Daily Comment (November 3, 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 a slew of U.S. news ranging from a preview of today’s Federal Reserve decision on monetary policy to a new administration antitrust case.  We next share a few thoughts on various global and international issues.  We wrap up with the latest developments related to the coronavirus pandemic.

U.S. Monetary Policy:  The Federal Reserve will issue its latest decision on monetary policy today.  It is widely expected the officials will announce a tapering plan to slow and eventually end the Fed’s balance sheet expansion by around mid-2022.  Chair Powell has stressed that the benchmark fed funds interest rate would likely be kept near 0% for some time after the balance sheet has been capped, but there is still some potential for volatility in the bond market as policy decisions are announced or if investors concerned about inflation and currency debasement try to force the Fed’s hand.

U.S. Fiscal Policy:  As Democrats in Congress continue to haggle over their $1.85 trillion healthcare, education, and climate-change bill, they’ve reportedly come to an agreement on a series of measures designed to bring down prescription drug prices.

  • The agreement, backed by the White House, would:
    • Empower Medicare to negotiate the price of some drugs;
    • Penalize drug companies for raising prices faster than the rate of inflation;
    • Cap out-of-pocket drug costs for seniors at $2,000 annually, including a $35 monthly maximum for insulin.
  • The agreement will likely meet some Democrats’ demands for the bill, but the legislation will still face resistance from moderates like Senator Joe Manchin of West Virginia.  We continue to see a significant risk that no legislation will get done, at least in the near term.

U.S. Antitrust Policy:  Reflecting the Biden administration’s more stringent approach to antitrust policy, the Justice Department yesterday filed a lawsuit to block top book publisher Random House from completing its proposed $2.2 billion purchase of rival Simon & Schuster.  Random House is a unit of Bertelsmann SE (BTG4.SG, 357.00), while Simon & Schuster is a unit of ViacomCBS (VIAC, $37.37)

  • Interestingly, the Justice Department’s suit doesn’t rest on any economic harm that might be imposed on book purchasers by way of higher prices and the like.  Rather, it’s based on concerns that the combination could weaken the compensation paid to authors.
  • In any case, the suit underlines the increasing regulatory risk on companies, as some legal scholars and activists argue that antitrust concerns shouldn’t be limited to just consumer prices and other harms to consumers.

U.S. Politics:  Democrats got taken to the political woodshed in yesterday’s gubernatorial election in Virginia, and they may still lose the New Jersey governorship as well when the ballot counting is done there.  With almost all the Virginia votes counted, Republican candidate Glenn Youngkin has received about 51.0% of the vote to Democrat Terry McAuliffe’s 48.4%.

  • Initial indications suggest the Republicans benefited from a much stronger turnout of their base than the Democrats, although analysts also point to Youngkin’s success in highlighting local education issues and not associating too closely with former President Trump.
  • A key question now is how the Democrats will understand their loss and how they might adjust their strategy going forward.  A prevalent theory among analysts is that the Democrats have become too wedded to “identity politics” and other issues that resonate with highly educated, affluent, white voters in major cities, rather than the economic and cultural issues that are more salient to the legions of lower-middle-class and working-class voters that Republicans have made gains with.  In today’s populism-driven politics, that failure to adjust could help cement Republican control of the federal and state governments into the future.

U.S. Labor Market:  Most union employees at Deere (DE, $355.30) voted to reject a second, richer contract offer and continue their three-week strike against the company.  Workers at two parts plants in Denver and Atlanta, who work under a separate contract, voted to approve an offer with identical economic terms as the one that the other employees rejected.  We still think the vote to reject illustrates how many workers are now increasingly confident in their market power.

  • Potentially, that could point to further labor action, bigger wage gains, and perhaps even some additional inflation pressure in the coming years.
  • We continue to believe that today’s high inflation rate will moderate over time as supply chain disruptions get worked out and pent-up demand peters out, but tighter labor markets, increased regulation, and reduced globalization could well mean that inflation won’t fall all the way back down to the levels common before the pandemic.

Climate Summit:  On the sidelines of the COP26 summit on climate change in Glasgow, former Bank of England Governor Carney said his Glasgow Alliance for Net Zero (GFANZ) group has gotten commitments from global financial firms for $130 trillion of private capital to help achieve net-zero greenhouse gas emissions by 2050.

  • However, even some climate activists have expressed skepticism about whether the funds will really be allocated to effective climate projects over time.
  • Besides the skepticism on financing commitments, some green energy firms also face more mundane operations issues, ranging from low wind speeds to supply disruptions.

United States-Russia:  In another sign that the Biden administration is looking for ways to ease tensions with Russia so it can focus on other priorities, most notably China, CIA Director Burns today was in Moscow for a meeting with his counterpart at Russia’s Foreign Intelligence Service (one successor to the KGB) and the head of President Putin’s security council.

Japan:  For the first time since 2013, the Bank of Japan and the government’s top economic officials have reaffirmed their commitment to cooperate on achieving 2% inflation.  The move could temper market worries that the goal might be abandoned after years of below-target inflation or that stimulus might be withdrawn now that Prime Minister Kishida has been formally elected for a full term.

France-United Kingdom:  After threatening punitive measures against Britain for denying licenses to French boats seeking to fish in British waters under the post-Brexit trade deal between the U.K. and the EU, President Macron said he would delay the measures in order to “give a chance” to last-ditch talks aiming to resolve the dispute.  Macron’s action seems to have diffused the situation for now, but it still appears that the U.K. is chafing under the trade deal and will likely continue to pursue changes to it in the future.

China:  During a meeting with China’s top market regulator, Premier Li said the government needs to lower fees and taxes for businesses, particularly struggling small and medium-sized enterprises, to counter the country’s economic slowdown.

  • Tax cuts would probably be a relatively healthier way for the government to deal with the slowdown stemming from the country’s energy shortage, disruptive pollution controls, and new restrictions on the real estate sector.
  • However, as in the past, officials could eventually be tempted to roll out bigger spending and lending programs that would prolong China’s debt problems.

Ethiopia:  The government has declared a state of emergency as rebel forces from the northern Tigray Region said they were gaining ground and authorities in the capital prepared for a possible military assault.

COVID-19:  Official data show confirmed cases have risen to 247,740,899 worldwide, with 5,017,139 deaths.  In the United States, confirmed cases rose to 46,172,312, with 748,630 deaths.  Vaccine doses delivered in the U.S. now total 521,502,845, while the number of people who have received at least their first shot totals 221,961,370.  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 the latest wave of infections recedes in many countries and economic activity and prices continue to rebound, negative bond yields are becoming less common in Europe.
    • French, Irish, Dutch, and Swiss yields have all either turned positive or flirted with the line in recent weeks and months.
    • German 10-year bond yields, the region’s benchmark, are still negative but rose as high as -0.07% this week, the closest they have come to turning positive since April 2019.

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