Daily Comment (September 29, 2021)

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

[Posted: 9:30 AM EDT] | PDF

We open today’s Comment with the latest brinksmanship in Congress over the federal government’s debt limit and budget, along with a note on Federal Reserve Chair Powell’s prospects of being reappointed to a second term later this year.  We next turn to international news, including the selection of a new leader in Japan and the latest on Evergrande’s debt issues in China.  We close with an update on the coronavirus pandemic.

U.S. Fiscal Policy:  Political maneuvers in Congress continue to stymie efforts to raise the federal debt limit and provide stopgap funding for the government.  Just a day after Senate Republicans blocked a House-passed bill that would have raised the borrowing limit and provided stopgap funding until early December, Senate Majority Leader Schumer yesterday sought unanimous consent to move straight to a final vote on a simple debt-limit increase.  That maneuver would have allowed Democrats to raise the ceiling on their own with just a majority vote.  However, Senate Minority Leader McConnell objected, blocking the effort.

  • In testimony before the Senate Banking Committee, Treasury Secretary Yellen warned that the government would be unable to pay its bills beginning October 18 if the debt limit is not increased.
  • The U.S. faces an estimated $20 billion in Social Security payments on October 20, along with around $6 billion in individual tax refunds, according to forecasts by the Bipartisan Policy Center. It faces another $49 billion in payments through October 29 and then an additional $80 billion in payments on November 1, including $14 billion in interest on the federal debt.
  • Democrats are actively exploring several alternatives to hike the debt limit on their own, most likely by attaching the increase to their budget resolution.  However, plenty of political wrangling and brinksmanship is probably still in store, which has the potential to unsettle markets over the coming weeks.

U.S. Monetary Policy:  For the first time, progressive firebrand Sen. Elizabeth Warren explicitly said she would oppose a second term for Fed Chair Powell if President Biden nominates the central bank leader.  The statement highlights the Democrats’ intraparty divide over his candidacy.  The most progressive legislators want Biden to nominate someone who would support progressive policies much more strongly than Powell has.  If the progressives eventually appear to be getting the upper hand in the debate, it will likely spark concerns about excessively loose monetary policy and unsettle the financial markets.

Japan:  Former Foreign Minister Fumio Kishida won the ruling Liberal Democratic Party’s leadership election.  It makes him the presumptive successor to Yoshihide Suga as Japan’s prime minister and ensures he will represent the LDP in the general elections slated to be held by November.  With no candidates obtaining a majority in the first round, the runoff in the LDP election was a head-to-head race between first-place Kishida and second-place Taro Kono, the vaccine czar and top choice for prime minister in public opinion polls.

  • An extraordinary Diet session will be convened on Monday, at which Kishida will officially be nominated to take over the Prime Minister’s Office. The LDP has a majority in the Lower House, essentially guaranteeing that he will become prime minister.  After his nomination, he will immediately form a Cabinet and appoint ministers.
  • Kishida has already vowed to continue strengthening Japan’s coronavirus response and to compile an economic stimulus package worth trillions of yen.  Indeed, he has vowed in the past to moderate the country’s neoliberal policies and reduce its wealth gap.  He has also supported raising the country’s low birth rates.  Although he comes from a traditionally dovish wing of the LDP, he has also recently expressed a need to ensure a free and open Indo-Pacific region.
  • We’ll provide a biography and assessment of Kishida in a Weekly Geopolitical Report soon.  For now, however, we suspect Kishida won’t stray too dramatically from the Abe and Suga policies of the recent past, so financial markets are unlikely to react badly.

China Evergrande (EGRNF, $0.40):  Heavily indebted real estate developer Evergrande said it sold part of its stake in Shengjing Bank for approximately $1.5 billion.  However, those funds won’t necessarily be available to settle the firm’s wider obligations because the bank is demanding the net proceeds from the sale be used to settle liabilities Evergrande owes to it.

  • The Evergrande saga, and China’s broader problem with excess debt, will likely remain a key risk for global financial markets in the near term.
  • Reflecting those concerns, Japan’s Government Pension Investment Fund has decided to shun renminbi-denominated Chinese sovereign bonds from its $1.73 trillion portfolio, citing liquidity concerns and other risks related to Chinese government debt.

China Belt and Road Initiative:  New data shows China’s “Belt and Road Initiative,” which has provided billions of dollars in infrastructure development aid worldwide, has left scores of lower- and middle-income countries saddled with “hidden debts” totaling $385 billion.  According to AidData, an international development lab at the College of William & Mary in Virginia, more than 40 of those countries now have debt exposure to China higher than 10% of their national gross domestic product.

COVID-19:  Official data show confirmed cases have risen to 232,888,917 worldwide, with 4,767,825 deaths.  In the United States, confirmed cases rose to 43,233,019, with 693,069 deaths.  Vaccine doses delivered in the U.S. now total 472,646,105, while the number of people who have received at least their first shot totals 213,752,856.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic and Financial Market Impacts

  • Both traditional and new, high-frequency data series ranging from shopping trips to movie theater attendance suggest the European economy continues to recover at a good pace.  The data suggest European consumers feel emboldened by high vaccination rates, despite a slew of worrying economic news, including higher energy bills, supply chain disruptions, and worries about the impact of an economic slowdown in China.

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