Daily Comment (November 18, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Our Daily Comment today opens with the latest news regarding the U.S. presidential election and transition.  In sum, all trends in terms of legal challenges and transition procedures appear to be moving in favor of Vice President Biden.  We also note a number of policy developments, including new difficulties concerning Judy Shelton’s nomination to the Federal Reserve’s Board of Governors.  We end with the latest developments surrounding the coronavirus pandemic.

U.S. Presidential Election:  President Trump has fired Chris Krebs, the top U.S. election security official, after he contradicted the president by saying the November 3 election had been the “most secure” in history.  Separately, the Wayne County Board of Canvassers in Michigan unanimously certified Vice President Biden’s win in the area around Detroit after an initial deadlock on the decision.  Finally, the Pennsylvania Supreme Court dealt another legal setback to the Trump campaign by ruling that the city of Philadelphia allowed ballot observers to watch the vote count in accordance with election law.  The ruling demonstrates how the Trump campaign is struggling to come up with evidence of significant election irregularities that can hold up in court.  With every such ruling, it is becoming ever more certain that Vice President Biden will be inaugurated in January as scheduled.  That certainty, in turn, should buttress the financial markets, at least in the near term.

U.S. Presidential Transition:  As the Trump administration continues to withhold information and resources from President-elect Biden, some national security officials are considering unofficially meeting at off-site locations with members of Biden’s team and providing unclassified information, which they would be allowed to do.  Separately, Biden named several members of his White House staff, including:

  • Jen O’Malley Dillon, Biden’s campaign manager, as his deputy chief of staff.
  • Mike Donilon, a chief strategist on the campaign, as a senior adviser to the president.
  • Steve Ricchetti, Biden’s campaign chairman, as a counselor to the president.
  • Rep. Cedric Richmond, a national co-chair of the Biden campaign, as a senior adviser to the president and director of the White House Office of Public Engagement.

U.S. Federal Reserve:  Faced with a likely vote against President Trump’s nomination of Judy Shelton to the Fed’s Board of Governors due to some Republican senators being out sick with COVID-19, Senate Majority Leader McConnell postponed the vote until later in the week.  However, even if the missing legislators are back by then, the confirmation could be scuttled if only one additional Republican defects on top of the three that have already declared they will vote against Shelton for her unorthodox beliefs regarding monetary policy.

United States-China:  Republicans on the Senate Foreign Relations Committee today will release a report recommending that the U.S. work more closely with European partners, the United Nations, and other market-led democracies in order to counter China’s rise and malign international behavior.  Since that strategy dovetails well with Vice President Biden’s approach, it suggests at least a modest rejuvenation of the U.S.’s traditional allied approach to international challenges.  However, because of the U.S. population’s continued preference to step back from the country’s hegemonic role, it’s not clear how broad or how far such a new system of alliances can go.

Israel-Syria:  The Israeli military said it struck Iranian and Syrian military targets in Syria after Iran-backed fighters placed improvised explosive devices on the fence separating Israel and Syria.  As always when there is military action in the oil-producing region, the risk of a widening conflict that could disrupt oil production may give a boost to global crude prices today.

COVID-19:  Official data show confirmed cases have risen to 55,769,818 worldwide, with 1,341,209 deaths.  In the United States, confirmed cases rose to 11,361,394 with 248,707 deaths.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Newly confirmed U.S. infections totaled 161,934 yesterday, while hospitalizations rose to 76,823.  Those in intensive care units also remained high, as did deaths.  The new wave continues to push various states toward tighter restrictions ranging from mask mandates to the closure of some businesses, although the lock downs so far remain less stringent than during the first wave in the spring.  Similar trends continue in much of Europe, with a few exceptions like Norway and Finland.
  • With additional data on their experimental vaccine now in hand, Pfizer (PFE, 36.04) and BioNTECH (BNTX, 86.93) said the compound was 95% effective and produced no safety issues.  According to the report, the vaccine offers protection against both mild and severe infections, and it’s 94% effective in older populations that are at greater risk from the disease.
    • The companies said they will apply to the FDA for emergency use authorization for the vaccine “within days.”
    • While the Pfizer/BioNTECH compound still has some ease-of-use disadvantages compared with the shot under development by Moderna (MRNA, 93.15), the additional data should bolster optimism about the vaccines, even as concerns about resurgent infections cloud the short-term outlook for the economy.
    • Naturally, the vaccines aren’t just boosting investor optimism about longer-term economic prospects, but also about the pharmaceutical firms themselves.  However, one cautionary note is offered by South Korea, which revealed that it will push off signing contracts for the new vaccines until it can get better pricing.  That serves as a reminder that some Asian countries that have long since gotten the virus under control may not be large, lucrative markets for the drug makers.
  • A group of developing countries, led by South Africa and India, said they will press at the World Trade Organization this week to free COVID-19 vaccines from patent protections, so they can be more accessible and affordable for poor countries.  The proposed waiver pits the developing nations against the U.S., the European Union, Japan, and other wealthier countries, as well as Western pharmaceutical companies, which say respecting intellectual property rights is key to promoting the rapid development of the vaccines.

 Economic Impacts

  • With the Fed pinning interest rates close to 0% and the budding economic recovery pushing inflation higher in recent months, “real” yields in the U.S. have fallen deeply into negative territory again, prompting increasing demand for high-yield bonds and pushing spreads back down to levels last seen in February.  Looking forward, however, trends in the market for TIPS suggest investors still expect inflation to remain under wraps in the longer term, reflecting not only the disinflationary impacts of the virus but also structural issues like slowing population growth.  The ten-year break-even inflation rate in the TIPS market now stands at approximately 1.72%, nearly the same as in February.
  • With China being first in and then first out of the pandemic crisis, and with its strongly rebounding economy as the U.S. and other major Western countries face a resurgence in infections, foreign investors are plowing money into the Chinese economy.  Official data show foreign direct investment in China rose in October for the seventh straight month, jumping 18% year-over-year to approximately $11.8 billion.  While that number is significant in itself, the overall trend also suggests that once the pandemic is a thing of the past, China will have improved its global economic and geopolitical position at the expense of the West.  In turn, that will make any effort to roll back China even more difficult and costly than it would have been before.

 U.S. Policy Response

  • In an online event yesterday, Fed Chair Powell said that the resurgence of the coronavirus poses an important risk to the economy in the months ahead, and that it was too soon to say how a potential vaccine would change the outlook.  In Powell’s view, the recent news about successful vaccine trials was “certainly good news, particularly in the medium term, [but] in the near term there are significant challenges and uncertainties.”
  • Democratic leaders in Congress have sent a letter to Senate Majority Leader McConnell requesting that negotiations on another coronavirus relief bill restart this week after months of stalemate.  However, McConnell is even more opposed to a large new relief package than Treasury Secretary Mnuchin, who is now largely sidelined from the negotiations because of President Trump’s apparent reelection loss.  Prospects for a major new bill, therefore, remain questionable in the near term.

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