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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities are expected to open higher this morning following reports that the Fed will likely not be withdrawing monetary support anytime soon despite the Consumer Price Index rising faster than expected in April. Today’s report starts off with a brief update on the Colonial Pipeline cyberattack. International news follows, with details about elections in Northern Ireland and Venezuela, a new conflict between Armenia and Azerbaijan, and escalation in the Israel-Palestine conflict. Economics and policy news are up next, including the debt ceiling talks, a possible end to the gasoline shortage, and the impact the semiconductor shortage will have on the auto industry. China news follows, and we close with our pandemic coverage.

Colonial Pipeline update: It was revealed on Thursday that Colonial Pipeline Company paid nearly $5 million to hackers last week to regain access to its computer network. The ransom was paid in “difficult-to-trace cryptocurrency” in exchange for a decrypting tool to help the company restore access to its computer system. So far, it isn’t clear who is responsible for the attack but President Biden has stated there is a “strong reason” to believe the attack was based in Russia, although he does not suspect that the Russian government was involved. The cyberattack on the pipeline exposes the vulnerabilities in U.S. infrastructure to attacks by opportunistic hackers and U.S. enemies. In addition, the ransom payment highlights the growing importance of semi-anonymous cryptocurrencies in facilitating criminal activity.

International news: Northern Ireland chooses a new leader, Olympic athletes are finding it difficult to find accommodations in Japan, and violence in the Gaza Strip.

• Northern Ireland’s Democratic Unionist Party will pick its new leader on Friday. Agricultural minister Edwin Poots is expected to win but he faces stiff competition with Jeffrey Donaldson, who represents the DUP in the U.K. parliament.
• The rise in COVID-19 cases may put the summer Olympics in jeopardy as hosting camps are refusing to accommodate athletes. On Thursday, Japan unexpectedly added three more prefectures under state of emergency.
• Armenia’s defense ministry complained that Azerbaijan has infringed on its territorial sovereignty. This could pave the way for more fighting between the two countries.
• Venezuela is preparing to hold regional and local elections on November 21. Parliamentary and presidential elections have not been announced.
• Violence in the Gaza Strip escalated on Friday as Israeli ground forces fired artillery into the area. Appeals for de-escalation have gone unheeded. Furthermore, the prospect of a possible Israeli invasion of the Gaza Strip is becoming more likely.

 Economics and policy: Colonial Pipeline is fully operational, Senate Democrats are considering alternatives to raising corporate and wealth taxes, and the semiconductor shortage is expected to have a more severe impact on the auto industry in the second quarter.

• The states that have suffered the most during the gasoline shortage will find some relief starting this weekend. The largest pipeline in the country is expected to resume operations over the weekend after a ransomware attack forced the pipeline to shut its operations late last week.
  • That being said, a lack of tanker trucks could prolong the shortage as there aren’t enough trucks to transport fuel to gas stations.
• Some Senate Democrats have expressed an openness to increase user fees such as gas taxes and raising money from electric car drivers as a way to pay for the infrastructure bill. The push for user fees is seen as an alternative to raising taxes on corporations and the wealthy to pay for the additional infrastructure spending.
• The semiconductor shortage is expected to cost automakers $110 million in lost revenue and 3.9 million cars in lost production. The industry does not expect to see signs of a recovery until the end of the year, and some automotive companies have warned that the second quarter could be worse than the first.
• Senate Democrats are disinclined to work with their Republican counterparts in the Senate to negotiate a new debt ceiling agreement. With the majority, Democrats have the ability to increase the debt ceiling without negotiating.
• Federal Reserve Governor Christopher Waller stated that the Fed will need to see several months of data before deciding whether to scale back monetary easing. St. Louis Fed President James Bullard shared a similar sentiment on Wednesday.

China:  Defaults for Chinese companies are rising, and China will start taxing dirty fuel.

• Mosques appear to have “disappeared” in Xinjiang as China seeks to contain separatist elements within the Uighur-dominated province. Beijing has denied taking actions to halt the practice of Islam within the country, but reporters have seen evidence to the contrary.
• Defaults on U.S. dollar-denominated debt by Chinese companies continue to put stress on China’s financial system. Last year, Chinese companies defaulted on $7.3 billion of offshore dollar debt and $22.7 billion worth of renminbi-denominated debt. This year, companies have defaulted on $3.3 billion of dollar debt. The growing debt burden puts pressure on Beijing to bail out these companies.
• China will start taxing the dirt fuel that it imports in order to curb pollution.

COVID-19:  The number of reported cases is 161,206,768 with 3,345,317 fatalities.  In the U.S., there are 32,852,998 confirmed cases with 584,487 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 337,089,765 doses of the vaccine have been distributed with 264,680,844 doses injected.  The number receiving at least one dose is 153,986,312, while the number of second doses, which would grant the highest level of immunity, is 117,647,439.  The FT has a page on global vaccine distribution.  The weekly Axios map shows rising cases in about half the country.

• The CDC announced on Thursday that anyone who has been fully vaccinated against the coronavirus, meaning those who received their last dose at least 14 days ago, can stop wearing masks or maintaining social distance in most indoor and outdoor settings.
• Following the CDC approval of the Pfizer (PFE, $40.24) vaccine for 12- to 15-year-olds, mass vaccinations for teenagers began on Thursday.
• A study published by the JAMA network and the Journal of Obstetrics & Gynecology released studies suggesting that Pfizer and Moderna vaccines are safe and effective during pregnancy.
• Several coaching and support staff for the New York Yankees tested positive for COVID-19, despite receiving the Johnson & Johnson (JNJ, $169.69) vaccine. Only one of the members showed any symptoms associated with the virus.
  • Comedian Bill Maher also tested positive for COVID-19 after being vaccinated.
• Cuba has developed its own COVID-19 vaccines and has begun administering shots before the vaccines have been given regulatory approval. The Abdala and Soberana II shots have been used for residents 60 years and older and for frontline workers.
• The president’s Chief Medical Advisor Anthony Fauci announced that schools should be able to open five days a week starting in the fall.

Extending the time between Pfizer vaccines from three to 12 weeks may boost the antibody response, according to a study released by Birmingham University. The study suggests that a longer interval between shots could reduce the need for a subsequent booster for the elderly.

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