Daily Comment (September 30, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning as we bid farewell to Q3. Although there is plenty to worry about, equities continue to move up on that wall of worry. Our coverage begins with a recap of legislation and other concerns in Washington; today could be quite active. We follow that with a report on tensions between Serbia and Kosovo. Our regular coverage begins with China news. Economics and policy are up next, and we close with the international roundup and pandemic news.
Washington update: A series of converging deadlines are occurring as we head into October. Let’s recap to see where we are:
- Bipartisan infrastructure package—Speaker Pelosi has set a vote for today on the bill. The current reading is that it is not at all clear that the Speaker has the votes. Sometimes, a Congressional leader will bring a bill to a vote knowing full well it will fail. The failure can be used as a tool to bring the measure later, but the risk is that it may never get another chance. Democratic moderates have pressed the leadership for a vote, even without tying it to the broader $3.5 trillion reconciliation package. Until this week, the leadership indicated both had to occur at the same time. Pelosi’s reputation is that she doesn’t bring bills to the floor if she doesn’t have the votes. However, if she delays a vote, it increases the likelihood that the moderates won’t support the reconciliation package. At the same time, Democratic progressives fear that if they support the infrastructure package, the moderates will then kill the reconciliation bill, leaving them with little of their legislative goals. Thus, they are threatening to vote down the measure. Complicating the issue is that this bill does have some support from the GOP, and that party might provide enough votes to offset the progressives. Overall, if the vote is held today, it very well may not pass.
- Reconciliation bill—it has become something of a foregone conclusion that the $3.5 trillion spending number is too high, but two key senators, Manchin (D-WV) and Sinema (D-AZ), have refused to indicate the number they will accept. In fact, the former released a statement suggesting that he won’t support most of the bill.
- Debt ceiling—this issue remains unresolved. Although the Democrats can lift the ceiling unilaterally, doing so becomes a campaign issue in what is looking increasingly like a midterm meltdown for Democrats. A measure has passed the House to extend the suspension of the ceiling into 2022, but the Senate won’t approve that measure. We expect the Democrats in the Senate to blink on this one, but it could go to the 11th
- Government funding—although a government shutdown remains a possibility, we expect a short-term funding extension to pass today.
- The Fed—as we noted yesterday, Senator Warren (D-MA) publicly indicated she won’t support Chair Powell’s renomination. We still think odds favor his reappointment, but the decision markets are signaling a rising degree of uncertainty. The betting odds dipped to 60% from 85% this week, although they have recovered to 75% this morning. We believe Powell will remain, but progressives will push to put doves (and regulatory hawks) in the remaining open governor positions and will push Quarles out as well.
All this turmoil has consumed the president’s political capital. He is facing criticism for his management of the process and is accused of not being as aggressive in building support as he needed to be. The Congressional leadership has also become frayed in the process. But, ultimately, this may be more about trying to push through expansive legislation with a razor-thin majority. Everything had to go well; there was no margin for error. We suspect history will argue that the distraction of Afghanistan severely weakened the odds of getting all this done.
Serbia and Kosovo: Tensions between Kosovo and Serbia are heating up again after a few years of relative quiet. As background, Kosovo became independent of Serbia in 2008 but has never been recognized by the Serbian government. The quarrel is ostensibly regarding rules in Kosovo requiring vehicles with Serbian license plates to swap them for Kosovo ones. This is similar to rules for Kosovo drivers who travel to Serbia, but Serbia is angry about the rule. There is a large Serb minority in Kosovo, and there have been incidents of civil unrest. NATO is monitoring the situation, and the EU is calling for calm. There are reports that Serbian tanks have moved toward the border. There have also been air incursions. Additional reports indicate Serbia is moving troops to the border as well.
We will continue to monitor the situation. If an armed conflict develops, it isn’t clear to us whether the U.S. would intervene. And, if Washington doesn’t act, we doubt the Europeans will come to the aid of Kosovo. Russia is a longtime ally of Serbia and would likely use a potential conflict to support its interest.
China news: PMI’s dip and population policy swings.
- China’s official manufacturing PMI data fell to 49.1 for September, dipping under the 50-expansion line, suggesting that the sector is in contraction. The private Caixin survey reversed that signal, moving from 49.2 in August to 50.0 in September. It is notable that both surveys were taken before the recent power interruptions, which would suggest that October could signal a full-blown pullback. In the official survey, export orders fell to a 15-month low.
- The Chinese firm SenseTime, a privately held AI firm, has apparently been able to avoid U.S. sanctions. The company was accused of participating in the suppression of Uighurs.
- Evergrande (EGRNF, USD, 0.44) was able to sell an ownership interest to a state-owned enterprise for $1.5 billion in a bid to improve its cash position. We think this might be the ultimate resolution of this saga. SOEs will pick up the distressed assets of the company, and this is how the debt will be socialized. The company has missed another offshore bond payment.
- Estimates are suggesting that China’s local government debt may be up to 50% of GDP.
- LinkedIn is blocking U.S. journalist profiles in China.
- China’s population policy is undergoing rapid changes. After years of squelching births, General Secretary Xi is rapidly moving to increase birth rates, clearly spooked by a rapidly aging nation with a falling population. It is worth noting that since the Communists took power, population policy, especially regarding reproductive policy, has taken massive swings. Mao supported larger families in the early 1960s, only to reverse the policy soon after as the population surged. Over time, the policy became even stricter, limiting families to one child. Policymakers engaged in draconian measures to restrict births, forcing abortions on mothers. Now, the Xi regime is flipping the other direction in short order, allowing up to three children per family. Authorities are now restricting abortion and are trying to prevent divorce. This rapid policy shift is leading to unintended consequences. For example, employers used to be fairly certain that if they hired a mother, there was a low likelihood that she would be out on a future maternity leave. That is no longer the case, and women are facing employment discrimination. These sorts of social policies are extremely sensitive; the dissension in the U.S. over reproductive issues is an example. China’s heavy-handed approach to this issue will complicate its recent turmoil.
Economics and policy: Supply chain woes continue.
- Central bankers around the world are lamenting supply chain problems and now admit that “transitory” means “long time.” The problem is that there is little evidence that supply chain issues are improving. Border controls, part of the pandemic response, and logistical snarls are exacerbating the problem. We are hearing increasing calls that holiday shopping could be very difficult…and inflationary.
- We are watching with great interest as companies try to ramp up hiring. The mystery remains, “where are the workers?” We view this issue as having multiple causal factors. One factor may be that for the past four decades, workers across the West bore the cost of adjustment to globalization and deregulation. Working conditions continually deteriorated, especially for lower skilled, lower educated workers. Now they are rebelling. Flush with pandemic cash and with older workers opting for retirement, firms are facing a shortage of labor and must decide how to attract workers. In the end, it appears to us that higher wages are unavoidable.
- Dollar Tree (DTLR, USD, 100.51) is raising price points above a dollar.
- The U.S. and EU are working together to alleviate the semiconductor shortage.
- Senator Lummis (R-WY) says stablecoins should be fully back with cash and equivalents.
- Plant meat substitutes may become more expensive as the price for a key ingredient—peas—soars.
- In Mexico, builders are experimenting with 3-D printing for affordable housing.
- Although regional FRB boards select presidents, the Boston Fed, who will need to replace the resigning Eric Rosengren, says it is “open” to calls for diversity.
International roundup: Washington and the EU talk trade.
- U.K. polls suggest Brexit isn’t going well; we note the GBP fell hard yesterday. The French government is threatening retaliation after the U.K. rejected most French fishing permits.
- North Korea claims it has tested a hypersonic missile.
COVID-19: The number of reported cases is 233,356,026, with 4,776,055 fatalities. In the U.S., there are 43,350,990 confirmed cases with 695,123 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 473,954,085 doses of the vaccine have been distributed with 391,992,662 doses injected. The number receiving at least one dose is 214,043,376, while the number receiving second doses, which would grant the highest level of immunity, is 184,335,263. For the population older than 18, 66.8% have been vaccinated. The FT has a page on global vaccine distribution. The new Axios map shows rising cases in the northern parts of the U.S., falling cases in the south.
- The president’s trust in COVID-19 polling has taken a dive recently. Pollsters suggest that the lack of a timeline for the end of pandemic measures has undermined trust. The slide isn’t partisan; declines were reported among Democrats, Republicans, and independents. This polling may reflect that Americans are experiencing pandemic fatigue.
- Company mandates for vaccines are running headlong into tight labor markets. United Airlines (UAL, USD, 48.71) is starting to fire unvaccinated workers. It is unclear how it will fill these openings. Meanwhile, oil firms facing mandates are worried they will be losing workers. It is possible the mandates may become unenforceable or may exacerbate worker shortages.
- Supply chains in Asia are being adversely affected by the lack of vaccines.