Daily Comment (March 31, 2021)

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with an overview of the new economic plan that President Biden will propose in a speech today in Pittsburgh.  We next review other key U.S. and international news, including today’s latest U.S.-China tensions.  We end with recent developments related to the coronavirus pandemic.

U.S. Fiscal Policy:  President Biden today will release a $2 trillion infrastructure plan centered on fixing roads and bridges, expanding broadband internet access, and boosting funding for research and development.  Under the plan, that spending would be paid for over 15 years by raising the corporate tax rate to 28% from 21% and increasing taxes on companies’ foreign earnings.

  • The proposal includes $621 billion to modernize transportation infrastructure like roads and bridges, $400 billion to help care for the aging and disabled, $300 billion to boost the manufacturing industry, $213 billion on retrofitting and building affordable housing, and $100 billion to expand broadband access, among other investments.
    • The plan calls for modernizing 20,000 miles of roadway; building 500,000 electric vehicle charging stations, replacing the country’s existing lead pipes and service lines, repairing aging schools, and investing billions of dollars in domestic semiconductor manufacturing.
    • The plan would also establish a standard mandating that increasing portions of the country’s electricity be generated from low-carbon sources, with a goal of eliminating carbon emissions from the power grid by 2035.
  • A second plan focused on childcare, healthcare, and education will be released in April.
  • As justification for the plan, Biden is expected to argue that the investments are necessary to help the U.S. compete with China and tackle climate change.
  • Obviously, the huge amount of additional spending and tax hikes will generate pushback from Republicans and moderate Democrats.  Nevertheless, Biden has promised to be flexible where necessary and firm where it’s essential.  His success in pushing through his $1.9 trillion pandemic relief package suggests all things are possible.  In any case, the prospect of massive new fiscal stimulus on top of today’s loose monetary policy could buoy equities and further undermine bonds, pushing yields higher. Although, those factors will be battling it out with concerns about higher taxes.  The result could potentially be increased volatility and only muted gains for risk assets over the course of the year.

U.S. Bond Market:  While domestic expectations for faster economic growth and rising inflation have clearly been a factor in the recent run-up in bond yields, new reporting suggests another important factor.  Many Japanese institutional investors sold down their holdings of U.S. Treasuries in order to lock in their investment returns ahead of their fiscal year end on March 31.

United States-China:  In its annual human rights report, the U.S. Department of State accused China of being an “authoritarian state” and committing “genocide and crimes against humanity” against its Uyghur minority.  According to the report, China is detaining more than one million Uyghurs and other Muslims in its western Xinjiang region and is engaging in abuses including rape, forced sterilization, coerced abortions, torture, and forced labor.  The report provides further evidence that the Biden administration is continuing much of the hardline approach to China adopted by former President Trump.  It is even going further than Trump in expanding its focus toward human rights and reinvigorating U.S. alliances.  Today’s report will further hike tensions with China, which, as we have often argued, raises the risk that investors could be caught in the crossfire.

Australia:  The government announced today that it is fast-tracking plans to manufacture advanced missiles and other guided weapons in response to growing tensions in the Indo-Pacific region and concerns over its reliance on imports.  According to Prime Minister Morrison, the government will spend $1 billion to develop an indigenous manufacturing capability along with a major western defense contractor.  The move highlights the possibility that military tensions between China and the major liberal democracies could eventually present investors with new opportunities in the defense sector, despite concerns that growing government debt will lead to tighter public budgets.

Slovakia:  Prime Minister Matovic has stepped down to end a crisis in the year-old ruling coalition that was sparked by his decision to buy Russia’s Sputnik V coronavirus vaccine.  Matovic will be replaced by his ally Eduard Heger, a member of the same Ordinary People party who currently serves as finance minister.  Matovic, in turn, is set to replace Heger at the finance ministry.  All four parties in the right-wing coalition have approved the changes.

Brazil:  Following up on President Bolsonaro’s cabinet shuffle on Monday, described in yesterday’s Comment, the chiefs of Brazil’s army, navy, and air force all stepped down in apparent solidarity with the ousted defense minister.  The resignations point to growing dissatisfaction with Bolsonaro’s attempts to politicize the military, especially as his government comes under fire for failing to prioritize or take control over the coronavirus pandemic.

COVID-19:  Official data show confirmed cases have risen to 128,301,662 worldwide, with 2,805,972 deaths.  In the United States, confirmed cases rose to 30,394,189, with 550,998 deaths.  Vaccine doses delivered in the U.S. now total 189,451,285, while the number of people who have received at least their first shot totals 96,044,046.  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 fell to approximately 60,000 yesterday, coming in below the seven-day moving average of 65,789 but slightly above the 14-day moving average of 59,741.  The figures remain well below the levels reached at the beginning of the year; nevertheless, they reflect a recent plateau and then rebound as factors such as new, more transmissible mutations and quick restriction loosening offset the gains from mass vaccinations.  Meanwhile, yesterday’s deaths related to the virus rose to 804.  On the vaccination front, 28.9% of U.S. residents have now received at least one dose of a coronavirus vaccine, and 16.1% are fully vaccinated.
  • In a study involving 2,200 children, the vaccine developed by Pfizer (PFE, $36.11) and BioNTech (BNTX, $104.44) was found to be 100% effective in protecting against symptomatic disease in those over 12 years old, with no safety concerns.
    • Given the results, Pfizer said it would ask U.S. health regulators in the coming weeks to expand the use of the shots to those 12 to 15 years of age.
    • The timetable for authorization in the U.S. could mean kids will be able to be vaccinated before the next school year begins in the fall.
  • In contrast with the improved conditions in the U.S. and the U.K. since early 2021, the pandemic continues to rebound in Europe.  In France today, President Macron is expected to announce strict new lockdown measures aimed at controlling a third wave that is overwhelming the country’s hospitals.  He may even be forced to close schools after pleas from teachers, doctors, and local officials.
    • Macron’s determination to keep schools open after the first coronavirus lockdown a year ago — in contrast to the closures ordered in many other countries — has been popular in France.
    • However, Macron has come under intense criticism in recent weeks for ignoring the warnings of scientists and doctors about the need for tighter measures against the third wave.
  • What appears to be a fourth wave of the pandemic is materializing in Japan mere weeks after the country began easing virus countermeasures.
  • Following a similar move by Canada, yesterday the German government said the vaccine from AstraZeneca (AZN, $49.97) would be restricted for people younger than 60 years of age due to new blood-clotting incidents found among recipients.  Despite a recent ruling by the European Medicines Agency that the vaccine is “safe and effective,” Germans under 60 will only be able to receive it if they specifically demand it, and if their request is granted by a physician.  Besides marking another body blow to the vaccine’s reputation, the decision is likely to further slow Germany’s plodding vaccination program.
  • The WHO team that visited China early this year to investigate the origins of the pandemic issued its report arguing that the coronavirus most likely jumped to humans from an animal,.  However, the real story was the international response to the document.  The U.S. and more than a dozen other countries issued a joint statement complaining the investigation came too late, and the team wasn’t afforded full or timely access to pertinent data by the Chinese government.
    • Rather, the statement called for “transparent and independent analysis and evaluation, free from interference and undue influence.”
    • On top of that, WHO Director, General Ghebreyesus, called for a more extensive probe into whether the coronavirus had escaped from a lab, the strongest terms he has used in public on the matter.
    • As might be expected, the Chinese government responded by warning against politicizing the issue and calling for similar probes in other countries.

 Economic and Financial Market Impacts

Foreign Policy Response

  • In China, the government’s effort to withdraw the pandemic stimulus it implemented last year has started to undermine the country’s currency.  In the tightly regulated onshore market, the renminbi has fallen 1.4% against the greenback so far in March, marking its worst one-month drop since August 2019 and erasing the currency’s gains against the dollar since the new year.

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