Daily Comment (November 13, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning and happy Friday the 13th! U.S. equity futures are rebounding after a drop yesterday. We lead off with the Fed, with a recant of yesterday’s thoughts about the two open governor positions; we also note the comments from Chair Powell in a forum of central bank leaders. China news is next, including new restrictions on Chinese investment. Pandemic news follows, and we close with Brexit news. As we promised yesterday, the Weekly Energy Update is available today after being delayed by the Veterans Day holiday. Being Friday, there is a new Asset Allocation Weekly, along with the associated podcast and chart book. Starting in January, in a bid to shorten this report, we will no longer publish the AAW at the bottom of the Daily. It will be available only as a stand-alone report but will be linked within the Daily Comment. Here are the details:
The Federal Reserve: Let’s start with a lesson we apparently forgot yesterday.
“It’s tough to make predictions, especially about the future.”
–Yogi Berra, although attributed to many others
Yesterday, we noted that President Trump would probably not fill the remaining two governor positions. We clearly spoke too soon. According to Senator Cornyn (R-TX), the two candidates could come up for a Senate-wide vote next week. Chris Waller is non-controversial; he is a Fed system economist at the St. Louis FRB and expected to be a dovish voter. Judy Shelton is another matter. She has supported the gold standard and suggested that Fed independence was unnecessary. Her previous comments would have suggested she would be an extreme hawk, but she seemed to reverse that stance when she was nominated. We view her as a political leaning governor; she would support policy accommodation under a GOP White House but propose tightening with a Democratic White House. We could be wrong—after all, we were yesterday. However, that is where her pervious comments seem to lean. So, will she get the nod? Two GOP senators, Romney (R-UT) and Collins (R-ME) have indicated they will vote against her. If all the other GOP members approve, she will pass 51-49. It behooves the Senate leadership to move quickly. Mark Kelly will be sworn in on Nov. 30 for the Arizona seat, and he would likely vote against Shelton. With two GOP senators already opposing Shelton, waiting for Kelly could put her confirmation at a tie, which could be broken by VP Pence. However, we noted in September, Senator Thune (R-SD) suggested Shelton didn’t have enough votes to be confirmed. We suspect something has changed, because Majority Leader McConnell rarely brings up a vote that he isn’t sure will prevail.
Will Shelton matter? Yes, insofar as all governors matter. They make speeches and vote on every policy decision. At the same time, Fed Chairs have had to deal with difficult governors in the past and managed to conduct policy. Dissents have become less common over time, but they used to occur often. Henry Wallich holds the record for most dissents, at 27, when he was governor from 1974 to 1986. If Shelton dissents at each meeting, it isn’t likely to change the path of policy. And once financial markets realize that she isn’t swaying policy, her comments won’t matter all that much. If she gets confirmed, look for mainstream economists to react negatively, but for markets, it’s probably not a major issue. It’s also notable that she is replacing a current term, which will end in 2024. Thus, her impact may be short. At the same time, as we have noted before, the Fed releases full transcripts of each meeting with a five-year delay. Although going through the transcripts requires a lot of reading (each meeting is around 200 to 250 pages, and there are at least eight per year), they give a clear picture of the personal conflicts that are part of any committee. If Shelton is on the committee, it should make for interesting reading in 2026…something to look forward to!
- Yesterday, the heads of the ECB, BOE and the Fed were on a panel at the ECB’s Forum on Central Banking. The consensus among the bankers is that the medium-term outlook is favorable, but the next three months could be a problem. The resurgence of the virus and the lack of fiscal action will slow growth and affect those with the fewest resources to respond. Chair Powell also noted that the pandemic will have longer-term effects that are still not clear.
- In the U.S., emergency aid programs tied to the pandemic expire at year’s end. If allowed to expire, there will likely be a negative impact on the economy.
China: Investment bans and TikTok gets a reprieve.
- President Trump issued an executive order yesterday banning U.S. investors from holding shares with ties to the Chinese military. Chinese telecom firms plunged on the news. There are 20 companies on the initial list; several other state owned firms have been added. This action by the White House is consistent with other measures designed to restrict China’s access to U.S. capital markets. We would expect a Biden administration to keep the ban in place. Investors have a year to remove the firms from their portfolios. As expected, Beijing took a dim view of the order.
- As the deadline loomed, the Commerce Department gave TikTok a reprieve, delaying implementation of the order to remove the firm’s content from the U.S. internet. The company has been granted a temporary injunction against the ban, so the Commerce Department decision likely reflected the injunction. So, for now, TikTok remains available.
- Next week’s WGR will discuss the situation with Ant Group. We note that financial regulators appear to be cracking down on excessive deb Although China’s debt situation has been on watch for years, authorities have tended to “extend and pretend,” allowing large firms, often state owned, to continue operations. It is not obvious why regulatory concern has increased, but we have noticed a drive by Beijing to emphasize stability. It may be that there are fears of financial stress that could increase unrest.
- Beijing has congratulated VP Biden.
COVID-19: The number of reported cases is 52,864,762 with 1,295,403 fatalities. In the U.S., there are 10,557,451 confirmed cases with 242,436 deaths. For the first time, new cases in the U.S. rose over 150,000 yesterday. 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 Rt data looks much like last week. Every state and territory, with the exception of Mississippi, has a reading above 1.0, meaning that infections are increasing. Maine had the worst reading.
- As the virus surges around the world, governments are reluctantly tightening social measures.
- In the U.S., several states have issued various lockdown restrictions, with Illinois perhaps being the most stringent. Governors and mayors are trying to avoid full lockdowns and widespread stay-at-home orders due to the economic fallout. Large urban school districts are contemplating the return to full on-line classes.
- In Europe, France has extended a full lockdown until the end of November. Meanwhile, the mink cull in Denmark has turned into a political disaster.
- Testing laboratories are warning that the rise in testing could lead to longer delays in getting results. Delays were a problem earlier this year; in general, a delay of five days renders testing ineffective.
- On the economic front, as mobility declines, grocers are bringing back purchase limits on some goods, primarily paper goods and disinfectants. As the exodus from urban centers increase, Manhattan landlords are making concessions to renters. In recent years, there has been a trend among builders to erect multi-generational homes. That trend has accelerated with the pandemic, as families are increasingly reluctant to put older relatives in nursing facilities, which have become vulnerable to COVID-19.
Brexit: Earlier this week, Lee Cain resigned from the Johnson government. Cain was director of communications and was rumored to become the next chief of staff. Dominic Cummings was a key advisor to PM Johnson; he has announced his exit as well. To a great extent, these resignations are part of the internal machinations of the PM’s staff, and it is impossible to separate policy from personality. The bottom line is that Cain and Cummings were hard line Brexit supporters. Their departure would give Johnson room to compromise with the EU to get a deal done. Although there is widespread rejection of this theory in comments from Johnson’s staff, we suspect that there is something to it. However, that doesn’t mean removing the hard Brexit group is the only factor. There is no doubt that personality clashes played a role. But, from a policy and market perspective, the personality issues are secondary. The exit of Cain and Cummings should be bullish for the GBP.
 Actually, if the goal is reflation, Fed independence is a hinderance. However, it is hard to square support for the gold standard and reflation.