Monday Musings: January 19, 2021

Jan 19, 2021


Public Trust Credit Team

President-Elect Joe Biden unveils administrative plans for first 100 days in office

Tomorrow, Joe Biden will succeed Donald Trump and officially assume office as the 46th President of the United States of America. Last week, Biden and his new administration outlined their plans for the first 100 days in office. Some agenda items (such as executive orders) can be completed quickly while others will require cooperation from a narrow Congress. According to the Wall Street Journal, Biden’s top priorities during his first days in office include confirming cabinet nominees in the Senate, rejoining the Paris climate accord, extending restrictions on foreclosure and eviction proceedings, and reversing travel bans from several majority Muslim and African countries. Concerning the pandemic, Biden has pledged the rollout of 100 million COVID-19 vaccine doses during his first 100 days in office as well as reopening K-8 schools during that same timeframe. 
To China, Biden has stated that he will not immediately roll back tariffs on Chinese imports or alter any stipulations of the Trump administration’s Phase One trade deal. Top of mind for market participants is the President-elect’s proposal for a $1.9 trillion COVID-19 relief package that he hopes will have Senate approval in the initial weeks of his presidency. Regarding aid to households, accounting for approximately half of the package’s cost, Biden’s prospective deal includes direct payments of $1,400/person per household, $400/week in unemployment insurance payments through September, increases in the child tax credit, and expanded paid leave. The second half of the stimulus plan includes $50 billion to increase COVID-19 testing, $160 billion in funding to launch a national vaccination program to help expedite the distribution process, $30 billion to establish a national disaster relief program, and additional funding to support state and local governments.

First look into Q4 2020 U.S. bank earnings

After spending most of 2020 building provisions for loan losses, bank management teams have begun releasing their reserves for credit losses during Q4 2020, ultimately benefitting their bottom lines. This trend reversal is a result of better-than-expected credit quality and generally more positive macroeconomic expectations for 2021. Asset quality metrics remain surprisingly strong thanks to the extraordinary fiscal stimulus of 2020 and widespread payment deferral programs that banks put in place to assist borrowers. Some banks have even stated that the additional fiscal stimulus expected for 2021 may push peak loan losses for this business cycle into 2022. The pace of additional reserve releases in the coming quarters will be contingent on the containment of COVID-19, the scale of the upcoming economic stimulus measures, and the strength of the economic rebound. 
Deposit levels continue to rise due to elevated liquidity from both consumers and businesses, but loan growth remains weak because of a lack of demand and tighter underwriting standards. As a result, banks are still having trouble redeploying their excess liquidity outside of their securities portfolios. Loan growth may start normalizing in the second half of 2021 as the vaccination rate and economic activity pick up, but the low interest rate environment will continue to pressure net interest income going forward. Boosted by the Fed’s unprecedented actions, capital market activities delivered record performance in 2020 and remained solid in the fourth quarter for the most part, though it is unlikely to see such exceptional results repeat themselves in 2021 as market performance normalizes. Regulatory capital ratios remain strong across the board and banks are getting ready to resume buybacks in Q1 2021 now that the regulators have removed several restrictions.

China was the only major economy to record growth in 2020; the new year appears poised for liftoff but some structural cracks remain

The Chinese economy grew 2.3% in 2020, making it the only major economy to register growth for the year and underscoring how the country’s manufacturing economy and targeted stimulus were able to keep the economy moving. Unlike many western countries that focused on lowering borrowing rates and giving money to consumers, China focused its stimulus on restarting factories and keeping the industrial complex active, resulting in a unique opportunity to maintain economic growth by pouring money into state-owned enterprises. 

While China is on track for a 7% growth bounce back in 2021, there are still areas of the economy that are struggling. China’s consumer spending is lagging due to a mixture of political and cultural factors. Due to a lack of a social safety net and a continued rise in the cost of living, most Chinese citizens have increased their savings, threatening to keep consumer spending low. According to the Wall St. Journal, citizens’ disposable income for the year was flat, but consumer spending fell nearly 15% in 2020. Without support from consumer spending, China’s economic recovery may be on less stable ground than the numbers suggest, especially as the economy continues to transition from a manufacturing economy to a service-based one.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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