Daily Comment (May 4, 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 yet another Federal Reserve official hammering home the message that U.S. monetary policy is likely to remain loose for as far as the eye can see. Besides that, it’s been a relatively slow news day, but we did find several tidbits from overseas that could touch on the markets today. Finally, we close with a review of the latest coronavirus pandemic news.
U.S. Monetary Policy: In remarks yesterday, New York FRB President Williams told the Fed’s party line that while the U.S. economy is likely to have a very strong year ahead, there isn’t yet an imminent need for the central bank to pull back on its aggressive levels of monetary policy support. According to Williams, “We are still far from our goals of maximum employment and price stability . . . Let me emphasize that the data and conditions we are seeing now are not nearly enough for the FOMC to shift its monetary policy stance.” The remarks underscore the policymakers’ intent to keep interest rates ultralow and asset purchases high for the foreseeable future, which we expect to continue supporting risk assets.
U.S. Financial Services Industry: In a speech yesterday, Federal Reserve Chair Powell said rules requiring banks to lend in the low-income communities where they have branches should be extended to cover all firms providing consumer credit. The remarks signal Powell’s support for efforts to overhaul the more-than-40-year-old Community Reinvestment Act to encompass non-banks that increasingly provide the bulk of the credit to individual borrowers, particularly in the $11 trillion mortgage market.
Japan: Former Prime Minister Abe urged members of his Liberal Democratic Party to re-elect his successor, Prime Minister Suga, as head of the party when his term ends in September. As Chief Cabinet Secretary, Suga has served as Abe’s right-hand man and the public face of the Abe administration since 2012, but some have speculated that a rift has emerged between the two. Suga has also come under fire for the government’s COVID-19 response. Public dissatisfaction has grown as vaccine rollouts have been slow, and the country is still struggling to stem rising coronavirus cases. Political instability at the top of the Japanese government would likely be at least a short-term negative for Japanese equities.
Germany: Police in Berlin have arrested a suspected far-right extremist who they say sent dozens of death threats to German politicians signed with the name “NSU 2.0” — a reference to a notorious neo-Nazi group from the 1990s. The case has made huge waves in Germany and rung alarm bells about the growing strength of the far right.
China-Philippines: Although Philippine President Duterte has tried to play nice with China despite its infringement on Philippine waters, it appears some members of his administration haven’t gotten the memo and have decided to push back. In a tweet yesterday, Foreign Minister Locsin wrote, “China, my friend, how politely can I put it? Let me see… O… GET THE F–K OUT” of Philippine waters in the South China Sea.
COVID-19: Official data show confirmed cases have risen to 153,632,236 worldwide, with 3,215,270 deaths. In the United States, confirmed cases rose to 32,472,596, with 577,565 deaths. Vaccine doses delivered in the U.S. now total 312,509,575, while the number of people who have received at least their first shot totals 147,517,734. 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 approximately 49,000 yesterday, almost matching the seven-day moving average of 49,209 but still much lower than the 14-day moving average of 53,686. New deaths related to the virus came in at a moderate 455. Meanwhile, while the pace of vaccinations has slowed recently, the CDC reported that more than 40% of U.S. residents are currently fully inoculated against the disease.
- The vaccine from Pfizer (PFE, USD, 39.83) will likely be approved for use in young people aged 12 to 15 by sometime next week, according to sources familiar with the process. If so, it would help keep the mass vaccination drive in the U.S. in high gear despite some recent slowing.
- In New York and New Jersey, state officials said they are lifting most capacity limits on businesses as more people get vaccinated and infections continue to decline. Capacity limits will end May 19 for retail stores, restaurants, gyms, amusement parks, salons, barbershops, offices, museums, and theaters.
- Tourist meccas like New Orleans and Las Vegas are already reporting a surge of visitors as they open up. The rebound in tourism appears to be a sign of the major snapback expected in much of the nation’s service industries, as pandemic restrictions are lifted.
- In Germany, the government has prepared legislation saying that people who have been inoculated against COVID-19 or have recovered from the disease will no longer be subject to curfews or restrictions on social gatherings beginning as early as this week. Despite concerns that the move could discriminate against younger people who are still months away from being able to get a vaccination, Justice Minister Lambrecht argued that since vaccinated people no longer present a health risk to others, the curbs on their fundamental rights must be lifted.
- As the pandemic worsens in India, officials in Africa worry they could face a similar fate. In total, Africa has received just 32 million vaccine doses, of which about 18 million have made it into people’s arms. Doses from the multilateral Covax program make up the bulk of jabs deployed so far, but supply has dried up after New Delhi blocked exports by the Serum Institute of India to battle its own outbreak.
- To justify its decision last week to deny emergency approval for Russia’s Sputnik V vaccine, a high-ranking official in Brazil’s health authority said the agency has doubts about the compound’s safety and efficacy. For example, the official inquired about the methodology used in the vaccine’s clinical trials and complained that Russia was defensive when questioned by the agency. Frustrated with the growing infection rate in Brazil, several medical groups in the country are trying to develop their own home-grown vaccines.
Economic and Financial Market Impacts
- With pandemic monetary policy responses driving interest rates lower all over the world, even conservative German savers have turned to the stock market.
U.S. Policy Response
- As anticipated, after the Fed allowed looser capital rules on U.S. banks to expire at the end of March, major institutions have been pushing large corporate clients to shift their deposits into money market funds. The benefit for the banks is that they earn a fee for managing the money funds, but the deposits are not counted in the supplementary leverage ratio that determines how much capital they need to hold.