The Top Line

• With China moving to cement direct control over Hong Kong, finance flows indicate markets’ opinions are shifting about the reliability of the territory as a good place to do business.

• As COVID-19 has accelerated the trend towards telework, the future of how and where large sections of the workforce operate is in flux.

• As the economy reopens and unemployment claims slow, old concerns about incentives to work are beginning to show.

• Space Tech Helping Fight COVID-19.

Protesting with Wallets

Source: Refinitiv Datastream/Noah Sin

As China moves to bypass Hong Kong’s elected legislature and impose national security laws crafted in Beijing, a continuation of capital outflows from the nominally semiautonomous territory may accelerate a trend begun over the last two years (see above).

• On Wednesday, May 27, the U.S. State Department determined that Hong Kong can no longer be considered semiautonomous from China. A reassessment of the special trading and diplomatic relationship that the U.S. shares with Hong Kong in light of the determination will take place against the backdrop of renewed protests by Hong-Kongers coinciding with Beijing’s move to exert greater control over the territory’s governance.
• The traditional center of China’s financial sector, Hong Kong continues to see correlated movement of funds to Singapore and relocation of some firms’ operations amid an uptick in licensing requests. This movement comes in response to fears stemming from COVID-19 as well as a potential renewal of Hong Kong’s pro-democracy movement as China moves to impose greater control.
• Meanwhile, supply chain diversification has taken on a new premium for companies who relied in-whole or in-part on China as a supplier and whose sources were cut off when China shut down following propagation of COVID-19 from its source in Wuhan. Those companies are now looking to decrease their reliance by seeking new sources and building new production facilities in other countries and here at home.

Office Space

Social distancing and workplace closures to counteract the spread of COVID-19 have accelerated the trend towards teleworking for large swaths of the workforce.

• Telework has been implemented with marked success and widespread applicability with over one-third of jobs able to be done from the employee’s home.
• A majority of employees who telework would like to still do so at least occasionally and more than half would like it to be their primary mode of working, according to one survey.
• As employers begin a phased return of their employees to the office, many are considering an extension of telework into the longer term.
• As the rise in utilization of telework by employers increases, their need for commercial real estate and office buildings is likely to decrease. Conversion of these spaces and other properties hosting businesses with decreased demand into residential units may help to address housing supply issues that existed before COVID-19.

Myth vs. Fact

MYTH: Some commentators suggest that recent expansionary monetary operations of the Federal Reserve in response to the economic effects of the COVID-19 pandemic must necessarily lead to inflation.

FACT: In actuality, the money supply itself is only one of multiple variables that determine the level of inflation in an economy. Price increases for goods and services – what we commonly call inflation – is usually determined by other inflationary phenomena. The two most common are cost-push inflation and demand-pull inflation.

• Cost-push inflation is when increases in prices of inputs like labor and materials leads to an increase in production costs, pushing the shelf-price of the good or service higher.
• Demand-pull inflation is when the total demand of all consumers for a given good or service rises faster than that good or service’s supply can respond, pulling the price of the good or service higher.

Unemployment Claims Slowing

As phased reopening continues and Americans head back to work, the number of new filings for unemployment benefits continues to fall (see above).

• On Thursday, May 28, reporting indicated that 2.1 million workers had filed for unemployment benefits the previous week as the number of filings continues to fall from its peak in late-March.
• However, data also showed a reduction of continuing unemployment claims – additional claims by those already collecting unemployment for two weeks – by nearly 4 million workers as businesses continue to reopen.
• As people head back to work, evidence that concerns of some Republicans regarding disincentives to work caused by expanded unemployment benefits that exceed recipients’ regular wages have begun to materialize. Researchers at the University of Chicago estimate that up to two-thirds of workers are receiving more in unemployment benefits than they do on the job.

Disruption of the Week

NASA research and technology is being tapped to help the pandemic response as manned space launches return to U.S. soil.

• After almost a decade of relying on Russian launch sites, this past week the U.S. restored our ability to send humans to space from Cape Canaveral.
• This launch is also historic in that is marks the first time a commercially owned spacecraft has carried people into orbit. Boosting prospects that public-private partnership will become the future of space exploration and travel.
• Back on Earth, NASA has unleashed its scientists and research in the fight against COVID-19, and is currently working to repurpose technology used to sterilize spacecraft to clean schools and hospitals.
• Additionally, the FDA recently granted emergency use authorization to a NASA-developed ventilator that is cheaper and more efficient than traditional ventilators.
• While this launch is just one small step in our return to space, further focus and investment in the public-private partnerships that promote space travel and tech research has the potential to make U.S. space great again.

Further Reading

• As Americans get back to work, Congress is looking at ways to incentivize the return to the workforce for those on unemployment. Two approaches are the leading contenders to help workers and businesses get back to where they were before COVID-19 hit. Wall Street Journal

• As Congress continues the response to COVID-19, it also must look towards renewal of the Surface Transportation bill passed in 2015 whose provisions expire this year. But a question lingers as this infrastructure package nears the Senate and House chambers: Why are infrastructure costs higher in the U.S. than in other countries? Bloomberg Opinion via Pocket