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Markets brimming with investor optimism on US economy – Financial Times

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It is easy to understand why investors are resoundingly positive about the economic outlook this year. But are markets pricing in too much optimism?

The reopening of the US government’s spending spigots has fuelled the bullishness. President Joe Biden is pushing for a $1.9tn relief package on top of the $900bn bill passed in late December. Something in the ballpark of $1.5tn is now expected, or nearly 7 per cent of gross domestic product, according to Goldman Sachs. 

Vaccine distribution is also accelerating, with the US now inoculating more than 1m people per day. The approval of the Johnson & Johnson jab could further bolster supplies, adding about 30m doses by early April and 100m by the end of June, according to Barclays. 

The bank has raised its real US GDP growth forecast for 2021 to 6.3 per cent. Goldman, Morgan Stanley and NatWest Markets have recently upped their own predictions, as has research firm Oxford Economics. Its economists now expect a 5.9 per cent expansion in 2021, nearly 2 percentage points higher than their January estimate.

The reassessments have bolstered bets that Treasury yields and inflation expectations are heading higher. A sell-off in US government debt gained pace this week sending yields on 30-year bonds above 2 per cent for the first time in a year, having hovered around 1.6 per cent as recently as November. And the 10-year break-even rate, a measure of expected inflation derived from the difference between interest rates on benchmark bonds and inflation-linked debt, spiked to its highest level since 2014, at 2.2 per cent. In September, it languished below 1.7 per cent.

After such an enormous market move, “the nagging doubts begin”, says Robert Tipp, chief investment strategist at PGIM Fixed Income. 

It is clear the list of credible risks is long. “It is hard not to be pretty optimistic looking out,” says David Riley, chief investment strategist at BlueBay Asset Management. But “it sounds horribly complacent, which makes me worried”.

New, more easily transmissible Covid-19 variants pose the most obvious potential threat to the recovery. Preliminary reports that show the suite of coronavirus vaccines so far approved are not as effective against the South African strain are particularly worrisome, investors say.

“The spread of the variant really is competing with the rollout of the vaccine, and that is where the risk is,” says Alicia Levine, chief strategist at BNY Mellon Investment Management.

The second issue centres around the consumer. Olumide Owolabi, a fixed-income portfolio manager at Neuberger Berman, has hinged his call for outsized growth in large part on expectations that once Americans can venture out, they will rush to spend the stockpile of savings many accumulated since the start of the pandemic. This pent-up demand will also feed into higher inflation, he says.

But what if consumers are more circumspect or the opportunities to spend are more limited than prior to the pandemic?

“We don’t really know how people are going to respond,” Riley says. “We could have a situation where we have a significant relaxation of restrictions within countries, but a tightening of travel between countries. For some [places] with big tourist sectors, that will have quite a big impact.”

If people are not spending freely by summer, Owolabi warns, the expansionary cycle he expects will be upended. “Timing is key,” he says.

The US Federal Reserve is highly sensitive to these risks, according to Tipp, who cites the central bank’s “heavy handed” reminders about the enormous ground to be made up before it will consider adjusting its policy stance.

Powell doubled down on this message on Wednesday, warning that America was “very far from a strong labour market” and that any temporary burst in inflation this year would be “neither large nor sustained”. Richmond Fed president Thomas Barkin, meanwhile, told the Financial Times this week that he sees deflationary pressures ahead.

Tipp reckons 10-year Treasury yields will slip back to 1 per cent by year end, a far cry from the 1.6 per cent or higher level some strategists have pencilled in.

“You are getting to a point where [the market] is already pricing in an unrealistic pace of Fed hikes,” he says, referencing the 2023 timeline endorsed by many investors. “The [reflation] trade is over. We are just in the overshoot, and the question is, how far is it going to go?”

Given the extraordinary support being provided by both the Biden administration and the US central bank, it could be quite a long time until reality catches up.

colby.smith@ft.com

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With many vaccinated, Israel reopens economy before election – CTV News

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JERUSALEM —
Israel reopened most of its economy Sunday as part of its final phase of lifting coronavirus lockdown restrictions, some of them in place since September.

The easing of restrictions comes after months of government-imposed shutdowns and less than three weeks before the country’s fourth parliamentary elections in two years. Israel, a world leader in vaccinations per capita, has surged forward with immunizing nearly 40 per cent of its population in just over two months.

Bars and restaurants, event halls, sporting events, hotels and all primary and secondary schools that had been closed to the public for months could reopen with some restrictions in place on the number of people in attendance, and with certain places open to the vaccinated only.

Israeli Prime Minister Benjamin Netanyahu’s government approved the easing of limitations Saturday night, including the reopening of the main international airport to a limited number of incoming passengers each day.

Netanyahu is campaigning for reelection as Israel’s coronavirus vaccine champion at the same time that he is on trial for corruption.

Israel has sped ahead with its immunization campaign. Over 52 per cent of its population of 9.3 million has received one dose and almost 40 per cent two doses of the Pfizer vaccine, one of the highest rates per capita in the world. After striking a deal to obtain large quantities of Pfizer/BioNTech vaccines in exchange for medical data, Israel has distributed over 8.6 million doses since launching its vaccination campaign in late December.

While vaccination rates continue to steadily rise and the number of serious cases of COVID-19, the illness caused by the virus, drops, Israel’s unemployment rate remains high. As of January, 18.4 per cent of the workforce was out of work because of the pandemic, according to Israel’s Central Bureau of Statistics.

At the same time that it has deployed vaccines to its own citizens, Israel has provided few vaccines for Palestinians in the West Bank and Gaza Strip, a move that has underscored global disparities. It has faced criticism for not sharing significant quantities of its vaccine stockpiles with the Palestinians. On Friday, Israel postponed plans to vaccinate Palestinians who work inside the country and its West Bank settlements until further notice.

Israeli officials have said that its priority is vaccinating its own population first, while the Palestinian Authority has said it would fend for itself in obtaining vaccines from the WHO-led partnership with humanitarian organizations known as COVAX.

Israel has confirmed at least 800,000 cases of COVID-19 since the start of the pandemic and 5,861 deaths, according to the Health Ministry.

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Startup: Only Quantum Cryptography Can Save The $100 Trillion Global Digital Economy – Forbes

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Nations and startups around the world are investing hundreds of billion of dollars in quantum computing, says quantum security startup CEO James Nguyen. And while there are plenty of positives in quantum computing technology — new medical treatments are just one — the problem is that for a high-functioning quantum computer, all the cryptographic security we currently have could be as flimsy as using “password123” for your bank account.

That means that $100 trillion could be at risk by 2025.

“The World Economic Forum already said that by 2025 … the digital economy is going to be worth a hundred trillion dollars,” Ngyuyen told me recently on the TechFirst podcast. “And … everything that we operate today that’s important to us, such as our memories, our financial assets, our legacy, or even our military weapons … anything that we deal with in sets of information … is controlled over the internet.”

Quantum pioneer IBM says that quantum computing will create new exposure risk since quantum computers can quickly solve the complex math problems that form the foundation of today’s security. Those problems secure our bank accounts and nuclear weapons, and while classical supercomputers can take thousands of years to solve them, IBM says a large-scale quantum computer could theoretically solve them in hours or days. Other computing giants like Microsoft are already hard at work on post-quantum cryptography. And Google has said that quantum computing could “end encryption” within five years.

Ngyuyen says the threat is already here, especially given that Russia and China are the two countries investing the most in quantum computing investment, and the regardless of the exact timeline, every organization needs to be “quantum ready.”

He also says that his Canadian startup, Quantropi, has the answer.

“We’ve developed the world’s first cloud-based platform for digital quantum key distribution over the internet,” Ngyuyen says. “We’ve been able to prove — with a partnership with McGill — that we’re a hundred thousand times faster than existing quantum key distribution systems.”

According to Ngyuyen, Quantropi’s solution is something like an abstraction layer for quantum security that banks and digital retailers and military organizations can incorporate into their systems without needing their own on-site quantum computers. Essentially, it’s software with the core of a quantum algorithm that can be implemented in quantum computers as well as classical computers. Quantropi says that while many companies can generate very strong quantum entropy — very random numbers — no-one has been able to distribute this effectively at high speed over existing infrastructure.

In other words, over the internet.

This is essentially quantum security as a cloud service, at gigabits per second.

Quantropi’s solution uses a quantum random number generator from Quintessence Labs out of Australia, then streams quantum cryptography to clients via a process the company calls QEEP: quantum entropy expansion and propagation. The result is “perfect secrecy” in key encoding, according to a presentation the company made during a recent IEEE quantum event.

Of course, many companies claim to have the perfect solution for security, and seemingly, everyone gets hacked sooner or later.

Ngyuyen says Quantropi is working in closed beta with Fortune 100 companies as well demonstrating and testing its technology in universities like McGill. The company has multiple patents with over ten outstanding, he adds, and has been recommended by the National Research Council of Canada to be a nominee for the Science Startup Breakthrough of The Year.

Whether or not Quantropi has the final solution remains to be seen. But fixing security in the age of quantum computing is almost unimaginably important.

Because a working quantum computer that can break high-standard encryption in the hands of bad actors would make the mammoth Solar Winds hack look like a script kiddie.

“[Quantum computing] really undermines and breaks today’s PKI encryption,” Ngyuyen says. “And if a criminal was going to basically leverage a quantum computer for bad reasons … you literally can start wars. You literally can basically empty people’s bank accounts … steal people’s identities … everything that we believe or, you know, is important to us, it’s going to be broken.”

Get the full interview on the TechFirst podcast.

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Biden on brink of passing historic $1.9tn boost to US economy – Financial Times

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Joe Biden is on the brink of securing final approval from Congress for his $1.9tn stimulus bill — a bet that massive fiscal intervention aimed at lower and middle class families will speed up America’s recovery without overheating the economy.

After the US Senate voted to approve the package on Saturday, the Democrat-controlled House of Representatives is poised to give its final green light to the bill on Tuesday, allowing it to be signed into law by Biden.

Barring any last-minute trouble in the House, where Democrats hold a slim majority, the stimulus legislation will mark a big political victory for Biden, who made it his top priority since entering the White House on January 20.

The stimulus bill — known as the American Rescue Plan — represents one of the largest US government interventions in the economy of the post-world war two era — just short of the size of the $2.2tn March 2020 pandemic stimulus, but larger than the $787bn recovery plan during the 2009 financial crisis.

The prospects for its passage have already led many private-sector economists to upgrade their forecasts for US growth this year. Federal Reserve officials are likely to do the same when they publish their latest economic projections next week.

But the plan has attracted criticism from Republican lawmakers — who have so far unanimously opposed the plan — as well as some economists, including Lawrence Summers, the treasury secretary under Bill Clinton — who say it risks a harmful spike in inflation.

A recent sell-off in long-term government debt — with yields on 10-year Treasury bonds rising above 1.5 per cent for the first time in more than a year — has fuelled those concerns, though senior US policymakers including Janet Yellen, the treasury secretary, and Jay Powell, the Federal Reserve chair, have dismissed the worries.

Around the world, the US stimulus package could give a fresh jolt to the global recovery amid hopes that widespread vaccinations throughout the year will help reopen many economies. But any unintended jump in US inflation or debt yields could unsettle markets and prove particularly harmful for emerging markets.

Domestically, Biden’s top aides and many Democrats on Sunday touted the plan as “historic and transformational” legislation for families that have struggled through the pandemic. The bill — which will be financed entirely by adding to the US deficit — will dispatch $1,400 means-tested payments to most Americans; extend emergency federal jobless benefits worth $300 per week until September; increase a tax credit for children; provide aid to states and local governments; and boost funding for schools and vaccinations.

“This is a bill that reflects President Biden’s belief that the best way to get the economy back on track and get it growing is to invest in working people and middle class people,” Kate Bedingfield, the White House communications director, told CNN. “It is urgent aid that is going to help people all across the country but it’s also making a long-term investment,” she added.

The US president had applauded passage of the Senate’s version in remarks on Saturday, following an all-night session in the upper chamber of Congress.

Biden was on Sunday expected to sign an executive order to boost voting rights, at an event commemorating the civil rights protesters who were tear-gassed and beaten by state troopers in Selma Alabama 56 years ago. 

Senate passage of the stimulus legislation — by a party-line 50 to 49 vote — was held up for hours as Democratic leaders sought to get the decisive consent of Joe Manchin, the moderate West Virginia Democrat, who was insisting on tighter terms for the jobless benefits.

On Sunday, Manchin did the rounds of US television networks to trumpet his role in the talks, rejecting any fears that the Biden plan was excessive.

“I can assure you, we have helped every segment of society right now, more so than ever before with this piece of targeted legislation,” he told Fox News Sunday.

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