Daily Comment (May 22, 2023)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Our Comment today opens with a short recap of the Group of Seven (G7) summit in Japan, which finished over the weekend. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including more Chinese retaliation against the U.S.’s clampdown on advanced technology flows and the latest on the negotiations over the U.S. federal debt limit.
G7 Summit: Wrapping up their annual summit over the weekend, the G7 countries (the U.S., Japan, Germany, France, the U.K., Italy, and Canada) said they will work to insulate themselves from Chinese economic coercion and block the transfer of sensitive technology to China. The statement reflects a growing realization of the way Beijing weaponizes other countries’ dependency on trade or capital flows with China, as we have described extensively in our various publications.
- Despite the tough communiques, however, President Biden said in a post-summit news conference that he wants more open lines of communication with China.
- Biden also predicted that U.S.-China relations would soon thaw, suggesting that there has been some sort of quiet diplomacy going on between the countries.
China-United States: Although President Biden hinted at the G7 summit about an imminent thaw in U.S.-China relations, the Cyberspace Administration of China said yesterday that products made by U.S. memory chip maker Micron Technology (MU, $68.17) failed its network security review and that it would bar Chinese operators of key infrastructure from buying Micron’s chips. The Chinese officials provided no details, and they didn’t say exactly which of the firm’s products would be affected. In any case, Seoul said it didn’t plan to stop South Korea’s big memory chip makers from filling the gap left by Micron, in spite of U.S. entreaties.
- The Chinese move against Micron is widely believed to be retaliation for the U.S.’s draconian restrictions on the sale of advanced semiconductors and related goods and services, which were announced last October.
- Other suspected retaliatory measures include China’s recent clampdown on foreign consulting firms operating in China and the arrests of foreign business executives in the country.
- China’s belated retaliation for the U.S. technology clampdown illustrates the U.S.-China decoupling that is gathering force, at least in the realm of technology. As the U.S. begins to focus more on China’s increasing military threat, such decoupling is likely to expand, creating significant risks for U.S. investors.
European Union-United States: Regulators in the EU imposed a record fine of $1.3 billion on Facebook parent Meta Platforms, Inc. (META, $245.64) for storing European user data in the U.S. in violation of the bloc’s privacy rules. At issue is the regulators’ belief that European user data stored in the U.S. could be accessed by U.S. spy agencies with insufficient protections. Meta said it would appeal the ruling, and the regulators said they would allow such data transfers if the EU and U.S. reach an accord on the protection of personal data.
United Kingdom: Prime Minister Sunak is facing another headache after news was reported over the weekend that last summer Home Secretary Suella Braverman tried to use her then-position as attorney general to avoid standard penalties for a speeding ticket. Sunak today will consult his independent adviser on ministerial ethics after being urged to investigate the matter. The scandal comes as Sunak continues to battle high inflation, public-sector strikes, a controversial immigration proposal, and his Conservative Party’s poor results in recent local elections.
Greece: In elections yesterday, the conservative New Democracy party of Prime Minister Mitsotakis won the most votes but not enough for a majority in parliament. Since Mitsotakis then derided the possibility of negotiating a coalition deal to form a government, it appears Greece will face a new election sometime in the coming weeks.
- Given the way that parliamentary seats would be allocated in a second vote, Mitsotakis and New Democracy stand a better chance of winning a majority in parliament in that election.
- In anticipation that the business-friendly conservatives will win a new mandate, Greek assets are trading higher so far this morning.
India: The Reserve Bank of India announced that it will take all of its largest denomination bills out of circulation by the end of September. The move, which is reminiscent of a 2016 currency reform that eliminated smaller bills overnight, has sparked fear among consumers even though the central bank offered assurances that the bills would remain legal tender until September. In fact, the large bills that are now subject to elimination were introduced amid the chaos touched off by the 2016 reform, which in turn was ostensibly aimed at undermining illicit activity. The move appears to be weighing very slightly on the value of the rupee (INR) in foreign exchange trading so far today.
U.S. Fiscal Policy: President Biden and House Speaker McCarthy have agreed to meet on Monday afternoon to try to overcome their impasse over raising the federal debt limit. However, Treasury Secretary Yellen reiterated her view that the government would be unable to pay its bills by June 1 if there is no deal to raise the limit, saying the date is a “firm deadline.” That underscores the risk that the government could default on its debt and leave many of its bills unpaid, potentially sparking economic havoc and calling into question the U.S.’s role as the foundation of the global financial system.
- All the same, we still suspect that the administration and Congress will reach a deal at the last moment and avert such an outcome.
- One key reason for optimism is that both Biden and McCarthy have already made some concessions to each other—a fact that’s easy to miss amid the political rhetoric.
- Press reports say Biden, for example, has expressed his willingness to claw back unused pandemic relief funding, tighten work requirements for some social safety-net programs, reform permitting for energy infrastructure, and freeze spending in this year’s budget.
- Meanwhile, McCarthy and his team haven’t pushed their earlier calls to undo provisions of last year’s Inflation Reduction Act and student debt relief. They also insist on increasing the budget for the armed forces, veterans, and border security.
U.S. Monetary Policy: In a Friday interview with the Wall Street Journal, Minneapolis FRB President Kashkari said he would be open to holding the Fed’s benchmark fed funds interest rate steady in June to give officials more time to assess the effects of past rate increases and the inflation outlook. Considering that other Fed officials have recently indicated they’re leaning toward at least one more rate hike in June, the statement by Kashkari illustrates how the June decision is basically too close to call at this time.
U.S. Oil Market: In a new effort to refill the nation’s Strategic Petroleum Reserve after massive sales from it last year because of the Russia-Ukraine war, the Energy Department has revamped how it will accept bids from oil companies. In contrast with its tender for fixed-price bids earlier this year, which failed because of the price risk it imposed on oil producers during the two weeks needed to evaluate the bids, the department will now request bids based on a less volatile measure of price spreads.
- If completed, the tender will result in the government purchasing about 3 million barrels of domestically produced sour crude, with more to be purchased later.
- Amid weakening demand and softer crude pricing as the economy slides toward recession, the purchases could provide some support for crude values.
U.S. Labor Market: In its annual report on foreign-born workers, the Labor Department said immigrants made up 18.1% of the labor force in 2022, the highest level ever in records dating back to 1996. Of the 164 million in the U.S. labor force (people working or looking for work), 29.8 million were born abroad, for an increase of 1.8 million from the previous year. That means immigrants accounted for more than half the increase in the labor force last year.
- The analysis suggests the increased weight of foreign-born workers in the work force reflects both the pull of strong labor demand by companies and the high level of retirements and other withdrawals from work by native-born workers.
- Amid strong labor demand and company complaints about worker shortages, the influx of foreign-born workers probably helped hold down average wage rates, potentially helping to limit inflation pressures. Nevertheless, many will likely see the rise in immigrant labor as competition for native-born workers, so the report could feed into the current backlash against immigration.