Daily Comment (May 11, 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 the latest on the Colonial Pipeline ransomware hack.  We then turn to a variety of news items relating to the global energy industry, international relations, eurozone monetary policy, Chinese population data, and the Israeli-Palestinian conflict.  We end with the latest developments on the coronavirus pandemic.

Colonial Pipeline Hack:  U.S. cybersecurity officials said they have been investigating the DarkSide ransomware used in the Colonial Pipeline hack since last October and that it constitutes a commercial-style “software as a service” model.  In other words, DarkSide sells the right to use the ransomware to other criminal groups, who then share any proceeds from its use with the DarkSide developers.

  • It remains unclear whether Colonial has paid or is planning to pay the hackers to release the company’s data.  Biden administration officials have opened a debate on how companies should handle such ransom attacks in the future.  Of course, the Colonial hack will also invigorate other industry-led efforts to harden companies’ cyber defenses, as outlined here.
  • Meanwhile, Colonial said it is working on a plan to phase operations back in by the end of the week.  If the pipeline remains substantially shut beyond that, there would be an increased chance on the East Coast and elsewhere of panic buying or significant price hikes for gasoline and other refined products.

Global Energy Industry:  The International Energy Agency today issued a report showing renewable power capacity grew at its fastest pace this century in 2020, with a rise of more than 45% from the prior year.  The increase of 280 gigawatts was driven partly by a rush to complete projects before government subsidies elapsed in China, the U.S., and Vietnam.  All the same, the data illustrate the extent to which the build-out of renewable power capacity is now well entrenched and has become a phenomenon that investors probably can’t ignore.

  • According to the IEA, renewables were the only energy source for which demand increased in 2020, with COVID-19 lockdowns hitting consumption of all other fuels as government restrictions shut factories, grounded planes, and kept people at home.
  • The agency also raised its 2021 and 2022 capacity growth forecasts by around 25%, with an addition of 270 gigawatts in capacity expected this year and 280 gigawatts next year.

United States-Japan:  Sources say President Biden has chosen Rahm Emanuel to be the next U.S. ambassador to Japan.  A close confidante of the president, Emmanuel is a former Illinois congressman, mayor of Chicago, and chief of staff to President Obama.  His nomination, therefore, would resurrect a U.S. tradition of sending influential former lawmakers to Tokyo, which Japanese leaders have appreciated because of their perceived gravitas and direct access to the White House.

United States-Iran:  In the third such incident in the last five weeks, a U.S. ship was forced to fire warning shots against a swarm of Iranian fast-attack boats that were harassing it in the Persian Gulf yesterday.  The Iranian moves are likely an effort to pressure the Biden administration for concessions amid talks in Vienna over restarting the 2015 deal limiting Iran’s nuclear program.  Even though none of the incidents so far has resulted in damage, the aggressive moves are risky and could lead to bloodshed that seriously escalates into a crisis, in which case global oil prices would likely spike.

Eurozone:  Ollie Rehn, the chief of the Finnish Central Bank and a board member of the ECB, said in an interview with the Financial Times that the ECB should follow the lead of the U.S. Federal Reserve by accepting an overshoot of its inflation target to make up for years of sluggish price growth.  In the interview, Rehn argued that changes in the eurozone labor market and the world economy had weakened wage inflation pressures, meaning lower levels of unemployment wouldn’t necessarily spark rapid inflation.  Although it’s not clear whether the ECB would take such an explicit stance as the Fed, the argument by Rehn offers additional evidence that monetary policymakers around the globe may tolerate higher inflation and hold interest rates lower for longer than investors envision.  Indeed, Isabel Schnabel, an executive director at the ECB, separately sought to soothe concerns about an expected increase in German inflation above 3%, saying such a rise was unlikely to cause a tightening of monetary policy.

China:  After an unusual delay, the government finally released the results of its 2020 census and said the country’s population grew to 1.41 billion last year.  However, the annual increase was marginal, and the data show that the country’s population growth rate averaged just 0.6% per year over the last decade (essentially matching the U.S. growth rate).  As in major economies, the culprit to the population slowdown has been a steep drop in births.  Falling birth rates are also pushing up average ages around the world, which will tend to retard economic growth and inflation over the longer term.

Israel:  Apparently reacting to an Israeli-Palestinian housing dispute, Palestinian demonstrators have been rioting in central Jerusalem, and Hamas forces have fired rockets into Israel.  In response, Israeli security forces are clamping down on the rioters, and Israeli warplanes are attacking Palestinian sites in the Gaza Strip.

COVID-19:  Official data show confirmed cases have risen to 159,031,885 worldwide, with 3,306,038 deaths.  In the United States, confirmed cases rose to 32,744,471, with 582,162 deaths.  Vaccine doses delivered in the U.S. now total 329,843,825, while the number of people who have received at least their first shot totals 152,819,904.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic and Financial Market Impacts

  • As further evidence that the post-pandemic inflation surge is gathering force, China’s April producer price index (PPI) was up 6.8% year-over-year, beating expectations and accelerating from a rise of 4.4% in the year through March.  In fact, the increase was the strongest in more than three years.  So far, however, wholesale inflation in China hasn’t yet had a large impact on consumer inflation.  The April Consumer Price Index (CPI) was up just 0.9% year-over-year, for its strongest gain in seven months.
  • Soaring commodity prices and supply shortages have driven up shipping costs as well.  The Baltic Dry Index, which tracks rates for the three largest classes of ships, has risen to its highest level in more than a decade, soaring over 700% in the last year.

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