Month: July 2021

Four months before the Obama administration suspended federal funding for gain-of-function research on US soil, the process by which virologists manipulate viruses to be more transmissible to humans, a subagency of the National Institutes of Health (NIH) – headed by Dr. Anthony Fauci – effectively shifted this research to the Wuhan Institute of Virology (WIV) via a grant to nonprofit group EcoHealth Alliance, headed by Peter Daszak.

The first $666,442 installment of EcoHealth’s $3.7 million NIH grant was paid in June 2014, with similar annual payments through May 2019 under the “Understanding The Risk Of Bat Coronavirus Emergence” project, as we noted in April.

As we noted in April, the WIV “had openly participated in gain-of-function research in partnership with U.S. universities and institutions” for years under the leadership of Dr. Shi ‘Batwoman’ Zhengli, according to the Washington Post‘s Josh Rogin.

Now, Daszak is refusing to comply with a months-old document request from House Republicans related to his work at the Wuhan lab, according to Just The News.

As government investigators and journalists dig to uncover the full scope of Daszak’s links to the WIV, Daszak is continuing to spurn a congressional request for that information. 

In April, Republicans on the House Committee on Energy and Commerce sent Daszak a letter directing him to submit, among many other documents, “all letters, emails, and other communications between [EcoHealth] and [the WIV] related to terms of agreements, bat coronaviruses, genome or genetic sequencing, SARS-CoV-2, and/or laboratory safety practices” pursuant to key NIH research funding through EcoHealth to the Wuhan lab as a grant sub-recipient.

Yet Daszak himself has not cooperated with the request. An aide with the Energy and Commerce Committee confirmed to Just the News this week that the committee has “received no response still from EcoHealth Alliance and Peter Daszak to the April 16th letter from Leaders Rodgers, Guthrie, and Griffith.” -JTN

“We have asked Daszak to provide information we know he has that sheds light on the origins of this pandemic,” said GOP Rep. Cathy McMorris Rodgers, who has also publicly noted Daszak’s refusal to play ball.

“Dr. Daszak, you received American funds you used to conduct research on bat coronaviruses at the Wuhan Institute of Virology,” Rodgers continued during a House subcommittee meeting last week. “You owe it to the American people to be transparent.”

Meanwhile, Congressional Democrats aren’t actually interested in getting to the bottom of things – as they themselves hold subpoena power in both chambers. The ultimate authority, as JTN notes, rests with that party – specifically Energy and Commerce Committee Chairman Frank Pallone – who notably boosted funding to Fauci’s NIH in 2015 to the tune of $2 billion per year through 2020. 

Why a subpoena hasn’t been issued in more than two months is unclear, but we could venture a guess…

By Michael Every of Rabobank

Will markets xenomorph?

Payrolls on Friday almost achieved escape velocity at 850K vs. 720K expected. However, with unemployment up to 5.9% not down to 5.6%, and average weekly hours down to 34.7, while stocks went into a higher orbit, bond yields actually came down, closing at 1.42%. What would it take to give the reflation trade a booster rocket? Presumably at least a million headline, a plunge in unemployment, and a surge in both the work week and earnings. When does that happen?

Today’s follow-up will be muted because it is a US market holiday given yesterday Americans either did or didn’t celebrate Independence Day. We saw the usual hoopla in many places; and tweets from sitting politicians questioning the validity of July 4th and the Declaration of Independence; The New York Times noting it is becoming political to display the US flag; and a recent poll showing only a minority of Generation Z prefer capitalism to socialism, including only 66% of young Republicans. Of course the grass is always redder, and in the 1960s and 70s, a swathe of suburban America turned hippy before quickly becoming yuppie a decade later. Nonetheless, this is potentially a huge socio-economic change if sustained into a cohort effect rather than being an age or Covid effect: markets will move on it if policy ever does.

Perhaps there is also good reason then -beyond ego, mid-life crisis, and more money than sense- for billionaire Richard Branson to be trying to beat billionaire Jeff Bezos into space: “In space no one can hear you scream at billionaires”? It’s also the only vantage spot from which they can check all of their vast global property portfolios efficiently – so think of it as a landlord inspection. They will probably be joined in time by Elon Musk, who loves anything with the word ‘rocket’ in the name. And perhaps the billionaire(?) CEO of China’s ride-sharing app Didi might want to join given just two days after a $4.4bn US IPO, Beijing regulators started an investigation into data-security issues and have now told Chinese web-stores to delete the app immediately (The Global Times noting this was about “national security”). That will play well with any of US Generation Z who put their sparse savings into the IPO – and with anyone thinking we aren’t heading for a global splinternet.

Yet perhaps even space isn’t safe for billionaires. As Amazon presses ahead with the purchase of MGM studios, Disney, which owns the Alien franchise via 21st Century Fox, is to make an Alien TV series which, as Variety puts it “Will Be Class Warfare With Xenomorphs”. As the showrunner says: “it’s about time for the facehuggers and xenomorphs to sink their claws into the white-collar executives who have been responsible for sending so many employees to their doom.”

After all, the first Alien film featured pre-Reagan blue-collar “truckers in space” getting killed by a giant corporation for profit; the second saw a group of Reaganite space marines getting killed by the same firm for the same goal; the third saw prisoners die the same way; the fourth, a group of mercenaries; then Prometheus saw an Erich Von Daniken trillionaire get a group of scientists killed for profit; and Alien: Covenant had a group of idiots getting killed by the aliens created by the robot created by the trillionaire to try to find the real aliens for profit. After four decades of this, we will apparently now get to see the C-Suite of Weyland-Yutani Corporation getting eaten one by one – and viewers will (presumably) cheer at this great Robespierre levelling exercise/gorefest.

Which is ironically aimed to make vast amounts of profit for a giant corporation.

Notably, the horror genre is often an allegory to the social zeitgeist – and excess inequality is genuinely as terrifying as it gets. It enters like a facehugger, usually via a period of one-off reforms; but then these drop away and the host seems to recover and is still fine on the face of it. The damage inequality will eventually do is hidden as it gestates unseen, like an Alien embryo in the stomach. Yet it will eventually burst out into the world, killing the host, to great shock and surprise. Even then, it still seems small and not too much of a threat to the rest of the social group. Yet if it continues to grow, it can demonstrably rip societies into bloody pieces. There is no guarantee of a happy ending, where inequality is simply blasted out of an airlock.

We enjoy watching horror films because the monsters are projected elements of the dangers of the real world and the darker parts of our own psyche. In short, we watch because we know what they show us will always be with us. I doubt many viewers watching space CEOs getting eaten by aliens will be thinking that this is going to somehow boost their own meagre pay, or reduce the generous package of the CEO of Disney. The bond and stock markets both seem to agree.

That doesn’t mean there is no lesson in watching horror films – that too is part of the reason to do so. And indeed, we already see policies being floated to try to deal with inequality in various places “Leveling Up”; “Build Back Better World”; “Dual Circulation”, etc. – albeit all of them so far tentative and aiming not to offend the Weyland-Yutanis of this, or other, worlds.

But perhaps we will end up with a horror show for asset markets that sends our billionaires off into space to avoid paying tax. The latest policy idea to fight inequality from the UK Labour Party, which only narrowly held a safe seat in last week’s by-election, is to go further than the governing Conservative Party’s post-Brexit “Level Up” with a pledge to “Buy British”; to “make, sell and buy more in Britain”; and to build a “strongly patriotic policy platform” where “far more public contracts [are] awarded to British businesses….This would be tied in with an emphasis on securing more high-skilled UK jobs for the future in the green, financial technology, digital media and film sectors, and other industries in this country.” Perhaps that involves making movies about aliens eating CEOs in space, which Brits are rather good at. However, it is also potentially a step back to an inflationary world where the Brits made cars nobody wanted to drive – and there is a lot of that about.

Meanwhile, as the market continues to trade as if there aren’t any monsters, really, life shows us:

• President Biden has said the US will respond if Russia is behind the series of cyberattacks that hit the country on Friday, which follow on from him telling President Putin at their recent summit that these were a red line;

• Forbes reports Japan is reportedly closer to shifting towards a policy where it would fight alongside the US should the latter do so over Taiwan, which marks a huge structural change in its defense policy, and which will either increase tensions in the region, or ease them, depending on whom one listens to;

• French President Macron and German Chancellor Merkel, who just had their request for an EU-Russian summit shot down by their European partners, are now shifting the focus of their negotiations to China, and will reportedly hold another video conference with Xi Jinping this week – presumably talking up the CAI deal frozen by the EU parliament, which would again underline how the EU cannot find one voice to speak with except on Northern Irish sausages; and

• Fed-maven Zoltan Pozsar is warning about the mix of excess cash, QE, the debt ceiling, and reverse repos, suggesting a potentially explosive mix if money market funds rotate out of T-bills into the new reverse-repo program, which could drain excess reserves from the banking system.

Tell me – are we making our horror movies about the right things?

We asked yesterday, Is the world about to go through another 2014 Thanksgiving massacre when OPEC collapsed sending the price of oil crashing and unleashing a brief if catastrophic wave of destruction across the US shale sector?

It would appear we have an answer – at least in the short-term – as Bloomberg reports that OPEC+ failed to reach a deal and called off a meeting planned for today, leaving the oil market to contend with much tighter supplies than had been expected.

The UAE’s position hasn’t changed, according to a person with knowledge of the country’s thinking. The joint monitoring committee, the JMMC, needed more time to consider the UAE’s position, and the country remains committed to an increase in OPEC production, they said.

Of course, that leaves the UAE still opposing an extension of the deal.

Stalemate stands, it seems.

This decision is implicitly bullish as there is no explicit increase in production across the cartel:

But, as Bloomberg’s Javier Blas notes, while the outcome today is the most bullish, I can’t but think that for 2022 it’s still the most bearish. It’s simply a matter of when and how, rather than if, the UAE puts more barrels into the market. It may happen next month, next year, or after April 2022, but I don’t see how Abu Dhabi walks away from this crisis pumping at a limit of 3.168 million barrels a day. The risk that the whole OPEC+ alliance unravels has also increased significantly. It may be a short-term bullish, medium-term bearish, scenario.

Here’s the background for today’s decision:

Commodity traders are wondering what happens next as just two days after the UAE refused to fall inline with the rest of OPEC+, late on Sunday, in a Bloomberg TV interview, Saudi Prince Abdulaziz said that “we have to extend,” referring to the deal agreed upon by all but the UAE on Friday, according to which oil production would be increased by 400kbd over the next few months, while also extending the broader production quota agreement until the end of 2022 for the sake of stability: “the extension puts lots people in their comfort zone” said the Saudi, adding that Abu Dhabi was isolated within the OPEC+ alliance.

“It’s the whole group versus one country, which is sad to me but this is the reality”, the Saudi summarized the potentially explosive situation, which has seen Saudi Arabia and the United Arab Emirates crank up the tension in their OPEC standoff which as Bloomberg summarizes, has left the global economy guessing how much oil it will get next month.

The bitter clash between the Saudis and UAE has forced OPEC+ to halt talks twice already, with the next meeting scheduled for Monday, putting markets in limbo as oil continues its inflationary surge above $75 a barrel. With the cartel discussing its production policy not only for the rest of the year, but also into 2022, the solution to the standoff will shape the market and industry into next year.

While traditionally the oil cartel has been shy of publicity, keeping its spats behind close doors, on Sunday the fight between the two key producers broke into public view with both countries, which typically keep their grievances within the walls of the royal palaces, airing their differences on television, with Riyadh insisting on its plan, backed by other OPEC+ members including Russia, that the group should both increase production over the next few months, while also extending the broader agreement reached in the aftermath of the oil price collapse of 2020 until the end of 2022 to avoid a production glut.

Just hours earlier, the Emirati energy minister, Suhail al-Mazrouei, again rejected the Saudi-proposed deal extension, supporting only a short-term increase and demanding better terms for itself for 2022.

“The UAE is for an unconditional increase of production, which the market requires,” Al-Mazrouei told Bloomberg Television earlier on Sunday. Yet the decision to extend the deal until the end of 2022 is “unnecessary to take now.”

What happens next is binary: while on one hand, Abu Dhabi is forcing OPEC into a difficult position: accept its requests, or risk unraveling the cartel without an output agreement in place, which would squeeze an already tight market, sending crude prices sharply higher. But only briefly because as Bloomberg notes, a more dramatic scenario is also in play – a repeat of Thanksgiving 2014 – when OPEC risks breaking down entirely, risking a free-for-all that would crash prices in a repeat of the crisis last year. Back then, it was a disagreement between Saudi Arabia and Russia that triggered a punishing price war, which according to some sparked the March 2020 liquidation panic, not the covid shutdown panic.

Speaking to Bloomberg, Prince Abdulaziz said that without the extension of the agreement there’s a fallback deal in place  under which oil output doesn’t increase in August and the rest of the year, potentially risking an inflationary oil price spike. Asked if they could hike production without the UAE on board, Prince Abdulaziz said:

“We cannot.” Which, of course, is false: should OPEC collapse it will be every oil exporter for themselves, and after a brief price spike oil will crater once again.

According to Bloomberg, OPEC+ nations, oil traders and consultants have been stunned by the severity and duration of the fight, and the apparent lack of communication between the two. Prince Abdulaziz said he had not spoken to his counterpart in Abu Dhabi since Friday — even as he insisted he remained his friend. “I haven’t heard from my friend Suhail,” he said, adding he was ready to talk. “If he calls me, why not?” Asked if more senior officials had been in touch, he declined to comment.

At the center of the dispute is a word key to OPEC+ output agreements: baselines. Each country measures its production cuts or increases against a baseline. The higher that number, the more a country will be allowed to pump. The UAE – a relatively minor oil producer – says its current level, set at about 3.2 million barrels a day in April 2020, is too low, and says it should be 3.8 million when the deal is extended into 2022.

That, however, is a non-starter to Saudi Arabia and Russia, which have rejected re-calculating the output target for the UAE, fearing that conceding to one member would prompt everyone else in OPEC+ to ask for the same treatment, unraveling the deal that took several weeks of negotiations, and the the help of U.S. President Donald Trump as broker, with the ultimate outcome being another glut of supply.

Prince Abdulaziz suggested that Abu Dhabi was cherry picking its new output target, and it would set a bad precedent. “What kind of compromise you can get if you say my production is 3.8 and this is going to be my base,” he said.

For its part, Abu Dhabi – which in April 2020 accepted its current baseline – said it doesn’t want the straitjacket to stay on for even longer, arguing that it has spent heavily to expand production capacity, attracting foreign companies too.

Meanwhile, as OPEC+ bickers, a potential wildcard is the flood of even more oil supply: Iran is expecting to return to the oil market as soon as it reaches a nuclear deal with Biden, boosting global supply by several millions barrels of oil.

And so, markets remain on edge ahead of the next OPEC+ virtual meeting scheduled for Monday at 3 p.m. Vienna time, although Prince Abdulaziz suggested it wasn’t set in stone. He wouldn’t comment on the chances of finding a consensus, saying he would work hard to seek one. “Tomorrow is another day.”

*  *  *

And circling back, we now know “tomorrow’s” decision – no deal!

Yesterday, when discussing China’s startling move to block Didi Chuxing from app stores, just days after the ride-hailing giant’s U.S. IPO, we said that the retaliatory move by Beijing will add to regulatory uncertainty surrounding Chinese internet companies as well as weigh on valuations and share sales. Overnight, most of Wall Street analysts agreed with this downbeat take, while traders sold first without waiting to ask question as the stock of Didi’s top shareholder SoftBank, tumbled 5.4% to its lowest level since Dec. 2020 in Tokyo. The angst spread to shares of most Chinese tech companies, which slid in Hong Kong as Tencent slumped 3.6% to erase this year’s advance, while food delivery giant Meituan – whose CEO was also targeted in May by authorities – dropped 5.6%.

Furthermore, as the SCMP reported overnight, China also expanded its latest crackdown on the technology industry beyond Didi to include two other companies that recently listed in New York — Full Truck Alliance Co. and Kanzhun Ltd.

Below, courtesy of Bloomberg, are highlights of what investors and analysts are saying in response to the draconian Didi escalation:

Robeco (Joshua Crabb):

• “We have entered a new period globally where the regulatory scrutiny on tech has increased and will be ongoing for some time. The first phase has been about antitrust and some fines and the impact of that has been digested by the market”
• “The new challenges on data security and privacy and ownership/use is a bigger question as it is the monetization of this data that is the key to these companies’ earnings. If that becomes a risk, the earnings and hence stock price implications could be much more dramatic than the antitrust fines we have seen so far”

Capital Group (Andy Budden)

• “We are clearly in an era where the Chinese authorities are really quite thoughtfully considering how they want to regulate the tech industry and the internet industry and I think that just seems to me to be a completely reasonable thing to do on a rather young industry,” Budden said in a virtual briefing adding that China is the most innovative country in the world where internet meets fintech and that won’t go away any time soon

Reyl & Cie (Cedric Ozazman):

• “It’s too early to jump in now as short-term uncertainties will prevail. We might be more constructive on Chinese names when there will be a new round of supportive monetary policies”

Kairos Partners (Alberto Tocchio)

• “Despite the relatively high uncertainty, I would prefer to start to own some Chinese exposure because it has massively underperformed and it has the greatest consumer exposure in the world to the most quickly growing market”
• “The enrichment of the Chinese population will continue to accelerate the development of services and tech and that’s why there are making an effort now to further regulate the process with the idea of getting further benefits in the medium term”
• “I would therefore use the current weakness to further increase the Chinese exposure with a medium term view”

Safehouse Global Consumer Fund (Sharif Farha)

• “Until the regulator takes its foot off the gas, valuation multiples on Chinese tech large caps will continue to compress. The investment case for China is clear yet in an environment where global equities continue to perform well, many investors may just choose to reposition and move capital to other geographies”
• “While we did not participate in any of these listings, we would imagine that several funds would consider exiting. For example with Didi, imagine tomorrow we wake up and the Chinese regulator temporarily suspends not only the downloads but also the usage of Didi apps. The risks outweigh the rewards by far right now”

Hullx (James Hull)

• “The real question is whether this move changes the perspective that China’s tech companies are caught in a regulatory ‘cycle’ rather than a new normal”
• “I doubt it will change that view. Everyone I talk to on the ground here thinks it’s a new normal”

Nomura (Jim McCafferty)

• “Chinese authorities are concerned that there’s too much concentration of power among these tech companies,” McCafferty said at a virtual briefing
• “In a way, it’s not dissimilar with what we’re seeing in the U.S., where the government is talking about antitrust procedures with regards to some of the big names such as Facebook, Amazon, Apple. There’s too much concentration”
• “We can take a view that China is actually emulating what we are seeing in the West with regards to these big companies and their ability to satisfy multiple stakeholders in term of tax payments”

IG Asia (Jun Rong Yeap)

• “The latest regulatory hurdle for Didi may raise concerns that the clampdown on big tech is far from over”
• A clampdown “after its IPO may suggest that while restructuring is deemed necessary in the near term, China’s strategy may be carefully calibrated tominimise the impact on its domestic tech firms in order to still rival against the U.S.”

CMB International (Daniel So)

• China’s move highlights “the policy risks facing the sector and there has been some knee jerk reaction to that”
• “Bad news has been priced in a lot as many tech stocks have pared most or all their gains this year”
• Valuations look attractive and investors can start buying the sector’s equities on dips

Smartkarma (Travis Lundy)

• “If the company is not accepting new users, this order is overkill. This order does not, however, seem to achieve anything else”
• It is clearly designed to send a message to the wider sector that one should not do an IPO when there are so many things hanging
• “I cannot suggest being long. I expect other apps/tech conglomerates will see declines as well”

Bloomberg Intelligence (Matthew Kanterman)

• “It’s clear that there’s a regulatory overhang on China’s tech giants at the moment and that may continue to weigh on sector valuations for the large internet platforms”
• Investors need clarity about when will such regulatory reviews get concluded

DailyFX (Margaret Yang)

• “It marks a step up further to tighten regulatory measures over China’s large tech firms, and may discourage them from considering U.S. listings”

 

Authored by Steve Watson via Summit News,

After failing to reach his previously stated benchmark for vaccinations, Joe Biden desperately tweeted a plea for Americans to do “the most patriotic thing you can do” and take the COVID shot.

If you haven’t gotten vaccinated, please do it now. It’s the most patriotic thing you can do.

— President Biden (@POTUS) July 4, 2021

The tweet came on the heels of an Independence Day speech yesterday at The White House when Biden urged “My fellow Americans, that’s the most patriotic thing you can do, so, please, if you haven’t got vaccinated, do it now: for yourself, for your family, for your community and for your country.”

The administration’s goal was to fully immunize 160 million Americans and to ensure 70% of adults get at least one shot by the Fourth of July.

That goal is far from being achieved, but Biden went ahead with a ‘celebration’ anyway, bandying around the slogan “America’s Back Together.”

Many on Twitter were definitely not in agreement that taking the shot is “the most patriotic thing” for them to do.

My Choice Joe . The most patriotic thing is to fly the Flag ….Joe .

— Elmo Jones (@HardCoreMoe) July 4, 2021

Government officials telling Americans what to do on Independence Day and invoking it as patriotism is peak irony.

— ErikVillagomez26 (@EVillagomez26) July 4, 2021

If I do and I get this COVID vaccine reaction, who will pay for my medical expense and loss of permanent income? You? Pharma? Of course not. pic.twitter.com/CBfQQLYuTr

— CryptoBull2020 (@CryptoBull2020) July 4, 2021

I got vaccinated and am currently stuck at home with Covid. Not exactly that patriotic.

— Logan Winegardner IV (@LoganWine_IV) July 4, 2021

I think the most patriotic thing you can do is to step down back to your basement and stop with the brainwashing and guilt tripping of Americans.

— Adel (@AdeldMeyer) July 5, 2021

*  *  *

Brand new merch now available! Get it at https://www.pjwshop.com/

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The week after payrolls is relatively quiet for newsflow but given the first Friday of the month was so early we have PMIs/ISM from the service sector to look forward to today and tomorrow, ahead of next week’s start of Q2 earnings season. Outside of that, DB’s Jim Reid notes that the main event of the week will be the release of the last FOMC minutes (Wednesday) given the surprise move at the meeting. Elsewhere a gathering of G20 finance ministers and central bank governors (Friday) will be interesting, especially after the news that 130 countries had signed up to the minimum tax agreement last week. Finally the development of the delta variant is never going to be too far from the top of the headlines. It has certainly put a dampener on the reopening trade for now. The U.K. is at the top of the global charts for new cases again, yet it seems to be powering ahead towards a full reopening two weeks today. So this is going to be an enormous test case as to whether heavily vaccinated countries can live with the virus.

Going through some of the week’s main event highlights, first we have the release of the global services and composite PMIs today and tomorrow. The flash readings we’ve already had were pretty strong, with the Euro Area composite PMI at a 15-year high of 59.2, while the US number came in at 63.9. Overnight, as discussed earlier, China’s Caixin June services PMI came in at 50.3 (vs. 54.9 expected and 55.1 last month), the lowest level since April 2020 and on the verge of contraction.

On prices, the statement along with the release added that “Prices in the service sector were stable, as inflationary pressure eased. High commodity and labor prices continued to push up costs for services companies, but the growth of input prices slowed.” Japan’s final services PMI came in at 48.0 vs. 47.2 in flash.

Also in focus will be the ISM Services index from the US, after the ISM manufacturing reading last Thursday saw the employment index move below 50 for the first time since November. And on top of that, the prices paid measure hit its highest since 1979, so we can expect there to be continued focus on signs of inflationary pressures. On employment, it’ll be worth looking out for the latest US JOLTS data for May on Wednesday will also be closely watched as this has shown a much healthier labor market than payrolls of late.

The main highlight outside of data will be the release of the FOMC minutes from their June meeting on Wednesday. That has the potential to shed further light on the hawkish shift that saw the median dot move to project two rate hikes in 2023, up from zero back in March. All signs of how the committee felt about the taper will also be devoured but we have heard from several members on this topic since the FOMC. Otherwise, there’ll be a few speakers to look forward to, including ECB President Lagarde and Bank of England Governor Bailey. In terms of monetary policy decisions however, the only G20 decision scheduled for this week is from the Reserve Bank of Australia (Tuesday), where the consensus expectation is that they’ll keep their cash rate target unchanged at 0.10%.

The G20 finance ministers and central bank governors meeting on Friday, which is taking place in Venice, will be interesting to see if there’s any discussion on the ongoing OECD negotiations on reforming the global corporate tax system, which, it was announced, 130 countries and jurisdictions have now signed on to. The main changes would see companies pay more taxes in the jurisdictions they operate in, including digital companies, and also a global minimum corporate tax rate.

Below is a visual summary of the week’s key global events:

Courtesy of DB, here is a day-by-day calendar of events

Monday July 5

• Data: June services and composite PMIs from Australia, Japan, China, India, Italy, France, Germany, Euro Area, UK and Brazil, UK June new car registrations
• Central Banks: ECB’s Vice President de Guindos speaks
• Other: US markets closed for Independence Day holiday

Tuesday July 6

• Data: Germany May factory orders, July ZEW survey, UK and Germany June construction PMI, Euro Area May retail sales, US June services and composite PMI, ISM services index
• Central Banks: Reserve Bank of Australia monetary policy decision, ECB’s Hernandez de Cos speaks

Wednesday July 7

• Data: Japan preliminary May leading index, Germany May industrial production, Italy May retail sales, US June JOLTS job openings
• Central Banks: Federal Reserve release June FOMC minutes, Fed’s Bostic speaks
• Other: European Commission publishes latest economic forecasts

Thursday July 8

• Data: Japan May current account balance, Germany May trade balance, US weekly initial jobless claims, May consumer credit

Friday July 9

• Data: China June CPI, PPI, UK May GDP, France May industrial production, Italy May industrial production, US final May wholesale inventories
• Central Banks: ECB President Lagarde and BoE Governor Bailey speak
• Other: G20 finance ministers and central bank governors meet in Venice

Finally, looking at just the US, Goldma notes that the key economic data releases this week are the ISM services report on Tuesday and the jobless claims report on Thursday. There are no speaking engagements from Fed officials this week.

Monday, July 5

• US Independence Day holiday observed. There are no major economic data releases scheduled. NYSE will be closed. SIFMA recommends bond markets also close.

Tuesday, July 6

• 09:45 AM Markit services PMI, June final (consensus 64.8, last 64.8)
• 10:00 AM ISM services index, June (GS 62.5, consensus 63.5, last 64.0): We estimate that the ISM services index retrenched 1.5pt to 62.5 in June, reflecting normalization from an elevated level and a waning sequential boost from the spring stimulus checks. Our services tracker rose 0.6pt to 62.8.

Wednesday, July 7

• 10:00 AM JOLTS Job Openings, May (consensus 9,313k, last 9,286k)
• 02:00 PM Minutes from the June 15–16 FOMC meeting: At its June meeting, the FOMC left the funds rate target range unchanged at 0–0.25%, as widely expected. The June FOMC statement noted that the economy had strengthened due to progress on vaccinations, strong policy support, and improvement in the sectors most adversely affected by the pandemic. In the Summary of Economic Projections, the median participant projected two rate hikes and a 3.5% unemployment rate and 2.1% core PCE inflation for the end of 2023.

Thursday, July 8

• 08:30 AM Initial jobless claims, week ended July 3 (GS 360k, consensus 350k, last 364k); Continuing jobless claims, week ended June 26 (consensus 3,325k, last 3,469k): We estimate initial jobless claims decreased to 360k in the week ended July 3.

Friday, July 9

• 10:00 AM Wholesale inventories, May final (consensus +1.1%, last +1.1%)

Source: DB, BofA, Goldman

Two weeks ago, in the aftermath of the Fed’s surprise hawkish FOMC announcement which also hiked the administered rates on the Fed’s overnight repo and IOER facilities by 5bps to 0.05% and 0.15% respectively, we quoted Credit Suisse repo guru Zoltan Pozsar who explained it best in his post-mortem, writing that “the re-priced RRP facility will become a problem for the banking system fast: the banking system is going from being asset constrained (deposits flooding in, but nowhere to lend them but to the Fed), to being liability constrained (deposits slipping away and nowhere to replace them but in the money market).”

What he means by that is that whereas previously the RRP rate of 0.00% did not reward allocation of inert, excess reserves but merely provided a place to park them, now that the Fed is providing a generous yield pick up compared to rates offered by trillions in Bills, we are about to see a sea-change in the overnight, money-market, as trillions in capital reallocate away from traditional investments and into the the Fed’s RRP.

In other words, as Pozsar puts it, “the RRP facility started to sterilize reserves… with more to come.” And just as Deutsche Bank explained why the Fed’s signaling was an r* policy error, to Pozsar, the Fed also made a policy error – only this time with its technical rates – by sterilizing reserves because “it’s one thing to raise the rate on the RRP facility when an increase was not strictly speaking necessary, and it’s another to raise it “unduly” high – as one money fund manager put it, “yesterday we could not even get a basis points a year; to get endless paper at five basis points from the most trusted counterparty is a dream come true.”

He’s right: while 0bps may have been viewed by many as too low, it was hardly catastrophic for now (Credit Suisse was one of those predicting no administered rate hike), 5bps is too generous, according to Pozsar who warns that the new reverse repo rate will upset the state of “singularity” and “like heat-seeking missiles, money market investors move hundreds of billions, making sharp, 90º turns hunting for even a basis point of yield at the zero bound – at 5 bps, money funds have an incentive to trade out of all their Treasury bills and park cash at the RRP facility.”

Indeed, as shown below, bills yield less than 5 bps out to 6 months, and money funds have over $2 trillion of bills. They got an the incentive to sell, while others have the incentive to buy: institutions whose deposits have been “tolerated” by banks until now earning zero interest have an incentive to harvest the 0-5 bps range the bill curve has to offer. Putting your cash at a basis point in bills is better than deposits at zero. So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain.

To help readers visualize what is going on, the Credit Suisse strategist suggest the following “extreme” thought experiment: most of the “Covid-19” deposits currently with banks go into the bill market where rates are better. Money funds sell bills to institutional investors that currently keep their cash at banks, and money funds swap bills for o/n RRPs. Said (somewhat) simply, while previously the Fed provided banks with a convenient place to park reserves, it now will actively drain reserves to the point where we may end up with another 2019-style repo crisis, as most financial institutions suddenly find themsleves with too few intraday reserves, forcing them to use the Fed’s other funding facilities (such as FX swap lines) to remain consistently solvent.

Finally, as we noted two weeks ago, this process is not overnight. It will take a few weeks to observe the fallout from the Fed’s reserve sterilization, and sure enough on the last day of the quarter, we saw a dramatic escalation as the total amount of reserves parked at the Fed exploded to just shy of $1 trillion, an increase of over $320 billion, of which half has come from a drop in pre-existing reserves, $80 billion came from the GSEs shifting cash from their unremunerated accounts, $40 billion from reserves freshly minted via QE since the rate adjustment, and the remaining $30 billion coming from a drop in the Treasury’s general account.

How much higher can this chart get?

For the answer we go to the most recent notes from Pozsar, who over the weekend was also finally discovered by the WSJ and from a niche name among a handful of high finance commentators, has now emerged a household name… inasmuch as discussing the most arcane aspects of modern monetary plumbing can ever be a topic of household discussion.

Writing in his latest Global Money Dispatch note, Pozsar picks up on the reserve sterilization theme he first brought up two weeks ago following the FOMC IOER/RRP rate hike, and says that there are two ways a “generously re-priced RRP facility” can sterilize reserves:

• money funds increase their net yields (by passing on the “gift” from the Fed), and
• pull money away from banks and into the RRP facility, or money funds rotate out of Treasury bills as bills mature and into the RRP facility, in which case someone with a bank deposit will have to buy bills instead.

Both examples lead to a decline in reserves and an increase in o/n RRP usage (what Zoltan defines as “sterilization”), but the former is accompanied by a higher AuM at money funds and the latter isn’t – the latter shows up only as a rotation from bills to RRPs.

So looking ahead, where reverse repo usage is likely to surpass $1 trillion in short notice, the Credit Suisse repo guru asks which of these two flows will dominate in coming weeks, and answers that – in his view – it will be the latter, as money funds don’t seem to be passing on the spoils of the re-priced facility – “net money fund yields are practically zero still” – so if money moves from banks, it will chase higher bill yields, not higher money fund yields.

This is schematically shown by the Pozsar chart below which shows how reserves will get sterilized through the rotation from bills to RRPs.

The next step to determine the coming surge in RRP usage is to figure out how much “space” money funds have to rotate out of bills into RRPs. To answer this, Pozsar starts with data on money fund holdings as of May 31st , which show the use of the RRP facility by individual money funds. Knowing their use, one can also calculate how far each fund is from the $80 billion per counterparty cap, i.e. how much “space” they have to rotate out of bills into RRPs.

Next, one compares the available “space” to the amount of bills each money fund holds, and choose the smaller of the two (as a reminder, we are trying to calculate the maximum RRP usage without any inflows).

The first chart below shows the results for the largest fund complexes – as of May 31st, the largest money funds had capacity to rotate out of $1 trillion of bills and place that much more money in the o/n RRP facility, which as Pozsar puts it, is “a lot.”

More importantly, the next chart shows that the bill holdings of these money funds will mature by August 31st – that’s a lot in a short period of time.

As an aside, not included in these charts are second-tier money funds that hold $350 billion in bills, some $300 billion of which they have capacity to replace with o/n RRPs.

Putting it all together, Pozsar calculates that we’re looking at $1.3 trillion of flows from bills into RRPs by the end of August.

A quick note: as these estimates use data as of May 31st, but today is July 4, can we calculate how much rotation money funds have already achieved during June? Well, according to Pozsar, the Fed’s o/n RRP data – ignoring the June 30 surge in use, which was driven by quarter-end flows – tell us the use of the facility is up by about $300 billion since the RRP rate hike, of which as noted above, only half came from a decline in reserves and deposits – i.e. a rotation from bills to o/n RRPs and from deposits to bills.

This means there is about a trillion more to go from a level in the $800-$900 billion range, or in other words, this time in August, the Fed’s reverse repo facility rise to just around $2 trillion, meaning that a mindblowing $2 trillion in reserves will have been drained in from the system. And while that is to be expected at a time when the financial system is burst with too much liquidity which continues to be added at a pace of $120BN per month, the question is what happens once too many reserves are drained? After all, as Pozsar puts it, the impact of this “sterilization” is that bank will lose deposits and reserves “which is what happens when rates on collateral-providing facilities are set above rates that are available in the bill market.” Ominously, Pozar notes that “we saw this  before when the foreign repo pool was priced too generously relative to bills in 2019.” Everyone remembers how catastrophically that particular episode in repo mispricing ended.

To this the only question we can add is that happens when – after another repo market tantrum as the Fed drains too much reserves as it likely will in just a few weeks – this liquidity drain goes violently into reverse and the Fed injects $2 trillion in inert reserves into the market: how high will risk assets rise then?

Authored by Robert Zumwalt via The Mises Institute,

Austrian school economists have long demonstrated that monopolies only tend to form as a result of government intervention, and “natural monopolies” have virtually never actually existed. Nonetheless, we are continually told by political and academic “experts” that unregulated economies inevitably give rise to monopolies, business trusts, and cartels, all of which they assure us have disastrous consequences for ordinary people. Therefore, we are told, governments are justified in taking forceful action to prevent monopolies from developing or to break them apart.

In this debate, the interventionists frame themselves as opposing the anticompetitive forces of large corporations having too much control over the lives of ordinary people. It is noteworthy, then, that these same interventionists support similar kinds of anticompetitive practices, and the increased control over people’s lives they entail, when they are employed by governments instead.

To that end, the leaders of the G-7 nations have recently gathered to propose a global minimum corporate tax that would allow national governments to exert a form of monopoly power of their own over the taxation of business within their borders. A major element of the proposal, if brought to fruition, is the requirement that every nation impose a minimum corporate tax rate of at least 15 percent. The clear purpose of this part of the proposal is to eliminate the so-called race to the bottom in corporate taxes, which is a euphemism for high-tax nations’ hopes of shielding themselves from competition from nations with low tax rates seeking to attract businesses away from them.

For this proposal to have its intended effect, several nations outside of the G-7 would need to voluntarily raise their corporate tax rates. Ireland, for example, sets corporate taxes at 12.5 percent, and a substantial part of its tax base is located there specifically because it is a comparative tax haven. Other parts of the proposal therefore appear to be intended to induce low-tax nations like Ireland, who are not likely keen on raising their tax rates and losing the main attraction they have for multinational companies headquartering there, to participate. For example, the proposal would also redirect the payment of corporate taxes to ensure that the world’s largest companies pay some taxes to the nations where they do business, rather than where they are physically located. These provisions appear designed to compensate low-tax nations for the loss in tax base they will surely suffer if they adopt the G-7 proposal.

In short, wealthy nations know they can only tax businesses so much before those businesses find it profitable to move to competing jurisdictions with lower tax rates, and the G-7 leaders are now openly seeking to collude with other nations to put a stop to that competition. There is little meaningful distinction between this and the alleged anticompetitive practices of private businesses—complete with “kickbacks” promised to cooperating participants—that the same governments continually vilify.

Governments Still Oppose Private Monopolies

Despite this apparent embrace of monopolistic practices, the federal government still seeks to purge what it sees as private monopolies at every turn. In the latest salvo, the US House of Representatives Judiciary Committee recently passed a series of antitrust bills which implement several recommendations put forward by the Judiciary antitrust subcommittee in a report entitled Investigation of Competition in Digital Markets, released in October 2020 after a year-long investigation. Unsurprisingly, the subcommittee recommended more government intervention in the business practices of digital platforms, including the enactment of measures prohibiting “certain dominant platforms” from operating in adjacent lines of business and prohibiting future mergers and acquisitions by those platforms unless they can prove to regulators that the merger or acquisition would not be anticompetitive.

We may not be sympathetic to Big Tech firms in their clashes with the state; it is now well documented that those firms gained their dominance largely through collusion with the state in the first place. However, the subcommittee’s report on this subject provides direct insight into what governments find so objectionable about these kinds of practices when they are employed by businesses like Google, Apple, Amazon, and Facebook.

For example, the subcommittee found that the “dominance of some online platforms has contributed to the decline of trustworthy sources of news,” citing news publishers’ concerns about the “significant and growing asymmetry of power” between dominant platforms and themselves. They also report concerns over the dominance of large digital platforms weakening innovation and entrepreneurship, citing the existence of an innovation “kill zone” because some venture capitalists say they are reluctant to invest in start-ups that would compete with the dominant platforms. The subcommittee also found that the ability of dominant platforms to intrude upon or violate the privacy of their customers is an “indicator of market power online.”

While there is much to criticize about how the subcommittee characterizes each of these concerns, it reveals what the state claims is so troubling about monopolistic practices, at least as regards digital platforms: according to them, large companies limit people’s access to information, impede innovation, and threaten privacy.

State Monopolies Are No Better Than Private Monopolies

But if the US government genuinely believes that the near dominance of these tech firms is a danger to its citizens, how can it also believe that its own total dominance within its own jurisdiction does not go far enough?

The difference between the anticompetitive G-7 proposal and the alleged anticompetitive behavior of the large digital platforms is only surface-deep. In both cases, the ultimate goal is to create conditions in which the “suppliers” are able to exact a higher “price” for their “products and services” than would be possible in an open market. The G-7 proposal would prohibit any nation from charging a lower “price” (i.e., tax rate) for its “products” (i.e., permission to do business in its jurisdiction).

Ludwig von Mises wrote in his 1944 work, Omnipotent Government, that:

Almost all the monopolies that are assailed by public opinion and against which governments pretend to fight are government made. They are national monopolies created under the shelter of import duties. They would collapse with a regime of free trade.

The common treatment of the monopoly question is thoroughly mendacious and dishonest. No milder expression can be used to characterize it. It is the aim of the government to raise the domestic price of the commodities concerned above the world market level, in order to safeguard in the short run the operation of its prolabor policies. The highly developed manufactures of Great Britain, the United States, and Germany would not need any protection against foreign competition were it not for the policies of their own governments in raising costs of domestic production. (p. 71)

The same forces that prevent natural monopolies from forming in the business world also apply to government attempts to exercise unlimited taxing power in the international arena. Governments of wealthy nations wish to raise the price of their commodity—the tax rate they can charge for the “privilege” of doing business within their borders—above the “world market level,” but it is no secret that high taxes tend to cause the wealthy and businesses to avoid those taxes by fleeing to lower-tax jurisdictions. In the same way that protected industries sought the shelter of government-imposed import tariffs, wealthy nations are trying to seek the shelter of international agreements to do virtually the same thing.

The interventionists would probably respond that they should exercise this monopoly power precisely because they, and they alone, can prevent the ills of commercial monopolies. But all the concerns expressed in the subcommittee’s report about private businesses are just as applicable, if not more so, to the actions of governments.

That the state is the enemy of innovation needs little elaboration to any regular mises.org reader. The very corporate tax they seek to globalize represents a barrier to innovators who lack the resources to arrange their corporate holdings in the tax-advantaged ways that firms like Amazon infamously have done.

Regarding the suppression of ideas and speech, what can a business, even a digital media giant, do that governments cannot do? Examples of state suppression of speech are easy to come by, but for the present purposes, it is worth asking whether subjecting these platforms to more domineering state controls might induce them to become more compliant with government demands to suppress opinions it considers antiscience, antidemocratic, or threatening to its purposes.

And we should ask the same question regarding privacy. In 2019, Facebook reported that it had received 50,741 demands for user data from the US government alone, 88 percent of which Facebook says it complied with. It seems overly optimistic to expect privacy protections to grow stronger when companies like these find themselves increasingly subject to state control.

Conclusion

The G-7 proposal is noteworthy for the fact that the leaders of the world’s most powerful nations, while accusing commercial businesses of abusing monopolistic power, are now seeking to expand their own use of monopolistic power against those same businesses internationally. More concerning, however, is the prospect of this trend expanding beyond corporate taxation and directly into the lives of individuals. If world governments can successfully monopolize corporate taxation, what other individual liberties might they be willing to exercise similar control over?

One month ago when observing the reversal of China’s all-important credit impulse to negative, its first red print in over a year, we warned that China was set to unleash a deflationary wave across the world…

… but first it would be China’s own economy that is impacted.

And sure enough, the country which first emerged from the covid pandemic it created courtesy of a tidal wave of new debt creation which saw a blowout in new Total Social Financing flows..

… is on the verge of contraction again, because overnight, the Caixin China General Services Business Activity Index (headline services PMI) fell sharply to 50.3 in June from 55.1 in May, badly missing the 54.9 Bloomberg consensus, and the largest one-month drop outside of the catastrophic February 2020.

And while the headline PMI remained just above 50 – or in expansion territory – another month of a similar decline and we will have the first Chinese contraction confirmation since last February.

The good news is that, for now, the manufacturing PMI still remains solidly in expansion territory, although absent another blast of credit across its economy, we expect it to catch down to its services peer in the coming weeks.

The growth slowdown was widespread as sub-indexes suggested growth of new business plunged in the services sector, employment contracted, and inflation pressure eased.

Digging into the numbers, here are some more details:

• The new business index fell to 50.5 from 54.7 in May, weighed by the resurgence of COVID-19 infections in the Guangdong province, while the new export business sub-index edged up to 50.3 in June from 49.7 in May, implying significantly weaker domestic demand growth. As the growth of new business moderated sharply, the pace of new hiring slowed notably to below 50. The employment sub-index was 49.0 in June (vs. 52.5 in May). The outstanding business index fell to 49.7 in June (vs. 51.3 in May).
• Price indicators suggest both input and output price inflation pressures eased markedly in the services sector, confirming our observation 6 weeks ago when looking at the sharp drop in China’s credit impulse which is now hitting China’s PPI, and will then move rapidly across the globe. Indeed, the input prices sub-index fell to 50.9 from 56.6 in May, the lowest since last September. However, cost burden is still high due to increased prices for raw materials and high labor costs, according to the survey. The output prices sub-index fell to 49.0 from 52.9 in May as surveyed companies tried to attract new businesses by lowering prices.
• The business expectation index declined to 61.2 in June (after seasonal adjustment) from 64.0 in May, a nine-month low. Some companies still reported “concerns over the COVID situation at home and abroad”, but remained optimistic about future business performance.

And while the latest China credit – and now PMI – data is flashing a bright red alarm light that the global reflationary wave is not only over but is going into reverse, the good news is that anyone harboring any expectation that the PBOC may tighten to frontrun the Fed’s tapering or hiking, is now crushed.

Authored by Linda Jiang via The Epoch Times,

The Asian Real Estate Association of America (AREAA), a national nonprofit trade organization, released its 2021 State of Asia America Report on June 30, showing the south has become an increasingly attractive choice for homeownership among members of the Asian community.

It has the highest Asian American & Pacific Islander (AAPI) homeownership rate in the nation.

The 38-page report, compiling data from over 14 sources, is a collaborative effort between AREAA, RE/MAX, and Freddie Mac. The report shows 50 percent of the AAPI community reside in the west, with approximately a third living in California. Of the 22 real estate markets studied nationally, AREAA found the AAPI community with a higher homeownership rate than the national average, in only 5 markets.

The highest homeownership rate among AAPI is at 65.4 percent for those living in the southern states. In contrast, they have the lowest overall average income compared to AAPI in the western, midwestern, and northeastern states.

Amy Kong, National President of AREAA, pointed out that the south is becoming increasingly popular among AAPI, enjoying the highest homeownership rate compared to those living in other regions of the United States.

Realtor.com Senior Economist George Ratiu said,

“That, to me, is a sign of the times, in many respects.” Ratiu explains,

“It’s not just confined to the Asian American community, but indicative of broader population migration. The South and Southeast, by and large, have attracted a lot of residents over the last two decades.”

Domestic and international companies have chosen to relocate to these areas. Ratiu explains,

“Toyota North America, which was based in California, moved its headquarters to Texas. The implication is huge. It wasn’t just the company’s headquarters that moved.”

He’s implying employees and their families relocate as corporations migrate south and eastward. He says this is a trend resulting from the significant economic development and employment growth in the South and the Southeast, with many other corporations following suit.

“The South and southeast markets have traditionally been a lot more affordable for someone living in California,” Ratiu said,

”a much lower price for a house, more spacious homes, and even the cost of living by and large tends to be cheaper.”

Business-friendly policies in the South have indeed benefitted many people who have moved to the region, according to Tim Hur, AREAA National Vice President. With year-over-year double-digit increases in residential real estate prices, spurred on by the strong surge in demand, new residents to the area are faced with the rising cost of living now affecting these sought-after areas.