Daily Comment (September 22, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment begins with a range of U.S. news, touching on monetary policy, fiscal policy, bond market regulation, and relations with China.  We next review the major international developments that could affect the financial markets today, including the latest information on the European natural gas crisis.  We wrap things up with an update on the coronavirus pandemic.

U.S. Monetary Policy:  The Federal Reserve wraps up its latest two-day policy meeting at 2:00 pm ET today, with a decision on interest rates and asset purchases due.  Many observers expect the policymakers to signal they will begin to taper the Fed’s bond purchases in the next few months.  That move might now be pushed off because of concerns about global financial contagion if Chinese property developer Evergrande defaults on its massive debt (see below).  In any case, Chair Powell has stressed that tapering bond purchases would not necessarily point to any hike in the benchmark fed funds interest rate in the near term.  The problem is that tomorrow the committee will also release its latest “dot plot” of economic forecasts.  If the dot plots indicate rates will be hiked earlier than anticipated, it would likely spark a renewed bout of volatility in the financial markets.

U.S. Fiscal Policy:  With less than two weeks to go before the federal government’s current funding ends on September 30, the House last night passed a measure to keep the government funded until December 3 and suspend its borrowing limit to December 2022.  The Senate should vote on the measure late this week or early next week, but Republicans have been strongly opposed to linking the two provisions, setting up the possible dual crisis of a government shutdown and a debt default.

U.S. Bond Market:  Lobby groups warn that activity in the U.S. bond market could grind to a halt at the end of this month without last-minute exemptions to an obscure 50-year-old rule that the SEC now wants to broaden beyond stocks to Treasuries and corporate bonds.  The rule change, which relates to issuer disclosures, was announced last year. Bond market professionals were apparently overconfident that it would be tweaked or they would otherwise be shielded from it.  Unless the rule is modified or trading firms are given more time to comply, the issue could feed into other bond market concerns related to inflation, Fed tapering, future interest rate hikes, and possible contagion related to Evergrande.

United States-China:  A federal team led by the Justice Department has launched a national security investigation into a proposal by Zoom Video ($278.24) to buy Five9 Software ($170.17), based on what it called concerns about the Zoom’s “foreign relationships and ownership.”  Zoom is already the subject of numerous other federal investigations related to its ties with China.  With the U.S.-China geopolitical rivalry intensifying, the new investigation could further exacerbate fears of technological and economic decoupling between the countries.

China Evergrande:  The flagship property business of Evergrande Group (EGRNY, $7.50) said it negotiated an “off-market” deal to make this week’s $35.9 million interest payment on an onshore bond, suggesting the payment may be made in kind rather than in cash.  The firm also has an $83.5 million coupon payment due Thursday on its U.S. dollar bonds but hasn’t said if it plans to make that payment.  The onshore interest payment may give the highly indebted conglomerate more time to work out what investors expect will be a lengthy and complicated restructuring.  However, we still see near-term risks of significant financial or economic impacts.

  • With concerns about contagion rising, since last Friday, the People’s Bank of China has pumped the equivalent of $43.3 billion on a net basis into the country’s repo markets, which many banks rely on for short-term funding.
  • That move may signal that the central bank is already taking steps to insulate the Chinese financial system from the effects of a possible Evergrande default.

United States-United Kingdom:  Even though some British officials this week floated the idea of the U.K. joining the U.S.-Mexico-Canada free trade pact (formerly NAFTA), it appears President Biden pushed back hard on trade issues during Prime Minister Johnson’s visit to the White House yesterday.  Most important, Biden warned Johnson not to let the U.K.-EU dispute over the treatment of Northern Ireland in the post-Brexit trade agreement result in a hard border between the U.K. and the Republic of Ireland.  The encounter appears to confirm that developing lucrative new trade relationships around the world after Brexit will be more difficult than Johnson thought.

European Natural Gas Crisis:  Soaring natural gas prices forced fertilizer plants in the U.K. to close.  One knock-off effect has been a worsening shortage of carbon dioxide, which is produced as a byproduct of those plants.  The CO2 shortage is threatening industries from healthcare to food processing, and it now appears that the shortage is spreading to the EU.

  • Separately, the International Energy Agency called on Russia to send more gas to Europe to help alleviate the energy crisis.  That makes IEA the first major international body to address claims by traders and foreign officials that Moscow has restricted supplies.
  • To the extent that Russia is perceived to be flexing its energy muscle in the crisis, it could have important implications in further souring European relations with Russia, perhaps further undermining Chancellor Merkel’s conservative party in the German elections and putting an even worse light on President Biden’s acquiescence in the completion of the Nord Stream 2 gas pipeline from Russia to Germany.

COVID-19:  Official data show confirmed cases have risen to 229,628,819 worldwide, with 4,710,758 deaths.  In the United States, confirmed cases rose to 42,415,398, with 678,517 deaths.  Vaccine doses delivered in the U.S. now total 467,249,715, while the number of people who have received at least their first shot totals 212,255,202.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • According to the latest CDC data, 63.9% of the U.S. population has now received at least one dose of a vaccine, and 54.8% of the population is fully vaccinated.
  • A study led by Pfizer (PFE, $43.92) and BioNTech (BNTX, $341.35) evaluating their vaccine in expectant mothers has been complicated by slow enrollment, delaying results that could help inform physicians about how the shots affect pregnant women and their babies.

 Economic and Financial Market Impacts

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