restrictions from the Zero Covid policy have weighed on consumer sentiment. The latest survey from the PBOC showed that confidence has fallen to its lowest level since 2009, with most households stating that they are more inclined to save rather than spend or invest.
- The FCC has urged Apple (AAPL, $139.91) and Google (GOOGL, $2,234.03) to remove TikTok from their platforms because the app poses a national security risk. Regulators suspect that the Chinese government could use the app to collect user data.
Israel: Prime Minister Naftali Bennett has decided not to stand for reelection. Instead, Bennet will stay on as an alternate PM until elections are held in late October or early November. Foreign Minister Yair Lapid will take over as head of government in the meantime. Current polling suggests new elections will probably end in a stalemate, creating more political uncertainty within the region.
Spending Bill: Senate Democrats are prepared to reduce the proposed tax hike to secure Joe Manchin’s (D-WV) support for the bill. The new spending bill will cost $1 trillion, with half going to deficit reduction and the other half going to new spending. If passed, the legislation will likely provide a boost to the economy and potentially to equities. The Democrats have until the end of September to push the bill through Congress before the budget resolution that allows them to enact legislation with a simple majority expires.
Commodities: OPEC+ is set to expand output production by 648,000 barrels a day in August, restoring its production target to pre-pandemic levels. Although the group has increased its output target, there are still concerns that countries still lack the capacity to meet demand. As a result, lifting the group’s production cap will likely not lead to a steep decline in oil prices.
COVID-19: Official data show confirmed cases have risen to 546,133,495 worldwide, with 6,334,004 deaths. The countries currently reporting the highest rates of new infections include the U.S., Germany, Taiwan, and France. (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.) In the U.S., confirmed cases have risen to 87,383,429 with 1,017,386 deaths. In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 222,123,223 equal to 66.9% of the total population.
- Pfizer is seeking approval for its COVID-19 pill, and if granted, the pharmaceutical company will be able to sell the drug commercially. The medication Paxlovid will likely be needed to fight further variations of COVID-19 as the virus becomes more endemic.