Tuesday Morning Reads
- China’s 2020 GDP Means...
- Investors Flock Back Into......
- How Full Employment Became Washington’s Creed
- Bitcoin Is Most Crowded Trade
- Why Medical Tourism Is Drawing Patients
- Is Small The New Big?
- Why Bubbles Are Good For Innovation
President-elect Joe Biden's pick for Treasury Secretary, Janet Yellen, is set to testify today before the Senate Finance Committee, which is considering her nomination as key member of the cabinet. She's set to call for "big" action on the COVID-19 pandemic after Biden unveiled a $1.9T economic stimulus plan last week. Yellen served as top White House economist in the 1990s and Fed Chairwoman in the 2010s, meaning a confirmation would make her the first person to achieve such a trifecta of economic leadership roles.
Quote: "Economists don't always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now - and long-term scarring of the economy later. Over the next few months, we are going to need more aid to distribute the vaccine; to reopen schools; to help states keep firefighters and teachers on the job," Yellen will say in her testimony. "Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big."
Bigger picture: Stock index futures are pointing to gains as traders mull the stimulus plans: Dow +0.6%; S&P 500 +0.8%; Nasdaq +1%. While Yellen is also expected to affirm America's commitment to market-determined exchange rates on Capitol Hill, concerns are surfacing over the national debt, which is currently at its highest level relative to the American economy since the end of WWII. At 100.1% of GDP, the debt already exceeds the annual output of the economy, putting the U.S. in company with economies like Greece, Italy, France and Japan.
Outlook: Yellen's approach to financial regulation and protecting the economy against systemic risks is also likely to differ from her predecessor's. Two years ago, Yellen co-signed a letter urging Treasury Secretary Steven Mnuchin not to move forward with plans to relax oversight of big financial firms, and last year, she called for a "new Dodd-Frank." Along with the Biden administration, Yellen has emphasized the need to create "equitable growth" and could use the tools of the Treasury Department to combat climate change and rebuild regulatory institutions like the Financial Stability Oversight Council. (16 comments)
On his first day in office, President-elect Joe Biden is planning to cancel the controversial $8B Keystone XL Pipeline, which restarted work in 2019 under the Trump administration. Environmentalists, Native American groups and farmers have fought the pipeline led by TC Energy (NYSE:TRP) for more than a decade, who fear that it might one day leak into rivers or aquifers or desecrate sacred sites. The project would carry oil nearly 1,200 miles from the Canadian province of Alberta down to Nebraska, to join an existing pipeline.
In a bid to save the project, TC Energy is committing to spend $1.7B on solar, wind and battery power to operate the partially completed system. Generating 1.6 gigawatts of power would rival the country's biggest corporate renewables purchases by companies like Amazon (NASDAQ:AMZN) and Google (GOOG, GOOGL) that have become common in recent years. TC Energy is also pledging to hire a union workforce and eliminate all greenhouse-gas emissions from operations by 2030.
Thought bubble: TC Energy's latest maneuvering reflects new realities at a time when Democrats are taking commanding positions in Washington. During his campaign, Biden joined with progressives calling for a transition away from oil to address climate change, in an era of growing environmental activism and social concerns. Other pipelines and mega projects for oil, natural gas and minerals have also started dying under pressure from financiers and environmentalists.
Bigger picture: Canceling the project would threaten Canadian jobs and the U.S.-Canadian relationship as Prime Minister Justin Trudeau tries to turn the page on trade protectionism seen during the Trump era. The news also prompted Alberta Premier Jason Kenney to urge Canadian Prime Minister Justin Trudeau to reach out to the incoming Biden administration in the next 48 hours. Shares of TC Energy are off nearly 5% in premarket trade as the drama unfolds. (52 comments)
Taking the data at face value, GDP numbers from China have confirmed what many analysts have been forecasting - the country will be the only major economy to have grown in 2020 despite dealing with the coronavirus pandemic. GDP growth expanded by 2.3% this past year vs. a significant contraction expected in the U.S. and elsewhere. While outside experts have long expressed skepticism over the veracity of the reports, many are weighing in on the new data, given the rate of China's export boom and the tumultuous trade war between Washington and Beijing under the Trump administration.
"The Q4 number is remarkable," said Haibin Zhu, chief China economist at JPMorgan. "If you look at Q4's 6.5% - that's even higher than the pre-pandemic growth path. From that perspective, China's V-shape recovery is complete." He still warned that a new COVID outbreak in Hebei Province could hurt the recovery of consumption and the service sector, as China reported more than 100 new coronavirus cases for the sixth consecutive day.
Consumer spending has been weak in the Chinese economy, with the latest figures showing year-on-year growth in retail sales slowed from 5% in November to 4.6% in December. Retail sales for 2020 were also 3.9% lower than the year before, according to official data. "Despite the latest dip in retail sales, we see plenty of upside to consumption as households run down the excess savings they accumulated last year," added Julian Evans-Pritchard, senior China economist at consultancy Capital Economics.
Outlook: Several economists expect double-digit growth rates for China in the first quarter of 2021. Iris Pang, chief economist for Greater China at Dutch bank ING, forecasts the economy to grow by 12%, partly owing to a low base of comparison, and even projects a 7% total growth rate for 2021. According to a recent report from the Center for Economics and Business Research, China will even overtake the U.S. to become the world's biggest economy by 2028, due to contrasting recoveries from the coronavirus pandemic. (47 comments)
Go Deeper: China risk to tech sector expected to fade.
The merger between Fiat Chrysler Automobiles and Peugeot began trading today under the name Stellantis. Shares rose as much as 7.7% in Milan, where the ticker STLA replaced Fiat Chrysler's symbol, while the stock also gained in Paris, where the company listed in place of Peugeot. The fourth-largest automaker in the world by volume will also trade on NYSE under ticker symbol "STLA," instead of "FCAU."
What kind of name is that? The automakers said it draws from the Latin word "stello," meaning "to brighten with stars." While that may be better suited for a space company, the Latin root reflects the combined companies' French and Italian heritage.
The hopes: Brands housed under Stellantis include Peugeot, Citroën, DS, Opel, Vauxhall, Alfa Romeo, Fiat, Lancia, Maserati, Dodge, Jeep, Chrysler, RAM and Abarth. It'll utilize Fiat's Ram and Jeep divisions in North America, revitalized Peugeot and Citroen brands that have excelled in Europe, as well as greater resources to compete with electric carmakers that are reshaping the sector. The new entity expects to save $5.9B through combined platforms, increased purchasing power, supply-chain scale and other merger benefits.
Many challenges await: Neither company has much of a foothold in the luxury car business or China's vast auto market. The prior merger of Fiat and Chrysler also did little to improve the fortunes of Alfa Romeo and Maserati, while PSA's purchase of Opel only made the company more reliant on Europe. The splashy entrance for Stellantis also comes at a busy time for the automobile industry with GM (GM) making a huge electric vehicle push and Tesla (TSLA) forecast to deliver 1M vehicles in 2021. (26 comments)
At the opening of the World Health Organization's Executive Board meeting, Director-General Tedros Adhanom Ghebreyesus warned that current trends of vaccine distribution are pushing the world to the brink of a "catastrophic moral failure." Not only is the "promise of equitable access at serious risk," he added, but it is a "strategic and economic imperative" that would ultimately prolong the pandemic. He noted that 56 bilateral supply deals were signed over the past year, instead of distributing vaccines through the COVID-19 Vaccines Global Access Facility (COVAX).
What is COVAX? The program is part of a global scheme co-led by an international vaccine alliance called Gavi, the Coalition for Epidemic Preparedness Innovations, as well as the WHO. It was established to ensure equitable vaccine access for every country in the world, and aims to deliver 2B doses of safe, effective vaccines by the end of 2021. Only after each nation receives vaccine doses for 20% of its population would countries' COVID risk profiles be considered in a subsequent phase of vaccine distribution.
Backdrop: Nations participating in COVAX are permitted to pursue bilateral contracts with vaccine manufacturers like Pfizer (NYSE:PFE), BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA), though the WHO has urged an end to these deals. While some countries and companies speak the language of "equitable access," they continue to prioritize bilateral agreements, thereby driving up prices and vaccine nationalism, according to Tedros. "This could delay COVAX deliveries and create exactly the scenario COVAX was designed to avoid, with hoarding, a chaotic market, an uncoordinated response and continued social and economic disruption."
Quote: "More than 39M doses of vaccine have now been administered in at least 49 higher-income countries. Just 25 doses have been given in one lowest-income country. Not 25M; not 25K; just 25. It's not right that younger, healthier adults in rich countries are vaccinated before health workers and older people in poorer countries."
How to change the rules of the game? Tedros called on nations with bilateral contracts (and control of supply) to be transparent with COVAX, including contract volumes, pricing and delivery dates. He also called on vaccine producers to provide the WHO with full data for regulatory review in real time.
Thought bubble: Even if one were to convince wealthier nations to put aside their individual interests, other challenges remain. Most current vaccines need to be stored at extremely cold temperatures, so transportation and distribution in poorer countries are a hurdle, while storage is another big impediment and enough healthcare workers need to be on the ground to deploy the inoculations. One also doesn't have to look too far for criticism of the WHO, which some fault with mishandling the pandemic, or assert the election of Tedros took place with Chinese behind-the-scenes support.
Outlook: Observers of the WHO board meeting (which lasts until next Tuesday) say it is one of the most important in the U.N. health agency's more than 70-year history. On the agenda is reform of the agency, as well as its financing system, which could shape its role in global health well after the pandemic ends. The U.S., the largest donor to the WHO, announced its withdrawal last year, but President-elect Joe Biden has said he will rejoin the health body when he takes office. (217 comments)
What else is happening...
To lockdown or not? The Swiss hold a referendum.
New lockdowns prompt IEA to cut oil demand forecast.
In Asia, Japan +1.4%. Hong Kong +2.7%. China -0.8%. India +1.7%.
In Europe, at midday, London +0.3%. Paris +0.1%. Frankfurt +0.4%.
Futures at 6:20, Dow +0.6%. S&P +0.8%. Nasdaq +1%. Crude +0.8% to $52.76. Gold +0.8% at $1844.10. Bitcoin +3% to $37035.
Ten-year Treasury Yield +2 bps to 1.11%
Today's Economic Calendar
4:00 PM Treasury International Capital