Daily Comment (March 3, 2021)

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 I of a 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.  The Weekly Energy Update is available.  You can find all this research and more on our website.

We open today’s Comment with the latest reassuring statements from policymakers at the Federal Reserve, who continue to stress that U.S. monetary policy won’t be tightened anytime soon.  In overseas news, we are noticing more evidence of pushback against right-wing populism, especially in Europe.  Finally, we cover the latest developments in the coronavirus pandemic.

U.S. Bond Market:  In a video speech yesterday, Fed Governor Brainard said the recent spike in longer-term bond yields caught her eye, but she didn’t see the kinds of disorderly movements or persistently tightening financial conditions that would require intervention.  Rather, she emphasized that even though the rollout of vaccines is likely to end the coronavirus pandemic and spur fast economic growth this year, the economy will remain far from the point where the Fed would start tightening policy.

  • Separately, San Francisco FRB Chief Daly, who has a vote on the rate-setting Federal Open Market Committee this year, was similarly unworried by the rise in yields.  Echoing other Fed officials, she said the rise in yields is “a sign investors think the future is a little brighter than they thought,” and “in many ways, it’s a good piece of news.”
  • Daly said monetary policy is “in a very good space” right now, and she didn’t see a need to push back against the bond market, although she noted the Fed retains the ability to push down long-term yields if it chooses to do so.
  • Along with other recent statements by Fed officials, the comments by Brainard and Daly show monetary policymakers are still committed to keeping policy loose, even as the Biden administration pushes for $1.9 trillion in new fiscal relief and pandemic restrictions on economic activity are already being loosened.  In other words, the key equity drivers remain in place for the time being, which should be positive for stocks in the near term.
  • All the same, there are still lingering concerns about liquidity conditions in the Treasury market, especially after weak demand at an auction of seven-year obligations last week forced primary dealers to pick up almost 40% of the sale.  That marked their highest share in seven years.  On top of that, a lot of the trading last week was consistent with some entity or entities rushing to raise cash, suggesting some stress in the system, with the non-bank sector being a key potential culprit.  Even though the debt markets have calmed considerably this week, we continue to watch developments closely.

U.S. Politics:  The White House announced it has withdrawn Neera Tanden’s nomination to lead the Office of Management and Budget amid opposition from Senate Republicans and a key Democrat.  The withdrawal marks the first failed confirmation push for one of President Biden’s cabinet picks.

  • Shalanda Young, a longtime congressional staffer and Biden’s choice for deputy director of the budget office, is now seen as a leading contender to lead the OMB.
  • During a confirmation hearing for her deputy director nomination on Tuesday, senators from both parties signaled they would support Ms. Young.

Germany:  Responding to an in-depth study by lawyers and experts on extremism, the country’s domestic intelligence agency has reportedly decided to designate the Alternative for Germany (AfD) as a suspected extreme right-wing organization and will start formally spying on the party.  The news could severely undermine the AfD’s chances in September’s Bundestag elections by damaging its credibility with conservative voters, especially civil servants fearful of the career implications of supporting a party seen by the authorities as disloyal to the German state.  The move would also be a sign that traditional establishment policymakers are becoming more confident about pushing back against right-wing populism.

  • The AfD is the largest opposition party in the Bundestag and is now represented in all of Germany’s 16 regional parliaments.
  • However, its poll ratings have sunk in recent months as the coronavirus pandemic boosts the standing of government parties.

Hungary-European Union:  Hungary’s right-wing populist Fidesz Party said it would withdraw from the European Parliament’s grouping of center-right parties known as the European People’s Party.  In more evidence of the pushback against Europe’s right-wing populism, the EPP has been pushing back against Hungary’s extreme policies and leader Viktor Orban’s aim to establish an “illiberal democracy” in the country.  The withdrawal by Fidesz follows an EPP decision, allowing the grouping to suspend a member party en masse.

United States-Saudi Arabia:  Prince Khalid bin Bandar, Saudi Arabia’s ambassador to London, told the Financial Times that the release of a U.S. intelligence report asserting that Crown Prince Mohammed bin Salman authorized the capture or killing of Saudi journalist Jamal Khashoggi was “an internal issue for the United States” and wouldn’t damage the relationship between the two countries.

United States-Iraq-Iran:  Just a week after the U.S. launched retaliatory airstrikes against Iranian-backed Iraqi militias in Syria, ten rockets struck a military base used by U.S. troops in Iraq’s Anbar province.  No injuries have been reported from the attack, and no group has claimed responsibility.  However, it continues to point to rising tensions in the region as Iran tests the new U.S. administration’s resolve and tries to force it into easing sanctions against it.

COVID-19:  Official data show confirmed cases have risen to 114,871,514 worldwide, with 2,551,338 deaths.  In the United States, confirmed cases rose to 28,719,860, with 516,616 deaths.  Vaccine doses delivered in the U.S. now total 102,353,940, while the number of people who have received at least their first shot totals 51,755,447.  Finally, here is the interactive chart from the Financial Times that allows one to compare cases and deaths among countries, scaled by population.


 Economic and Financial Market Impacts

  • With so many people stuck without childcare because of the pandemic, a whopping 98% of employers now plan to expand their benefits, according to a survey of H.R. departments by Care.com.  About 66% are adding flexibility to help parents and other caretakers, and 63% are adding childcare benefits.

U.S. Policy Response

  • President Biden held a strategy meeting with Senate Democrats yesterday to refine their approach to pushing Biden’s $1.9 trillion pandemic relief bill through the chamber.  Biden urged the lawmakers to pass the legislation quickly, but various Democratic factions continue to adjust a range of provisions in the bill.

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