Daily Comment (October 25, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday, the last in October.  Risk markets are trending higher this morning, with WTI moving over $85 per barrel.  Much of the country is being rocked by wild weather.  Anyone watching the late NFL game saw two teams dealing with torrential rain.  California, which has been dealing with drought, is now facing heavy rains that are causing mudslides.  In Missouri and Illinois, the late evening was all about tornadic activity and 20o temperature swings.  The northeast is preparing for an early season nor’easter.  Our coverage this morning begins with economics and policy.  We update the latest on the budget and discuss the upcoming FOMC meeting.  China news is next.  Real estate and defense are front and center.  The international roundup follows, with Turkey and Poland leading the news.  We then look at crypto; the new ETF and Tether are the focus. We close with our regular pandemic coverage.

Economics and policy:  The budget and the Fed lead the news.

  • Budget negotiations continued over the weekend, and the Democratic leadership says they are “close” to a deal. A “billionaire’s tax,” which would include a version of a wealth tax, is apparently being discussed.  The budget is being pared back; the current “talk” is around $2.0 trillion, down from $3.5 trillion earlier.  This report details the current state of the negotiations, including what is still in the mix and what has been pared or cut out completely.
  • The FOMC meets on November 3, and it looks increasingly like the central bank will announce tapering. Recent comments from Chair Powell were more hawkish than usual. He admitted this transitory inflation talk no longer reflects the current situation.  Turning hawkish now won’t help him in his renomination efforts, but we are fast approaching the point where the president can nominate a replacement.  If Powell is going to be replaced, the new chair nominee will need to be named in the next three weeks or so.
  • In Europe, the energy crisis continues. The latest nation to face problems is Moldova, which has declared a state of emergency due to the lack of supplies.  Russia has been pressuring this country for years and is apparently using Europe’s natural gas crisis as a lever to gain additional influence.
  • Inflation is a growing worry; companies increasingly signal that their costs are rising fast and may outstrip their power to pass the increases to consumers. If so, earnings could be adversely affected next year.  So far, though, companies are still passing on price increases.
  • Although the level of workers on strike is still low relative to history, the numbers are rising. President Biden has not publicly supported the labor actions.  The most likely reason he has been reticent is that the strikes add to inflation pressures.  Wage pressure is expected to remain elevated.
  • The supply chain problems are well known, but we noticed an interesting bit of news. Local regulations limited how high containers could be stacked in California, exacerbating the supply problem.  A recent Twitter blast seems to have led some localities to temporarily relax the rules, adding storage capacity.
  • There has been an uptick in hacking activity originating from Russian crime groups. Official Russian cybersurveillance activity has also increased.

China news:  Real estate and defense are in the headlines.

  • Last week, we noted one way we know that China was getting serious about bringing their property sector under control would be to implement a property tax. Politically, a property tax would affect nearly anyone from the middle class to the wealthiest, a group that usually has some degree of influence.  It looks like the Xi regime is floating a larger trial balloon on this issue and is something we will be watching carefully in the coming months.
  • On the defense front, the fallout from China’s summer test of a hypersonic missile continues to resonate. This system would seriously undermine U.S. antimissile defenses and potentially change the balance of power between the two nations.  According to reports, China is also working on an anti-satellite system that would attach to the satellite’s boosters and could disable it at will.
  • General Secretary Xi gave a talk that clarified the “common prosperity” mandate. It appears more about taxing the rich than giving money to the poor.  The “iron rice bowl” policies of the past tended to bring low productivity, something that Xi likely wants to avoid.  On the other hand, he also wants to curb the power of entrepreneurs.
  • Evergrande (EGRNF, USD, 0.36) has reportedly resumed working on some projects. It isn’t clear if the firm has found financing to continue or if this is a publicity action taken to reassure investors.
  • U.S. intelligence agencies are warning firms in biotech and AI that Chinese intelligence is targeting these industries. China is reportedly seeking to gather information from American firms, while Beijing denies similar access for U.S. firms.
  • Tesla (TSLA, USD, 909.68) is reportedly helping Chinese auto battery makers get access to the U.S. EV industry.
  • China has passed a new law that will give it expanded powers to police its land borders. This may coincide with the situation in Afghanistan, raising fears of refugee flows.

International roundup:  Turkey and the EU lead today’s news.

Crypto:  Investors should exercise caution with the new ETF, and stablecoins are a cause for concern.

COVID-19:  The number of reported cases is 243,780,679, with 4,950,324 fatalities.  In the U.S., there are 45,444,779 confirmed cases with 735,941 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 503,493,015 doses of the vaccine have been distributed, with 413,645,478 doses injected.  The number receiving at least one dose is 220,351,217, while the number receiving second doses, which would grant the highest level of immunity, is 190,578,704.  For the population older than 18, 68.9% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

   View PDF