U.S.-China talk heats up a little — Quarles on banks taking risk — How the economy has changed

From: POLITICO's Morning Money - Wednesday Jun 02,2021 12:03 pm

Jun 02, 2021

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Quick Fix

U.S.-China talks heat up a bit — It’s been strange to go from constant, full-on trade wars with China under former President Donald Trump to the Sino-America relationship being almost an afterthought in the early months of the Biden White House. Which doesn’t mean the fight is at all over.

Many of the tariffs remain and the current White House has taken a tough line on human rights and other issues (witness the dust-up in Alaska back in March). But it’s been relatively quiet until the last week as Chinese Vice Premier Liu He, the point man in trade war talks with the Trump White House, has held talks with a couple of top U.S. officials, including Treasury Secretary Janet Yellen on Tuesday.

Treasury put out a pretty bland read-out of the Yellen/Liu call: “Yellen discussed the Biden-Harris Administration’s plans to support a continued strong economic recovery and the importance of cooperating on areas that are in U.S. interests, while at the same time frankly tackling issues of concern. Secretary Yellen noted that she looks forward to future discussions with Vice Premier Liu”.

The U.S.-China stuff won’t really come to a head until late this year when the “Phase One” deal with the Trump White House, which demanded increased purchases of U.S. goods in exchange for some tariff relaxation, expires.

At that point, the White House will face some difficult choices with the business community arguing for further deescalation of tensions and tariffs and unions and others on the left concerned with human rights pushing for a tough line.

And the choice will come just as Democrats head into the 2022 midterms with a couple of competing priorities. They need the left to be fully engaged to prevent usual losses in a president’s first midterm but will also need tons of cash to hold off Republicans eager to retake control on Capitol Hill. So it’s worth starting to pay pretty close attention to how the administration handles the China relationship in the second half of the year.

GOOD WEDNESDAY MORNING — Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on @AubreeEWeaver.

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Driving the Day

President Joe Biden in the afternoon delivers remarks on the Covid-19 response … Biden and the first lady will then head to MM’s former summer headquarters, Rehoboth Beach, Dela. where they will stay until Friday …

Yellen heads to the G-7 finance ministers meeting in London, her first overseas trip as Treasury secretary where she will “reinforce the U.S. commitment to policy priorities to promote the global recovery from the COVID-19 pandemic, including maintaining supportive fiscal policies”

THE BIG IDEA: HOW COVID HAS CHANGED ECONOMICS (MAYBE FOREVER) — Bloomberg’s Matthew Boesler: “Once ideas about how to manage the economy become entrenched, it can take generations to dislodge them.

"Something big usually has to happen to jolt policy onto a different track. Something like Covid-19. In 2020, when the pandemic hit and economies around the world went into lockdown, policymakers effectively short-circuited the business cycle without thinking twice. In the U.S. in particular, a blitz of public spending pulled the economy out of the deepest slump on record — faster than almost anyone expected — and put it on the verge of a boom. The result could be a tectonic transformation of economic theory and practice.”

GENSLER MOVES ON TRUMP RULE — Our Kellie Mejdrich: “SEC Chair Gary Gensler on … paused the enforcement of rules designed to rein in investor advisory firms that influence the voting of public company shareholders, in his first move to undo an agency action from the Trump administration.

“Gensler's decision was a big blow to business interests that lobbied the agency for years to crack down on the two dominant investor advisory firms, Institutional Shareholder Services and Glass, Lewis & Co. The 2019 rules at issue — enacted under previous SEC Chair Jay Clayton — required the firms to consult with target companies before making recommendations to their shareholders about upcoming proxy votes.”

QUARLES ON BANK RISKS — Also via Kellie: “The top Federal Reserve official responsible for supervising the banking system said … that lenders were beginning to loosen credit standards, but that the increased risk-taking was welcome as the economy opens up and that financial firms could withstand potential market volatility.

“Federal Reserve Vice Chair for Supervision Randal Quarles said during an event hosted by POLITICO that banks that tightened up lending requirements last year ‘are beginning to relax those standards back to pre-Covid levels.’ ‘That's actually a good thing,’ Quarles said. ‘They are taking more risks than they were a year ago. It doesn't seem to be kind of a concerning level of risk in the aggregate.’”

GOLDMAN: SOME RICH FLED BLUE STATES BECAUSE OF SALT — Our Brian Faler: “Some wealthy people — including 5 percent of New York households earning more than $10 million — fled high-tax states in the wake of Republicans’ cap on state and local tax deductions, acco rding to a new analysis.

“Overall, Goldman Sachs says, about 1.5 percent of households making more than $1 million headed to low-tax states because of the $10,000 limits imposed as part of Republicans’ 2017 tax cuts. That cost their old states as much as 1 percent of their tax revenue, the report said.”

Markets

STOCKS END MIXED — AP’s Damian J. Troise and Alex Veiga: “A wobbly day on Wall Street ended with a mixed finish for the major stock indexes Tuesday as losses in technology and health care companies offset gains elsewhere in the market.

“The S&P 500 gave up an early gain, slipping less than 0.1 percent. That broke a three-day winning streak. The benchmark index had been up 0.7 percent in the early going. The tech-heavy Nasdaq inched 0.1 percent lower, while the Dow Jones Industrial Average eked out a 0.1 percent gain.”

SPAC PULLBACK PRESSURES CREATORS TO FIND QUALITY MERGERS — WSJ’s Amrith Ramkumar: “Competition among so-called blank-check companies to find mergers is already stiff. Share-price declines and a ticking clock to take companies public are ratcheting up the pressure. The new challenges for creators of special-purpose acquisition companies, or SPACs, result in part from the abundance of the deals that raised money early in 2021.

“Looming over these firms is a two-year deadline to do a deal or hand back cash to investors. Now that shares of many SPAC-related companies have fallen, fewer startups are interested in going public through a SPAC. That mismatch is intensifying competition between some blank-check firms for the same private firms, known by some on Wall Street as a ‘SPAC-off.’”

AMC, GAMESTOP RALLIES DEAL SHORTS ANOTHER $591M BLOW — Bloomberg’s Bailey Lipschultz: “AMC Entertainment Holdings Inc. and GameStop Corp.’s stock rallies Tuesday hammered short sellers to the tune of $591 million, deepening bears’ horrific 2021 losses.

The movie theater operator’s more than 18 percent surge handed shorts $373 million in mark-to-market losses, while the video-game retailer’s 9.3 percent rally dealt another $218 million blow at mid-day, according to financial analytics firm S3 Partners. Their meteoric gains have squeezed short sellers with losses ballooning to $9 billion in total for investors betting against both companies this year, Ihor Dusaniwsky, S3’s managing director of predictive analytics, said in an email.”

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Fly Around

WHILE U.S. WORRIES ABOUT INFLATION, GROWTH ELSEWHERE FACES LASTING DAMAGE — WSJ’s Jon Sindreu: “As investors weigh and reweigh the chances that the U.S. economy will run too hot, they should remember that the rest of the world isn’t close to recovering from the pandemic. Globally, the economic outlook has improved, thanks to the ramp-up in vaccinations.

“On Tuesday, the Organization for Economic Cooperation and Development upgraded its forecasts for growth in world gross domestic product to 5.8 percent for this year and 4.4 percent for next year, compared with December projections of 4.2 percent and 3.7 percent, respectively.”

IS THE LABOR MARKET WORSE THAN IT APPEARS? — Reuters: “U.S. labor market signals are conflicting to an ‘unprecedented’ degree, but those suggesting labor market slack should be given more weight than those pointing to tightness, according a paper published Monday by the San Francisco Federal Reserve Bank. The paper looked at 26 labor market measures that typically move in tandem and found that during the current recovery they are giving wildly divergent signals about the health of the job market.

“The job openings rate, for instance, suggests the job market is much tighter than the unemployment rate; the labor force participation rate points to much more slack than detected in the unemployment rate.”

FED’S BRAINARD: MORE ‘PROGRESS’ ON RECOVERY AHEAD — Reuters’ Howard Schneider and Ann Saphir: “The United States is getting closer to the Fed's maximum employment and 2 percent inflation goals, Fed Governor Lael Brainard said on Tuesday, but the depth of the remaining problem still requires the central bank to stick to its super-easy monetary policy until more progress is seen.

“‘While we are far from our goals today, we are seeing welcome progress, and I expect to see further progress,’ Brainard told the Economic Club of New York. But ‘jobs are down by between 8 and 10 million compared with the level we would have seen in the absence of the pandemic. And it will be important to see sustained progress on inflation,’ not just a temporary jump.”

REGIONALS RELY MORE ON OVERDRAFT — Bloomberg’s Max Reyes: “Wall Street bore the brunt of lawmakers’ assault on overdraft fees last week, but it’s regional banks that rely most on that revenue, according to a note … from Morgan Stanley.

“Consumer overdraft fees accounted for almost 5% of 2020 revenue at Alabama’s Regions Financial Corp., the bank most dependent on those charges, according to the note. They represented around 2% of revenue at firms including Citizens Financial Group Inc. and Huntington Bancshares Inc. That contrasts with the nation’s biggest banks. Such fees generated just 1.2% of revenue at JPMorgan Chase & Co.”

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For Your Radar

WELCOME TO THE WORLD — Lucy Jackson, a U.S. Treasury alum who is now director of partnerships and strategy at Petal Card, Inc., a consumer lending fintech, and Christopher Dennen, senior director of corporate strategy at Optum, on May 25 welcomed Jackson Robert Dennen.

WEEKEND WEDDING — Brooke Hamroff, who works on content strategy and programming at Instagram, this weekend married Noah Putter, who recently graduated from Wharton MBA and is soon starting a new job in health care private equity. The wedding was at the Liberty Warehouse in Brooklyn, and the couple met through their sisters, who set them up in 2015.

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