by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EST] | PDF
We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara. We also have several other recent multimedia offerings. There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios. Here is the latest Confluence of Ideas podcast. A new Asset Allocation Weekly, chart book, and podcast are also available. This week’s Weekly Energy Update is available. You can find all this research and more on our website.
Turning to today’s Comment, we open with U.S. news related to the bond market and the impact of fiscal stimulus. Next is international news, especially related to China and Russia. Finally, we look at the latest developments regarding the coronavirus pandemic, where President Biden’s massive new pandemic relief package is likely to get final approval in Congress today. Various indicators now show that the massive monetary and fiscal relief provided over the last year has helped cushion the economy. As discussed below, federal aid has even helped keep state government revenues on an even keel. The new package is likely to bolster consumer spending in particular, which should help fuel a powerful economic recovery in the coming months and help buoy risk assets as well.
U.S. Bond Market: The Treasury Department will auction $38 billion in new 10-year notes today, in what could be an important test of demand amid massive government borrowing and market concerns about rising inflation. It could also be a test of the thesis that major bank’s demand could be crimped by uncertainty over their continued exemption from a capital rule known as the Supplemental Reserve Ratio (SLR). All those concerns have the potential to create choppy trading and unexpected outcomes in the financial markets today.
U.S. Infrastructure: Now that President Biden’s “American Rescue Plan” is on the verge of becoming law, the administration is already starting to shift its focus to a major infrastructure rebuilding program. In recent days, the president has reportedly met with lawmakers from both parties, as well as union leaders and government officials, to discuss the contours of a package. Congressional Democrats say they expect him to press ahead as soon as the relief package is signed into law. One key question is how the talk of even more fiscal stimulus will play into the current bond market concerns about future inflation.
United States-Japan-Australia-India: In his first major multilateral meeting, President Biden will meet virtually with the “Quad” group on Friday to discuss the coronavirus pandemic, economic cooperation, and other important issues in the Indo-Pacific region. Almost certainly, the discussion will also address China’s rising military, economic, and diplomatic aggressiveness and how the countries could work together to counter the threat.
- At a Senate Armed Services Committee hearing yesterday, Admiral Philip Davidson, head of the U.S. Navy’s Indo-Pacific Command, warned that the military balance in the region has “become more unfavorable” to the U.S. and could be encouraging the Chinese to take more aggressive action. According to Davidson, “We are accumulating risk that may embolden China to unilaterally change the status quo before our forces may be able to deliver an effective response . . . I cannot for the life of me understand some of the capabilities that they’re putting in the field unless it is an aggressive posture.”
- Separately, U.S. and Chinese officials are trying to hammer out the details of the first high-level meetings between the countries during the Biden administration. The discussions appear to focus on a potential meeting in Alaska involving Secretary of State Blinken, National Security Advisor Sullivan, and their Chinese counterparts. Officials close to the administration say they want to ensure China is not completely sidelined while urging allies to work with the U.S. on adopting a more confrontational stance towards Beijing.
Russia: The government’s communications regulator, Roskomnadzor, said it would slow down the speed of Twitter (TWTR, 67.52) in the country for failing to delete banned content. The regulator said it would limit the speed of the service on all cellphones and half of the stationary devices, such as desktop computers, beginning March 10. It also warned it could block Twitter entirely if it failed to remove banned content linked to suicide, pornography, and drugs.
COVID-19: Official data show confirmed cases have risen to 117,671,884 worldwide, with 2,612,526 deaths. In the United States, confirmed cases rose to 29,096,566, with 527,705 deaths. Vaccine doses delivered in the U.S. now total 123,232,775, while the number of people who have received at least their first shot totals 61,088,527. Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.
- Newly confirmed U.S infections rose to 55,900 yesterday, while new deaths related to the virus rose to almost 1,900. However, those figures remain well below the levels seen at the beginning of the year, and stress on the healthcare system has been reduced dramatically.
- As vaccine supplies become more plentiful, some states are loosening eligibility requirements. In Alaska, Governor Michael Dunleavy announced yesterday that all state residents aged 16 and over would be allowed to get a shot. In New York, Governor Andrew Cuomo said residents age 60 and up can sign up for vaccinations beginning Wednesday. The state is also expanding vaccination eligibility on March 17 to certain essential workers who interact with the public, including some government employees, building workers, and certain nonprofit employees, among others.
- The Russian government signed a contract for its Sputnik V vaccine to be manufactured by a Swiss pharmaceutical firm at a factory in Italy as global demand for the shot increases. The Russian government has already farmed vaccine production to China, India, South Korea, and Brazil.
- The Los Angeles Unified School District reached a tentative agreement with its teachers’ union that would allow some students to resume in-person learning for the first time in more than a year. The deal will allow preschools and elementary schools to reopen in mid-April, though no specific start date was given.
Economic and Financial Market Impacts
- Contrary to expectations, new data suggest the pandemic had a much smaller negative impact on state government revenues than first expected. According to the Urban Institute, total state tax revenues were roughly flat in 2020 from the year before.
- The better-than-anticipated results came as federal intervention buoyed households, businesses, and financial markets. The stable employment environment for the country’s most affluent workers also brought in stronger than expected tax revenue.
- Analysts still expect states to confront budget gaps this year, but they are projecting smaller shortfalls partially filled in with federal aid.
- Preliminary data in Europe suggest the pandemic will drive global birthrates sharply lower, leading to even stronger demographic headwinds for economic growth in the long term. However, those headwinds might also help keep down inflation and interest rates.
U.S. Policy Response
- President Biden’s $1.9 trillion pandemic relief package is expected to pass the House today, after which it can go to the president to be signed into law. One notable item in the final version of the “American Rescue Plan Act” (ARPA) is that it exempts from income tax up to $10,200 of a worker’s unemployment benefits received in 2020, subject to specific household income caps. That means many people who have already filed their 2020 tax return may need to file an amendment. It also suggests that those who haven’t filed yet may want to delay filing until the IRS can issue any relevant rules and tax software programs can be updated appropriately.