Daily Comment (November 22, 2021)

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

[Posted: 9:30 AM EDT] | PDF

N.B.:  HOLIDAY SCHEDULE –  The Daily Comment will go on hiatus after Tuesday’s report and will return on Monday, November 29.  A Weekly Geopolitical Report will be published today, and the next report will be available on December 3.  There will be no Asset Allocation Weekly Report or podcast this Friday; it will return next week.  There won’t be a Weekly Energy Update report either.   It will return a week from Thursday. 

From all of us at Confluence Investment Management, have great Thanksgiving. 

Good morning and happy Monday!  We have breaking news; Fed Chair Powell has been renominated (see below).  Equity futures were higher before the news and have moved to new higher levels in the aftermath.  Our coverage begins with comments on the renomination.  Up next is China news.  Economics and policy come next, with cyber news to follow.  The international roundup comes after, and we close with the usual pandemic update.

Fed nominations:  The president has been quite deliberate in making a decision on the fate of the FOMC.  But breaking reports indicate that the president will renominate Jay Powell as Chair and Lael Brainard as Vice-Chair.  We note Brainard was named Vice-Chair, replacing Richard Clarida, meaning the Quarles position of Vice-Chair for supervision remains open.   The early market reaction appears positive; equity futures and Treasury yields are up.  We also note the dollar is up as well, while commodities have reacted negatively to the news.

Although left-wing populists wanted to replace Powell, in our view, President Biden simply doesn’t have the political capital to make that move.  Replacing Powell, who is quite dovish, would have been difficult, whereas even with progressive opposition, Powell will likely breeze through renomination.  He cultivates relations on Capitol Hill and is quite popular.  This means that Biden has two governor open positions to fill on the FOMC.

China news:  Lots of news on semiconductors, and there was an apparent prisoner swap last week.

  • A number of stories are circulating about semiconductor chips.
    • A South Korean firm, SK Hynix (000660, KRW, 107,500), had planned an overhaul to its chipmaking facility in Wuxi, China. The plant, which makes memory chips, wanted to improve the efficiency of the facility, but U.S. pressure has led the company to reconsider.  One worry was the company was considering using some of the leading-edge lithography machines from ASML (AMSL, USD, 857.17)[1].  The U.S. is uncomfortable with China having access to these advanced machines.
    • AMSL expects to see $2.3 billion of sales to China this year. It will be interesting to see how its sales to China will fare in the future.
    • Intel (INTC, USD, 49.52) has decided not to take over a GlobalFoundries (GFS, USD, 62.11) abandoned chip plant in Chengdu. It is a bit tone-deaf to see how the company thought this was a good idea.  The U.S. pressured Intel to abandon the project.
    • The Chinese firm SMIC (0981, HKD, 22.20) says the lack of semiconductor talent will undermine China’s goal of self-sufficiency.
  • Although it wasn’t necessarily advertised or discussed, it appears that a prisoner swap of sorts occurred. Daniel Hsu, who has been blocked from leaving China for more than four years, was apparently swapped for seven Chinese nationals who were convicted of crimes in the U.S.  The administration continues to insist that there was no swap per se, but just before Xi and Biden spoke last week, the aforementioned people returned home.
  • China has started a new anti-monopoly bureau. One characteristic of bureaucracy is regulatory capture.  The sector being regulated eventually gets control of the regulator.  When governments want to overcome capture, they sometimes just start a new regulatory body.  That may be the case here.
  • China has downgraded its relationship with Lithuania over the latter’s warning relations with Taiwan.
  • As the U.S. continues to investigate China’s hypersonic missile test from last summer, they have found that Beijing has made very important and unexpected strides in the development of the technology.
  • Peng Shuai, the Chinese tennis player who seemed to disappear after being linked to a sex scandal tied to a senior CPC member, has resurfaced. It is still unclear how safe she is.
  • Self-imposed austerity is being touted by “young Chinese,” at least according to state media.

Economics and policy:  Inflation dominates the newsflow.

Crypto news:  Hackers are apparently getting mobile phone numbers and using them to drain accounts of cryptocurrency.  Given the nature of cryptocurrencies, there is little hope of recovering the asset.  There has been a large shift into stablecoins, which may suggest crypto investors are looking for safety.

International roundup:  The U.S. warns of Russian activity, Modi backs down with farmers, and elections were held in Chile, Bulgaria, and Venezuela.

COVID-19:  The number of reported cases is 257,674,519, with 5,153,373 fatalities.  In the U.S., there are 47,731,237 confirmed cases with 771,118 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 566,964,025 doses of the vaccine have been distributed with 451,453,834 doses injected.  The number receiving at least one dose is 230,298,744, while the number receiving second doses, which would grant the highest level of immunity, is 196,284,442.  For the population older than 18, 70.9% of the population has been fully vaccinated, with 59.1% of the entire population fully vaccinated.  The FT has a page on global vaccine distribution.  In the U.S., 2021 fatalities from COVID-19 surpassed levels seen in 2020.

   View PDF

[1]  An in-depth look at AMSL can be found here.