Daily Comment (October 28, 2021)

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.

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.
  • 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.

Crypto:  The SEC spikes leveraged bitcoin ETFs for now.

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.

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