Daily Comment (November 5, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning! A strong jobs report has pushed U.S. equity futures higher this morning. Today’s Comment begins with U.S. economic and policy news followed by several China-related stories. International news is next, and we conclude with our pandemic coverage.
Economics and policy:
- The Joint Committee on Taxation, a nonpartisan group, estimates that the latest version of the social spending package would raise $1.5 trillion over 10 years. The analysis does not include possible revenue increases due to increased IRS enforcement. However, the score suggests the bill is relatively revenue neutral, which should increase its chances of becoming law. The House is expected to vote on the bill on Friday.
- The White House released guidelines on Thursday ordering employers with 100 or more workers to mandate vaccinations or require weekly testing by January 2022.
- The State Department approved a major arms deal with Saudi Arabia. The deal comes as a surprise given the harsh stance the President took against Riyadh on the campaign trail. As a candidate, Biden vowed to make the country a pariah. Over the last few years, Saudi Arabia has been criticized for its war in Yemen and its alleged involvement in the killing of U.S.-based journalist Jamal Khashoggi. In defense of the deal, the Pentagon has stated that the arrangement is intended to ensure that Saudi Arabia has the ability to defend itself from Iranian-backed Houthi airstrikes. It is worth noting that, although the deal has been approved, no contract has been signed.
- A pact to end the use of coal was met with resistance at the COP26 summit. The wording of the agreement was watered down to extend the deadline to discontinue coal use by 2032. Additionally, major countries including China, Australia, India, and the U.S. all refrained from signing the agreement.
- Senate Democrats are expected to meet with Federal Reserve Chair Jerome Powell to discuss his renomination. The progressive wing of the party has expressed reluctance to back his reappointment due to his previous support for loosening financial rules. Senator Elizabeth Warren (D-MA) has already stated she will not vote to support his reappointment. That being said, financial markets have already priced in a second term for Powell; thus, a rejection may have a negative impact on equities. Additionally, there are no obvious replacements if he is rejected. Fed Governor Lael Brainard, the perceived front-runner, has already received pushback from Senate Republicans who have vowed to make her confirmation process difficult. We think Powell’s chances of being reappointed are high, even without the support of Warren. As a Republican, it is likely that his confirmation likely has bipartisan support, particularly among moderates.
- Beijing announced on Thursday that it was open to negotiations on its subsidies to industrial and state-owned enterprises. The remark appears to be an olive branch to the U.S. ahead of a planned meeting between President Xi Jinping and President Joe Biden. During the meeting, the two sides will talk about deescalating trade tensions. Earlier this week, Treasury Secretary Janet Yellen stated China is expected to meet its commitment under the Phase One trade agreement. If true, it could mean that the U.S. may consider lowering tariffs that were imposed by the previous administration.
- Republican Senators introduced a bill into Congress that will seek to boost Taiwan’s military defenses. The bill comes amidst growing speculation that China will try to invade Taiwan. It has been widely reported that Taiwan is not capable of defending itself. The bill will grant Taiwan $2 billion in military aid through 2032 as long as the island meets certain criteria.
- On Friday, China imposed sanctions on three Taiwanese officials in response to the island’s growing push for international support. The sanctions will ban these officials from traveling or doing business in mainland China. Although the sanction will likely not impact these politicians, as many of them have no plans on traveling or doing business in mainland China, the sanctions do represent an increase in tensions between Taipei and Beijing.
- Chinese bonds have rallied after the People’s Bank of China injected more liquidity into the market as it deals with the country’s debt crisis. The move comes after a second real estate developing company, Kaisa Group (1638 HK, HKD 1.01), also appears to be on the brink of default.
- Regulators in China have instructed local banks to limit the sale of wealth management products due to the risk it may pose to the country’s economy. Wealth management products have been used by Chinese property developers as a source of off-balance-sheet funding. It is believed that these products helped fuel the ongoing debt crisis in China.
- OPEC and its allies refused to accelerate plans to increase oil production despite cries from other countries. The decision by OPEC not to increase production has angered the U.S., which is pushing the group to produce more oil. As a result, it is expected that the U.S. could consider releasing some of its strategic reserves and pursue ways to punish the group through antitrust laws.
- Saudi Arabia’s sovereign wealth fund is positioning itself to make investments in Chinese companies. The fund has applied for a Qualified Foreign Institutional Investor license. If granted, it will have the ability to purchase Chinese stocks directly as opposed to through a third party.
- The Japanese government has come to an agreement to provide one-off checks of $880 for each child under the age of 18. The stimulus checks appear to be Prime Minister Kishida Fumio’s first attempt to lay out his “new capitalism” agenda, which is focused on the redistribution of wealth within the country.
COVID-19: The number of reported cases is 248,757,793, with 5,032,337 fatalities. In the U.S., there are 46,335,944 confirmed cases with 751,559 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 528,775,895 doses of the vaccine have been distributed, with 426,728,092 doses injected. The number receiving at least one dose is 222,591,394, the number of second doses is 193,227,813, and the number of the third dose, the highest level of immunity, is 21,483,519. The FT has a page on global vaccine distribution.
- Coronavirus cases have started to rise again in Europe. The surge in infections has led to talk about reintroducing restrictions in order to limit the spread of the virus over Christmas break.
- The U.K. became the first country to approve the COVID-19 antiviral pill developed by Merck (MRK, $90.54) on Thursday. Pfizer has also developed its own pill but is currently waiting for review.