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by Brunello Rosa
25 October 2021
On July 19, the UK celebrated what was emphatically labelled “Freedom Day:” the end of all restrictions related to the pandemic after the difficult months of the second lockdown, which had been particularly severe. More recently, though, the summer holidays, the gradual re-opening of the economy, the return of social interaction without social distancing, and the spreading of the Covid Delta variant have all contributed to a rapid increase in Covid cases.
According to government statistics, there are around 40,000 new daily cases of people having tested positive to Covid, and 330,000 new weekly cases. That is a 9.4% increase compared to the previous week. The number of people admitted to hospitals has also increased (it has surpassed 1000 cases daily), and the number of deaths is also increasing (it reached 72 per day and almost 1000 per week). This is also due to the spreading of a new sub-variant, called AY.4.2, VUI-21OCT-01 or “Delta Plus”, which is thought to be up to 10% more transmissible than the original Delta. The new sub-variant is responsible for 6% of the new cases recently registered in the UK.
For this reason, the government is said to be preparing to implement the so-called Plan B, which would include the return of certain restrictions, such as wearing masks in some public spaces, the obligation to show a “green pass” to attend some events or public places, and the suggestion of working from home whenever possible.
If these new restrictions are adopted, this would likely result in less dynamic growth in economic activity, which was already downgraded by the IMF in its latest World Economic Outlook (as we discussed last week).
All this is happening at a time when the UK is already going through a very challenging period, in which it is having to deal with the effects of the pandemic and Brexit at the same time.
The result has been labour shortages in a number of sectors, including hospitality and logistics, with the dearth of workers that can legally operate as waiters, car or truck drivers, for example. All this compounded the effects of higher gas prices, which led to the gasoline shortages at pump stations of a few weeks ago and the absence of key products (such as mineral water) in the shelves of supermarkets. Inflation, meanwhile, has reached 3.2% recently, and is expected to reach 4% or even 5% in coming months.
Facing all these emergencies at the same time, what’s the policy response of the authorities? As far as fiscal policy is concerned, this Wednesday the UK Chancellor of the Exchequer will deliver its annual budget, which is expected to bring – among other measures - a new spending review, new investments in education, culture, digitisation of public administration. However, the budget is not expected to massively deviate from the gradual fiscal consolidation path that was envisioned when an increase in corporate tax rates was announced months ago.
Monetary policy is also on the move, with the Bank of England expected to have “a live debate” on November 4th, when the new Monetary Policy Report will be issued, on whether or not the BoE should increase its policy rate by 15bps to 0.25%. At this stage, the MPC seems inclined to go in that direction. However, if the government will implement new restrictions and economic activity will suffer as a result of it, a rate increase in 2021 may prove premature.
by Brunello Rosa and Nouriel Roubini
25 October 2021
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi, Carmen Pages Serra, Zafiris Tzannatos
13 October 2021
by Brunello Rosa
6 October 2021
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi and Karmen Meneses
1 October 2021
by Giorgio Cafiero
29 September 2021
by Brunello Rosa
22 September 2021
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by John Hulsman
19 October 2021
Introduction: The dying days of the ‘Trump of the Tropics’?
Much as is true of his right-wing populist idol to the north, both Donald Trump and current Brazilian President Jair Bolsonaro provoke strong reactions in nearly everyone. Both were elected following the discrediting of their respective ruling elites, both disdaining ‘experts’ who they claimed had led their countries into decline and decay. The problem for both populists is that—while their critique of failed leaderships hit home politically—in terms of actually running things, they found the ruling of their respective countries difficult, given their elevation of the cult of the amateur over the (often rightly discredited) professional.
It is little wonder that chaos ensued. In each case, both Trump and Bolsonaro did well despite all this, until a genuine world historical crisis, the Covid pandemic, came along. Suddenly, experts were needed, and their respective countries had little time for their idiosyncratic, narcissistic populist leaders, who now seemed less refreshingly ‘authentic’ and more a danger to pulling their societies out of the Covid-19 abyss. The pandemic almost singlehandedly made Donald Trump a one-term president. The exact same process is well advanced regarding his soulmate to the south.
Bolsonaro And The Price Of Amateurism
To put it mildly, the Brazilian President (who ironically himself, like Trump, came down with the virus) has not helped matters in his erratic, often bizarre, response to the Covid-19 crisis. As of September, the pandemic has killed fully 590,000 Brazilians, the second worst absolute recorded total in the world, behind only the US.
Voters are furious at Bolsonaro’s chaotic handling of Covid, and more his bizarre belittling of their mass suffering. In a homophobic slur, Bolsonaro has gone so far as to question the wearing of masks, saying anyone who does so is a ‘pansy.’
Bizarrely questioning the almost universally agreed value of Covid vaccinations, the president—with no personal medical qualifications of any kind — has said taking them could lead to ladies becoming bearded, and people developing strange powers. This otherworldly neglect and disdain for the funeral pyres burning in his country is by far the single greatest reason for Bolsonaro’s political fall to earth.
But it is not the only policy example of Bolsonaro’s amateurish meddling. In March, the heads of the country’s three armed services (army, navy, and air force) jointly resigned after the president installed a hireling as the new defense minister, while firing his more professional predecessor. This mass resignation is unprecedented in Brazilian history, and has stoked political risk concerns that Bolsonaro is stocking the military leadership with loyalists so as to contest next year’s presidential elections in extra-constitutional terms, given that he is bound to lose them. The president himself has grimly said he will either emerge triumphant in 2022, or die or go to prison. This beyond alarming statement does not bode well for Brazil’s future political stability.
Bolsonaro’s amateurism has also showed on the economic front. On February 19, he replaced the head of Petrobras, the mammoth, state-owned oil company, naming an army general with absolutely no oil and gas experience as its new CEO. The markets reacted immediately, with Petrobras shares plunging by fully 19 percent after this became known. So, both economically and strategically, Bolsonaro’s amateurism has had baleful consequences.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com. His original writing work can all be found at johnhulsman.substack.com.
Week: 25 - 31 October 2021
The Week Ahead: Economic Activity Accelerates While Inflation Falls
In the US, GDP growth rate for Q3 is expected to rise to 2.5% q-o-q (p: 6.7%).
In the EZ, GDP growth rate for Q3 is expected to grow 2.0% q-o-q (p: 2.2%), and 3.5% y-o-y (p: 14.3%).
In the US, September’s core-PCE index is expected to increase to 3.7% y-o-y (p: 3.6%), and PCE index to 4.4% y-o-y (p: 4.3%).
In the EZ, October’s core inflation is expected unchanged at 1.9% y-o-y while headline inflation is seen falling to 3.7% y-o-y (p: 4.3%).
The Quarter Ahead: Global Economic Growth Aided By Service Sector Growth; Downside Risks Remain Elevated
Service-sector strength aids global growth. Business activity accelerated in some of the world’s largest economies owing to a pickup in the services sector that has offset weakness in manufacturing caused by supply-chain bottlenecks and rising prices. That combination likely means the global economy will continue to recover in the final months of the year, but not at the pace reached in Q2, when re-openings led to a growth spurt.
US infrastructure bill could help prevent the next supply chain crisis. US President Biden and Democratic lawmakers are edging toward a deal on the scope of their cornerstone economic revival package, and hope to reach a compromise. Scrambling to broker an agreement, Biden met with 19 lawmakers in a busy day of legislative negotiations. He aimed to secure what may be the signature effort of his administration, a multitrillion-dollar, two-bill legislative package that: i) expands social safety net programs; and ii)infrastructure spending.
EU mulls terminating Brexit trade deal if UK rift deepens. The EU could weigh terminating the post-Brexit trade deal if the UK government pulls out of its commitments over Northern Ireland. UK PM Boris Johnson has threatened to unilaterally suspend parts of the Northern Ireland Protocol, which governs trade between the province and the rest of the UK, using the powers granted in Article 16 of the pact. European officials have been discussing the need to prepare a powerful response.
US Fed Chairman Powell is readying markets for an announcement of a slowdown in its asset purchases – suggesting that the US economic recovery looks fit enough to sustain reduced Fed stimulus as soon as next month. Powell said the Fed is “on track” to begin slowing the pace of its UST and agency MBS purchases, which it is currently doing at a clip of about USD 120bn a month.
Real Economy: Downside Risks Could Slow The Economic Re-Opening, As Inflation Remains High
In the US, the IHS Markit composite PMI rose to 57.3 in October (c: 54.7; p:55.0), showing the fastest pace of expansion in private sector business activity for three months, as: i) service sector growth accelerated to the strongest since July (a: 58.2; c: 55.1; p: 54.9); and ii)manufacturing output increased the least in 15 months (a: 59.2; c:60.3; p: 60.7).
In the EZ, the IHS Markit composite PMI fell to 54.3 in October (c: 55.2; p:56.2), pointing to the slowest pace of expansion in the EZ private sector business activity, as: i) manufacturing posted the weakest increase in production seen over the past 16 months (a: 58.5; c: 57.0; p: 58.6); while ii) service growth eased to a six-month low (a: 54.7; c:55.5; p: 56.4).
In Japan, the au Jibun Bank composite PMI was up to 50.7 in October (c:50.7; p: 47.9), pointing to the first expansion in private sector activity in six months. The rebound came with: i) services activity registering an increase in activity for the first time since January 2020 (a:50.7; c: 48.0; p: 47.8); while ii) manufacturing was at a 3-month high (a: 53.0; c: 51.4; p: 51.5).
In China, the PBoC kept its one-year LPR unchanged at 3.85%.
In Russia, the CB raised its policy rate by 75 bps to 7.5%, the highest since June 2019.
In Turkey, the CBT slashed its one-week repo auction rate by 200bps to 16%, defying market expectations of a 50bps cut.
Financial Markets: Global Stocks Gain; Bond Yields Rise; USD Weakens, As Commodity Prices Rise
Market drivers: i) positive Q3 earnings; as ii) investors pay close attention to how higher energy and raw materials prices were affecting both Q3 profits and future guidance.
Global equities rose w-o-w (MSCI ACWI, +1.3%, to 742). In the US, the S&P 500 gained (+1.6% w-o-w to 4,545), lifted by real estate, utilities, and health care stocks. In the EZ, shares ended higher (Eurostoxx 50, +0.1% w-o-w, to 4,189), as optimism about corporate earnings season overcame worries about the potential risks if CBs tighten monetary policy as economic growth loses momentum. In EMs, equities advanced (MSCI EMs, +0.7%, to 1,293), as Chinese stocks rose (Shanghai Comp., +0.3%, to 3,583). Volatility fell below averages (VIX S&P 500, -2.5 pts to 14.4, 52w avg.: 20.5; 10y avg.: 17.2).
Fixed Income: w-o-w global bonds fell (BAML Global, -0.4% to 292.7.9), while UST yields rose (+6 bps, to 1.64%), after the Fed warned that supply constraints and elevated inflation are likely to last longer than previously expected, and well into next year.
FX: w-o-w, the US Dollar Index fell (DXY, -0.3%, to 93.642; EUR/USD +0.4%, to 1.165). In EMs, currencies rose against the USD (MSCI EM Currency Index, +0.2% w-o-w, to 1,732).
Commodities: Oil prices rose (Brent, +0.8% w-o-w, to 85.5 USD/b), as an ongoing energy crunch in Europe and Asia. Gold gained (+1.4% w-o-w, to 1,792 USD/Oz), as the USD weakened after Fed Chair Powell said that the Fed is ready to begin tapering
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