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 unrestNATO 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.

Economics and policy:  Supply chain woes continue.

International roundup:  Washington and the EU talk trade.

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.

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