Member Briefing June 14, 2022

June 14, 2022

Posted By: Harold King in Daily Briefing,

Fed Meets Today Amid Slumping Stock Market, Out-of-Control Inflation

The Federal Reserve begins a two-day meeting Today facing the challenge of an inflation spiral that may require it to raise interest rates to a level that markets are just beginning to take note of and do so without tanking the economy. Markets and experts had expected another 50 basis point hike by the Fed this month after a similar increase in May. But now there is talk the Fed may need to shock markets and the economy with a larger increase of 75 basis points.

“The Fed knows that in the economy, it can’t control supply, only demand, so the Fed will keep raising rates until demand cools sufficiently,” says Gary Zimmerman, a former investment banker who is now CEO of MaxMyInterest. “With so much pent-up demand for travel and experiences and so much dry powder sitting in bank accounts, it could take more drastic measures, or prolonged high rates, to contain inflation.”

War in Ukraine Headlines

The “R” Word

An increasing number of economists are now doubting the possibility of a “soft landing,” which would see the Fed get inflation under control without triggering an economic downturn. While the Fed has so far telegraphed half-point hikes at its meetings in June (coming up on Wednesday) and July, there is some murmur that a larger 75 basis point increase could be on the table.

“I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession,” said JPMorgan Chase chief economist Bruce Kasman, who also warned of a harmful wage-price spiral. The feedback loop occurs when surging inflation triggers elevated wage demands, leading to increased costs for companies and thereby raising prices even further. “The chairman of the Fed doesn’t want to let the ‘r’ word slip out of his mouth in a positive way, that we need a recession,” added former Fed Vice Chair Alan Blinder. “But there are a lot of euphemisms and he’ll use them.”

Higher Unemployment Rate Looms as the Fed Fights Inflation

Federal Reserve officials are beginning to signal that higher unemployment rates might be a necessary consequence of their efforts to damp inflation by raising interest rates. This marks a reversal from last year, when their policies provided strong economic stimulus aimed at spurring the labor market’s recovery from the pandemic’s damaging effects.

In economic projections to be released this week, more officials are likely to pencil in plans to raise rates this year to levels high enough to deliberately slow hiring and economic growth in an effort to cool inflation. The policy makers also could project somewhat higher unemployment rates over the next two years than they had anticipated earlier this year. The unemployment rate is at 3.6%. Fed governor Christopher Waller said in a speech on May 30. “If we can get unemployment to just 4.25%, I would consider that a masterful performance by the central bank.”

US COVID – Why Everyone you Know is getting COVID These Days

Packed indoor events and fully booked flights where masks are few and far between suggest that the pandemic is a distant, unpleasant memory. In reality, Covid-19 cases have steadily increased nationwide since the end of March. Hospitalization and death rates remain low, and will likely stay that way. But beyond that, many experts say they’re unable to predict the trajectory of the current wave, including how and when it will end.

Given the past two years of pandemic precedent, that’s somewhat surprising — and one indicator of many that the ongoing rise in cases is noticeably different than previous Covid surges. Some experts say it might even mark the beginning of the country’s “new normal.” Here’s why, and what that means for the future of the pandemic:

Test to Return to the U.S. by Air Dropped

As of last Sunday morning, travelers flying to the United States no longer had to provide a negative test result before boarding their plane. On Friday, the Centers for Disease Control and Prevention said that it was going to lift the requirement on Sunday at 12:01 a.m. after officials determined that the widespread adoption of vaccines and treatments for Covid-19 no longer make it necessary.

In an agency release explaining her decision, Dr. Rochelle P. Walensky, the C.D.C. director, also cited booster shots and the milder Omicron variant, which she said had “generally caused less severe disease among those who are infected.” The decision was met with joy in the travel industry, which for months has been lobbying the administration hard to get rid of the testing rule.

FDA: Pfizer, Moderna Vaccines for Kids Under 6 are Safe, Effective

Two Covid-19 vaccine options for babies and toddlers are safe and effective, FDA reviewers said in briefing documents posted online over the weekend, setting the stage for regulators to potentially authorize the shots for emergency use later this week. The documents will form the basis of the FDA’s independent vaccine advisers’ review at meetings today and Wednesday, during which they’ll vote on whether to recommend the agency endorse EUAs for the myriad age groups.

The three-dose Pfizer-BioNTech vaccine for kids ages 6 months through 4 years will likely benefit this age group, the FDA said, noting higher hospitalization and death rates among the youngest children in the U.S. compared with those 5 and older. Moderna’s two-dose Covid-19 vaccine regimens for children are generally safe and effective for children ranging in age from 6 months to 17 years old, the FDA said in a separate briefing document posted late Friday.

S&P 500 Drops Into Bear-Market Territory as Dow, Nasdaq Fall

Faced with rising chances of aggressive monetary tightening by the Federal Reserve, investors broadly unloaded risk. The S&P 500 slumped 3.9%, with most member stocks down on the day. Meanwhile, a rout in cryptocurrencies highlighted investors’ increasing unwillingness to hang on to their most speculative holdings. The price of bitcoin plunged Monday below $23,000, at one point trading down 67% from its November high.

“We’re definitely seeing a risk-off atmosphere, a flight to quality,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “In that environment, people need to raise cash.” The declines put the S&P 500 in a bear market—down more than 20% from its January high—for the first time since 2020. The Dow Jones Industrial Average fell 2.8%, or about 875 points, while the tech-heavy Nasdaq Composite declined 4.7%.

New York Lawmakers Pass a Flurry of Worker Protection Laws

As the New York State legislative session came to a close, state lawmakers passed a flurry of laws providing protections to workers, ranging from wage protections for freelance workers, prohibitions against absence control policies that penalize employers for taking protected leave, and amendments to the Hero Act, as well as laws aimed at providing employment protections in specific industries – nursing and warehousing.

These laws are in addition to a salary transparency law, which was also recently passed by New York lawmakers. These bills are now headed to Governor Kathy Hochul’s desk for her signature or veto.

Supply Chain Issues Threaten Chemical Industry Growth

The American Chemistry Council (ACC) Mid-Year 2022 Chemical Industry Situation and Outlook report states that in spite ongoing supply chain constraints, the American chemical industry expects to deliver solid growth this year as it benefits from inventory rebuilding, steady demand across many end-use industries and a continued competitive advantage in natural gas-based chemistries.

Demand for the industry’s products is being driven by technological innovations taking place in different fields, For example, the manufacture of lighter-weight vehicles designed to lessen their impact on the environment is an important end-use market for chemistry, with over $3,200 in chemistry going into each vehicle produced. These lighter-weight vehicles also improve fuel economy and increase safety, according to ACC.

NY- 17, Working Families to Drop Maloney Endorsement and Back Biaggi

The progressive Working Families Party is switching its endorsement from Rep. Sean Patrick Maloney to state Sen. Alessandra Biaggi, who’s challenging the five-term incumbent in the Democratic primary.

The small but influential party in March endorsed Maloney, who heads the Democratic Congressional Campaign Committee. But since then, New York’s congressional maps were redrawn, and Maloney angered much of the left by announcing he was running in the new district he lives in despite it heavily overlapping with the district won by party-backed Rep. Mondaire Jones in 2020 — prompting Jones to now run in New York City.

Liquefied Natural Gas Prices Will Steam Up Again

An explosion at one of the largest U.S. LNG export terminals last week sent European gas prices soaring again—demonstrating the fragility of the market and the extent to which it remains exposed to any supply hiccup. Europe’s gas supplies have been under threat since Russia invaded Ukraine in February. While there still appears to be no immediate prospect of a complete halt to Russian supply, overall Russian flows to the region have fallen.

Moreover with Shanghai groping toward reopening and Asian countries stocking up for the winter, Asia is seeing a rebound in demand. That is especially true since rising oil prices and cheaper LNG have made the supercooled fuel more attractive again. On a dollar per British thermal unit basis, Asian LNG prices and Brent oil have reconverged in recent months. Many Asia-bound LNG cargoes were rerouted to Europe earlier this year when the EU was willing to pay a premium. But the spread between European and Asian prices in June has narrowed to about $1 per million British thermal units (MMBtu) from $5 in May.

The Hamilton Index: Assessing National Performance in the Competition for Advanced Industries

The Hamilton Center on Industrial Strategy at the Information Technology and Innovation Foundation (ITIF) examined national changes in global shares of output in seven industry sectors that the Center has aggregated into the Hamilton Index of Advanced-Technology Performance: pharmaceuticals; medicinal, chemical, and botanical products; electrical equipment; machinery and equipment; motor vehicle equipment; other transport equipment; computer, electronic, and optical products; and information technology and information services.

The data show U.S. performance is weak and declining, both in absolute market share and relative to the size-adjusted global average (a ratio known as a location quotient). It is strongest in IT and other information services (software and Internet companies) and other transportation equipment (principally aerospace). In contrast, U.S. global market share in electrical equipment, machinery and equipment, and motor vehicles is quite low and falling. Significant growth in the IT and other information services sector, both globally and especially in the United States, is why the overall decline in U.S. global market share of advanced industries was limited to 1.5 percentage points from 1995 to 2018.