Daily Comment (November 1, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning, happy Monday, and welcome to November!  It’s going to be a busy week.  The ISM manufacturing data is out this morning.  The FOMC meets this week and will likely announce its tapering plans.  We may also get a vote on the budget and infrastructure package this week.  COP26 kicks off today.  Our coverage begins with the international roundup, which previews the COP26 and recaps the G-20 weekend meeting.  Economics and policy are up next, with inflation and central banks leading the headlines.  China news follows, and we close with the pandemic update.

International roundup:  The G-20 met over the weekend, and COP26 starts today.

Economics and policy:  The budget and central banks lead the news.

  • There is rising optimism that a vote might come soon on the budget and the infrastructure package. Negotiations have continued to include drug cost containment.
  • Financial markets around the world are pricing in central bank tightening. We are also seeing the yield curve flatten, suggesting markets expect the central banks to step in and raise rates; this action will slow economic growth.  The latest jump in rates was seen in Australia, where the central bank decided not to defend its previous yield curve control measures, leading to a rapid rise in interest rates.  The 3-year Australian sovereign has moved from 20 bps to 100 bps in the past month.  The Bank of Canada recently surprised the markets by abruptly ending its QE.
    • The consensus appears to be that the markets will force the central banks to raise rates, and policy tightening will increase the risk of recession. This is seen by the tumult in short-term parts of the yield curve and the lack of reaction on the long end.  We are still not convinced that the Fed will bow to market pressure.  Powell still wants to get reappointed to Chair, and raising rates won’t help with that goal.  But, for now, that is the market’s position.
  • A key element to the market’s position is the persistence of inflation. Wage pressures are unrelenting.  Much of the low inflation of the past 40 years was based on wage suppression through offshoring, automation, and flexible scheduling (gig work).  The ride-sharing companies are forced to lift pay to attract workers.  Since these companies are not profitable anyway, the business case for these firms looks rather shaky.  The loss of baby boomers to retirement appears to be a key factor in tightening labor markets.
  • One of the more interesting op-eds from the weekend comes from the junior senator from Missouri, Josh Hawley (R-MO). His premise is that global supply chains are broken, and something akin to industrial policy will be required to fix them.  This means reshoring production and using domestic content rules to ensure that most things are produced in the U.S.  The industrial policy used to come from Democrats.  We also note that recent comments from Sen. Rubio (R-FL) suggest the GOP should abandon “big business” and focus on the working class.  Such proposals have been circulating for some time, but the fact such ideas are coming from GOP senators shows party constituents are in flux.
  • Last week, natural gas prices in Europe fell on reports Russia was going to boost production. However, we note that Russia reversed the flow of a natural gas pipeline to Europe, which led to a withdrawal of gas from the EU.

China news:  PMIs were soft, and real estate remains a worry.

COVID-19:  The number of reported cases is 246,815,047, with 5,001,932 fatalities.  In the U.S., there are 45,971,267 confirmed cases with 745,836 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 518,696,735 doses of the vaccine have been distributed, with 422,070,099 doses injected.  The number receiving at least one dose is 221,520,153, while the number receiving second doses, which would grant the highest level of immunity, is 192,453,500.  For the population older than 18, 69.6% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

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