Daily Comment (March 4, 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.  This week’s Weekly Energy Update is available.  You can find all this research and more on our website.

Good morning.  U.S. equity futures are weaker this morning but off the worst levels of the session.  We start with comments on policy and the economy; we have had a number of Fed speakers this week, and Chair Powell will top the list.  Next up is China news as it prepares for CPC meetings and the next five-year plans.  International news follows, and we close with pandemic news.

Economics and policy:  We look at Fed speakers and the Beige Book.  There is some tweaking to the stimulus bill as it moves through the Senate.

  • The Beige Book had an optimistic tone; although current conditions have not improved all that much, there are great hopes that vaccinations will open the economy. We continue to sift through comments from Fed officials, and there does appear to be an evolving narrative.  The FOMC members are watching the rise in Treasury yields.  But, for now, they are willing to allow the rates to rise because they are rising for the “right” reasons, namely, a better economy.  At the same time, they are in no hurry to raise rates because they don’t expect inflation to become a problem.  In addition, the patience on policy is part of the regime change where the Fed will no longer focus policy on inflation suppression.
    • As we suspect will be detailed in the full transcripts of the current FOMC meetings when they are released in 2026, there is likely a robust debate underway about interest rate increases and financial stability. One thing we are watching for is a return to “Operation Twist,” where the Fed skews its purchases to the long-duration Treasury curve in a bid to slow the rise in yields.
  • On the fiscal and regulatory front, the stimulus bill is in the Senate. To make the bill more acceptable to centrist Democrats, eligibility for stimulus payments has been narrowed, giving less money to the more affluent.  The populist wing of the Democratic Party isn’t pleased but probably will go along.  It doesn’t appear that the overall size of the spending will decline, however.  The funds will shift to other parts of the bill.  In the end, we would not be surprised to see the overall bill fall to around $1.6 trillion.
    • An interesting sidelight has emerged on the state fiscal situation. In the last downturn, the recovery was hampered; state governments were forced to cut spending due to declines in tax revenues.  Politicians, like generals, tend to fight the last war.  There has been great concern that state governments would be forced to repeat the same pattern as seen in 2010-12.  However, so far, that isn’t the case.  For the most part, revenues have held up better than expected.  If the economy bounces back, it may turn out that these concerns over state cutbacks were overblown.
    • Political capital is being spent by the White House. We may be seeing the first casualty in policy triage. It looks like immigration policy is being shelved.  Although some hope that it can be revived later, in reality, there will be less political capital later on.  This looks like immigration is being sacrificed for pandemic stimulus.
    • The $15 minimum wage looks like it won’t make it either. But we would not be shocked to see a $12 level passed with some bipartisan support.
  • One of the key goals of the Biden administration’s foreign policy is to rebuild coalitions. We have our doubts this goal will work for two reasons.  First, other nations have no idea whether this goal will last beyond the current administration, so committing to it may not make much sense.  Second, one of the primary reasons foreign governments accepted U.S. hegemony is that they derived economic benefits.  The U.S. accepted large current account deficits which supported foreign economies.  The Biden administration is talking about bringing manufacturing back to the U.S. and “buy American first.”  There isn’t much incentive to join a coalition with few economic benefits.  Still, the administration has issued a preliminary document on its policy goals.
  • As we see a retreat from globalization, one glaring problem is semiconductors. We have been documenting for weeks the travails of the auto industry as it grapples with the lack of chips.  Large trucks are the latest victim of this shortage.  When one looks at the supply chain for semiconductors, one is struck by the geopolitical risk of having the world’s largest chip foundry in Taiwan.  The U.S. is talking about creating conditions to build capacity in the U.S., which is a wise move.  It will be a long-term process, one that will require the policy to remain in place for multiple administrations, something difficult to accomplish in the current political environment.
  • We are seeing increased corporate interest in single-family home rentals.
  • The Texas regulatory bodies are urged to suspend collections in the wake of the recent electricity crisis.

China:  CPC meetings dominate the news.

International news:  The U.K. plans for the post pandemic economy, and the AfD is under investigation.

COVID-19:  The number of reported cases is 115,297,267 with 2,561,937 fatalities.  In the U.S., there are 28,760,267 confirmed cases with 519,867 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 107,028,890 doses of the vaccine have been distributed with 80,540,474 doses injected.  The number receiving a first dose is 52,855,579, while the number of second doses, which would grant the highest level of immunity, is 26,957,804.  The FT has a page on global vaccine distribution.  The Axios map shows some increases in infections.


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