Daily Comment (March 24, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with the ongoing testimony before Congress from Federal Reserve Chair Powell and Treasury Secretary Yellen.  Both officials will wrap up their testimony before the Senate today.  We next turn to various overseas developments, including elections in Israel, new missile tests in North Korea, and a container ship causing a traffic jam in the Suez Canal.  Finally, we recap the latest news on the coronavirus pandemic.

U.S. Monetary Policy:  Testifying before the House Financial Services Committee yesterday, Fed Chair Powell repeated his view that the post-pandemic economic recovery is far from complete, and the Fed should keep monetary policy extraordinarily loose for some time to come.  Powell did note that the recovery and the latest fiscal package could push inflation higher, but he said such price hikes wouldn’t be very large or sustained, and even if they were, the policymakers have the tools necessary to get inflation under control again.

  • Despite Powell’s sanguinity, many investors continue to fret that the Fed could end up behind the curve as inflation accelerates and might have to react by tightening policy sooner than planned.  Bond yields have recently risen in response, prompting volatility in stocks.
  • At the same time, however, concerns about deadlier and more transmissible coronavirus mutations have started to make some investors question the thesis about a fast economic recovery, especially in Europe.  That contributed to the fall in stocks yesterday.
  • All the same, it’s notable that if the European economy remains locked down, it would be a drag on global economic growth and could help hold down inflation.  In other words, inflation fears and bond yields could begin to moderate in the near term.  They may have already started to do so.  Eventually, a more balanced view of economic prospects and stable bond yields could prompt another up leg in equities.

U.S. Fiscal Policy:  In her testimony before the House Financial Services Committee yesterday, Treasury Secretary Yellen said tax increases would be required to fund President Biden’s evolving $3 trillion infrastructure and economic development package.  Facing strong opposition from Republicans, she pledged that the administration wouldn’t do anything to adversely impact small businesses or middle-income citizens.

  • Just as the Biden spending plan would be broken into two parts, one for infrastructure and one for other economic initiatives, the developing tax plan would also include two parts.  Taxes on businesses would be included with the infrastructure spending plan, while taxes on higher-income households would be matched with the other spending proposals.
  • Aides are expected to present the plan to Mr. Biden and his top advisers this week, meaning its details and configuration could change before the White House brings it to leaders on Capitol Hill.

Israel:  In yesterday’s parliamentary elections, Prime Minister Netanyahu’s alliance looks like it would come up just short of a majority in parliament, even if he manages to entice a former ally, Naftali Bennett, to join his camp.  The ultimate size of Netanyahu’s shortfall will depend on whether a small Islamist party clears the vote threshold to be represented in the Knesset.  If it does, the seat allocation would be shifted enough to make Netanyahu’s shortfall substantial.  Final results, and the formation of a government, are likely to be up in the air for days.

Turkey:  President Erdogan’s decision to replace the Turkish central bank chief continues to reverberate in the country’s financial markets.  The lira and Turkish assets have depreciated severely.  Meanwhile, the offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to an annualized 1,400% on Tuesday before easing to a still-elevated 500% late in the day.  Those rates indicate it is becoming more difficult for foreign investors to hedge their exposure to lira assets, unwind their bullish positions, or bet against the currency.

China:  Satellite imagery shows China has reclaimed land to extend a reef in an area of the Spratly Islands that is also claimed by Vietnam and the Philippines.  Moreover, the imagery suggests the Chinese may be preparing the site to construct a military radar system.  The aggressive moves to increase control and militarize the island will likely feed into concerns about Chinese territorial ambitions and further exacerbate tensions between China and other countries.

North Korea:  Officials in South Korea and at the U.S. Defense Department confirmed that the North Korean government tested two cruise missiles over the weekend.  However, the officials downplayed the development on grounds that it was not unusual for the regime and therefore didn’t require a response.

Global Shipping:  Adding to the port congestion, container shortages, and other woes that have been holding back global shipping and boosting prices in recent months, one of the world’s largest container ships has run aground in the Suez Canal, creating a massive traffic jam that might not be cleared for days.

COVID-19:  Official data show confirmed cases have risen to 124,330,400 worldwide, with 2,736,621 deaths.  In the United States, confirmed cases rose to 29,923,371, with 543,849 deaths.  Vaccine doses delivered in the U.S. now total 164,300,795, while the number of people who have received at least their first shot totals 83,930,495.  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 slightly to approximately 51,000 yesterday, but that was still within the recent range.  New infections have fallen dramatically since the beginning of the year, but they’ve hit a plateau as new, more transmissible mutations offset the impact of accelerating vaccinations.  Meanwhile, new deaths related to the virus came in at 844.
  • Texas and Georgia announced plans to expand vaccine eligibility to all adults, joining a handful of states that will have fully opened appointments to residents by the end of the month.  Ohio began allowing unfilled appointments to be given to residents aged 16 and older as of Monday and will open up vaccinations to all adults on March 29.
  • While the U.K. has given at least one vaccine dose to 41% of its population, and the U.S. has done so for about 25% of its people, countries in Asia that were initially far more successful in controlling the pandemic are now far behind in their vaccination efforts.  Although China and Hong Kong have given at least initial doses to about 5% of their citizens, most Asian countries have only hit about 3%.
  • In an effort to encourage hesitant Russians to get vaccinated, the Kremlin said President Putin has finally been vaccinated.  However, officials deliberately decided not to reveal the name of the Russian-made vaccine Putin chose to take.
  • AstraZeneca (AZN, $49.40) said it would publish more data on its U.S. clinical trial “within 48 hours,” after the independent monitoring board that oversaw the study warned that efficacy results released by the company on Monday were misleading.
  • In an escalation of its dispute with the U.K. and AstraZeneca over access to vaccine production, the European Commission is drafting a new law broadening the basis for stopping vaccine shipments to countries that import from the EU but refuse to export their own vaccines or vaccine raw materials.
  • Moderna (MRNA, $136.52) is developing a vaccine targeting the seasonal flu and COVID-19.  If successful, the combination would protect recipients from both illnesses. The shot could be ready for use in a couple of years, a timeline dictated by the company’s progress and the regulatory process.
  • Pfizer (PFE, $35.36) said it has begun testing an oral COVID-19 drug on humans, and if proven to work safely could provide doctors yet another tool to fight the pandemic.  Researchers are enrolling 60 healthy subjects to evaluate the safety of different doses of the treatment.  If results are positive, Pfizer would determine whether the treatment works safely in people infected with COVID-19.

 Economic and Financial Market Impacts

  • As broader vaccinations and economic reopening points toward increased driving this summer, and as fuel stockpiles remain contained, gasoline prices are marching higher.  According to the AAA, national gasoline prices averaged $2.88 this week, up 30% from one year ago.  Rising fuel prices could eventually help dampen the expected economic recovery later in the year, although they would naturally heighten concerns about broader inflation pressures.

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