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

[Posted: 9:30 AM EDT] | PDF

Good morning!  It’s a big day today.  Q3 GDP is out (quick take—the data was weaker than expected, with very weak investment and a larger drag from net exports); we cover it in detail below.  The ECB meeting is also today.  As expected, there was no change in policy, but the European bank is getting out of step with the rest of the world.  For example, the Bank of Canada surprised everyone by (a) abruptly ending its QE program and (b) signaling rate hikes as early as Q2 2022.  Oil execs are on Capitol Hill today.  Meanwhile, markets are mixed.  U.S. equity futures are trending higher, while oil prices are in retreat.  Our coverage begins with the ECB.  Economics and policy are next.  China and international news will follow.  We close with Crypto and pandemic news.

The ECB:  Policy, as expected, didn’t change, but the leadership of the bank is facing increasing pressure to tighten credit.  It is, like the Fed, arguing that the inflation rise is temporary.  Market reaction has been muted, suggesting there were no surprises in the news.

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

• The White House presented a “framework” to move the budget and infrastructure plan through Congress. We will be watching to see if it is enough.  Major progressive goals are falling out of the bill; paid leave is the latest proposal to be excluded.  Progressive anger is rising, and we are still skeptical that a deal is in the offing.  The odds are that we are still talking about this in November.
• Although Chair Powell has implemented new trading guidelines for the FOMC members, Congress is considering a law that would enforce a financial penalty if the rules are violated.
• President Biden has seen his approval ratings falling since summer. Confidence in his ability to engineer a strong economic recovery is declining.
• One standard answer to low pay is that workers should get training to make themselves more valuable. It seems that workers are taking that message to heart, with interesting consequences.  There is a surge in job interest in IT, media, civil engineering, and software.  On the other hand, nobody wants to work in childcare, restaurants, warehousing, and home health areas.  We appear to have forgotten the wisdom of Judge Smails.  If this trend continues, those undesirable jobs will either need automating or generate higher wages.

China news:  More on the reaction to the hypersonic missile test, the real estate situation, and shortages.

• General Milley, chair of the Joint Chiefs of Staff, publicly compared China’s recent hypersonic test to a near-“Sputnik” moment. The Chinese test continues to reverberate, with the U.S. intelligence community being caught off guard by the scope of the Chinese test.  Calling the test a Sputnik moment will trigger memories of the U.S.S.R.’s satellite launch in 1956 that also caught the U.S. by surprise and launched a scramble by the U.S. to catch up on science and missile technology.  If this characterization holds, look for defense budgets to be expanded in the coming years.
• We are starting to hear rumbles about debt restructuring for China’s troubled real estate industry. This outcome is to be expected.  There are assets available but not enough income to service the debt.  Lowering the debt service is a time-honored way to address the problem if it is a liquidity issue.  If the problem is solvency, restructuring is futile.  Caixin published an editorial calling on the government to maintain its crackdown on the sector.
• Inflation is a key factor in Chinese history. The Nationalist government failed, in part, due to runaway inflation.  Tiananmen Square coincided with a spike in price levels.  The Xi government, acutely aware of history, likely understands this issue.  We are watching a number of developments on the price front.  One-way authoritarian regimes deal with higher prices is to prevent them from being published.  That appears to be occurring in the coal industry.  However, the lack of price transparency will likely lead to a cession of trading, not lower prices.  When households face higher prices, they often “trade down” in their purchases; beef gives way to pork.  One way that is often used is to reduce protein consumption and eat more vegetables.  However, prices on these items are soaring as well.  The risk of unrest is rising.  The other sensitive commodity is gasoline. Reports of shortages are emerging, which will exacerbate the tensions.
• The EU has been reluctant to press against China. Much of this hesitancy is due to Germany’s massive investments in China.  However, there is some evidence that German industry is becoming jaded with China, too.  If so, this development could pave the way for a tougher EU stance on China.
  • A recent trip from a Taiwanese official to Brussels has angered Beijing.
• One issue we constantly monitor is the disconnect between the U.S. business sector and the political class in China. The former tends to want to maintain open and friendly relations; the latter has moved to an adversarial position.  Although it’s not a foregone conclusion who will win out, the odds favor a decoupling.  However, that isn’t stopping China from trying to use the differences as a wedge to improve its position.  A recent meeting to woo U.S. chip firms to build capacity in China is an audacious example of this situation.
• The FBI raided the U.S. offices of PAX Technology (PXGYF, USD, 1.00), a Chinese firm that manufactures point-of-sale devices. The investigation appears to be examining data transfers of purchasing information.
• China’s foreign direct investment is often criticized by foreign host nations because Beijing usually imports Chinese workers to build the project instead of using local labor. Apparently, it’s no bed of roses for the Chinese workers either.

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

• The European Court of Justice is accessing a €1.0 million per day fine on Poland until it complies with a court ruling, which will change how Warsaw oversees its judiciary. The EU will be able to collect the payments by reducing transfers to Poland.  Evidently, Chancellor Merkel’s policy of avoiding confrontation didn’t hold.
• France and the U.K. are having yet another spat concerning fishing rights. Both sides are making threats.
• Portugal’s minority government has failed. Elections will be coming soon.
• The recent flare-up over diplomats in Turkey is having longer-term effects. Erdogan remains mercurial.  He still wants U.S. warplanes but feels he doesn’t need to cooperate with Washington.
• U.S. intelligence agencies warn that the U.S. could face terrorist events emanating from Afghanistan.

Crypto:  The SEC spikes leveraged bitcoin ETFs for now.

• Although the current bitcoin ETF has been very popular, the SEC is, for now, delaying the approval of leveraged products.
• The CFTC looks to increase its policing of the crypto products.
• In related news, global regulators are backing tougher money laundering rules related to crypto transactions. Crypto has become the currency of choice for nefarious activities.

COVID-19:  The number of reported cases is 245,179,357, with 4,975,680 fatalities.  In the U.S., there are 45,705,087 confirmed cases with 741,242 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 507,637,305 doses of the vaccine have been distributed, with 416,154,424 doses injected.  The number receiving at least one dose is 220,936,118, while the number receiving second doses, which would grant the highest level of immunity, is 190,990,750.  For the population older than 18, 69.1% of the population has been vaccinated.  The FT has a page on global vaccine distribution.  The Axios map shows that infection rates are falling across most of the U.S.

• Although vaccines have gotten most of the media’s attention, anti-viral treatments are also critically important. It is abundantly clear that vaccines won’t prevent infections.  There is strong evidence they reduce hospitalization, but people are still getting sick.  Having treatments to reduce the impact of infection will move us further along in the process of leaving the pandemic and entering the endemic phase.
  • The antidepressant fluvoxamine has shown promise in reducing hospitalizations. The drug is inexpensive and could be attractive to the developing world.
  • Merck (MRK, USD, 81.54) has indicated it will grant licenses for molnupiravil at no cost to developing nations.
• China has maintained a “zero tolerance” policy on COVID-19, which has led to rolling shutdowns across the economy. We expect the policy to be maintained through the Winter Olympics, which are 100 days away.
• Germany is likely to end its national emergency related to the pandemic at the end of November.
• New studies indicate that meatpackers were much harder hit by the pandemic.
• We continue to monitor the externalities of the lockdowns. The most recent insight is that lockdowns increased smoking.

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