Daily Comment (September 28, 2021)

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with a range of recent developments regarding U.S. fiscal and monetary policy.  Next, we review international news that could have an impact on the financial markets today or in the near future.  We wrap things up with the latest developments related to the coronavirus pandemic.

U.S. Fiscal Policy:  As expected, Republicans in the Senate blocked a House-passed bill that would have raised the federal borrowing limit and provided stopgap funding for the government until early December.  The main thrust of the Republican opposition to the measure was to force the Democrats to take responsibility alone for raising the debt limit.  Both parties support the stopgap spending measure.

  • The failure of the procedural vote could prompt Democrats to decouple the short-term spending measure and the debt-limit vote.  House Speaker Pelosi suggested last week that Democrats would do so, saying Congress would pass a stopgap spending measure before the end of the month to keep the government funded.
  • Despite the likelihood that the measures will be decoupled and passed separately, the brinksmanship over the coming days has the potential to unsettle markets.  Underlining that risk, New York FRB President Williams yesterday warned that the Federal Reserve would be unable to mitigate the “extreme kind of reaction in markets” that would result from a potential default on the government’s debt.
  • Indeed, bond market dynamics are already affected by the risk of a potential default.  Short-term Treasury bills most at risk of delayed payment are being sold off, driving up their yield, while investors are snapping up the dwindling supply of longer-term obligations, driving their yields down.
  • Meanwhile, at a closed-door meeting last night, it appears that House Democrats started to coalesce around a deal to pass President Biden’s $1 trillion “hard” infrastructure package, with progressive opposition weakening in response to arguments about the political realities in the Senate.  If enough progressives move, it will open a path to the immediate passage of spending for roads and bridges, with a promise of future work on climate change and other progressive priorities.

U.S. Monetary Policy:  The Federal Reserve banks of Boston and Dallas said their presidents were resigning, following reports of the two leaders’ investment trading that prompted calls for their departures and a central-bank review of its ethics rules.

  • The two banks gave different reasons for the exits.
    • Dallas Fed President Kaplan, who is resigning on October 8, acknowledged in a statement that his stock trading distracted from the Federal Reserve’s work.
    • Boston Fed President Rosengren, who will retire on Thursday, about nine months early, cited health reasons. He said in a statement that he was leaving as he had qualified for a kidney transplant to deal with a long-running condition.
  • The Fed is under intense criticism for the trading by Kaplan and Rosengren, but one important implication of the resignations is that Chair Powell may have more control over the organization than might have been expected, given that some policymakers have been far out in front of Powell’s view regarding inflation risks.  Influence over administrative personnel issues is separate from monetary policymaking.  Powell’s apparent success in pushing out Kaplan and Rosengren suggests he may still be able to keep policy accommodative, despite some policymakers’ preference to tighten policy in the near term to guard against inflationary risks.

China Evergrande:  Heavily indebted real estate developer Evergrande (EGRNG, $0.34) remains in limbo for the next few weeks during the grace period after its missed international interest payment.  The sector as a whole, however, got a boost today when the People’s Bank of China said it would support liquidity in the sector.  Rival Sunac (SCCCF, $1.72), which had been under heavy selling pressure recently as investors feared it could be the next to default, is rebounding particularly strongly today.

Germany:  Following up on the weekend parliamentary elections, the mid-sized leftist Green Party and the libertarian Free Democratic Party have emerged as the likely kingmakers, since both the main parties would likely need to ally with these two parties to form a governing coalition.  To fully leverage their position, the parties are, therefore, launching talks to determine how to bridge their policy differences and wield the greatest possible influence, regardless of which government they join.  All the same, it still looks like the process of forming a government could take until the end of the year.

France:  The center-right Les Républicains (LR) party has delayed choosing its candidate for next year’s presidential election until it can hold a primary election in December.  Party leaders hope that the divided movement will be able to coalesce behind a champion who can take on President Macron and far-right leader Marine Le Pen in the April vote.

European Union-Russia:  Hungary signed a new 15-year natural-gas supply deal with Russia’s state-controlled energy giant Gazprom.  At least in part, the move reflects Russia’s use of energy as a political weapon.  At one level, the deal means Ukraine will lose tens of millions of euros in gas transit fees.  Against the backdrop of Europe’s current energy shortage, it may also exacerbate tensions between Brussels and Hungary.

North Korea:  The North Korean military has launched at least one more short-range missile, marking their third test this month and pointing to a possible renewal of tensions on the Korean peninsula.

COVID-19:  Official data show confirmed cases have risen to 232,428,536 worldwide, with 4,758,529 deaths.  In the United States, confirmed cases rose to 43,117,906, with 690,556 deaths.  Vaccine doses delivered in the U.S. now total 471,818,715, while the number of people who have received at least their first shot totals 213,657,193.  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, 64.4% of the U.S. population has now received at least one dose of a vaccine, and 55.4% of the population is fully vaccinated.
  • In an effort to “lead from the front,” President Biden yesterday received a booster shot of the vaccine from Pfizer (PFE, $43.57).  He received the booster more than eight months after getting his second shot of the vaccine on January 11.
  • Russia has recorded 852 fatalities over the past 24 hours, marking its highest daily coronavirus death toll since the start of the pandemic.

 Economic and Financial Market Impacts

  • The federal government’s extra pandemic unemployment benefits were long considered a reason firms are having trouble finding workers.  Evidence is now accumulating in both the U.S. and Europe that shows removing those programs isn’t necessarily prompting potential employees to come off the sidelines.
  • As the pandemic eases and the economy continues to recover, landlords in New York are once again boosting rents.

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