Aug 16, 2019

Axios Markets

Dion Rabouin

Axios Markets is going on summer vacation next week. So, sadly, I won't be in your inbox again until Aug. 26. I'm headed to Charleston, South Carolina, for some R&R this weekend and then I'll be in Montreal next week. Please send recommendations for both. I'll see you again next Monday.

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Situational awareness:

  • GE CEO Larry Culp purchased close to $2 million of the company’s stock after it sold off following a report from whistleblower Harry Markopolos that alleged the company was “a bigger fraud than Enron.” (CNBC)
  • Japan bought $22 billion worth of U.S. Treasuries in June, far more than any other country, and overtook China as the world's largest foreign holder, Treasury Department data showed. (Reuters)
1 big thing: Central banking's brave new world

Illustration: Aïda Amer/Axios

The European Central Bank is leading the charge in the next wave of central bank stimulus measures, but experts and former central bankers argue it will be insufficient to deal with the looming global downturn.

What's happening: ECB governing board member Olli Rehn said the central bank will announce a fresh package of “impactful and significant” stimulus at its September meeting that's expected to include “substantial" bond purchases as well as cuts to the ECB’s already-negative interest rate, WSJ reported.

  • Analysts expect the central bank will cut rates to -0.5% and restart its quantitative easing program with around $56 billion a month of fresh bond purchases.

Why it matters: The eurozone already has negative interest rates and the ECB already has spent trillions buying bonds in an attempt to stimulate the economy. In spite of these efforts, major European economies have been unable to generate inflation or growth that's even close to their targets for years.

The big picture: Central banks see that the global economy is in trouble and they are stepping in to act, but are responding to new problems with old solutions.

What they're saying: "Unprecedented policies will be needed to respond to the next economic downturn," a report released Thursday from the BlackRock Investment Institute argues.

  • The report was authored by former Fed vice chair Stanley Fischer, former Swiss central bank chief Philipp Hildebrand, former Bank of Canada deputy governor Jean Boivin and other former central bankers.
  • "Monetary policy is almost exhausted as global interest rates plunge towards zero or below...There is not enough monetary policy space to deal with the next downturn."

The intrigue: The paper urges the introduction of "helicopter money," or “going direct” with "an explicit and permanent monetary financing of a fiscal expansion" otherwise known as central banks giving money directly to the public.

The bottom line: Central banks are gearing up to stave off a recession and highly respected former central bank leaders now see quantitative easing and negative interest rates — both considered extraordinarily and controversially powerful when they were first discussed — as insufficient to deal with the world's problems.

2. Q3 GDP expected above 2% after hot retail sales report
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Data: Federal Reserve Bank of Atlanta; Chart: Andrew Witherspoon/Axios

U.S. retail sales surged above expectations in July and sales at retailers including Amazon and Best Buy posted their biggest increase in 4 months.

  • A strong earnings report from Walmart also helped drive optimism that American consumers are still shopping and perhaps are confident enough to carry the economy through trade war tensions.

The big picture: As a result of the retail sales data, the Atlanta Fed raised its GDPNow forecast to 2.2% for the third quarter.

  • That's higher than many economists are predicting, but remains well below enough to bring 2019's GDP growth to the 3%-4% President Trump has sought to account for massive government spending and revenue losses from the tax cuts.
3. Exclusive: Tech companies slow buybacks as the trade war bites
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Data: Catalyst Funds; Chart: Andrew Witherspoon/Axios

Public companies are slowing their stock buybacks in 2019 from 2018's record pace, and the slowdown in the tech sector shows the trade war is beginning to hit the economy in unexpected ways.

What's happening: After starting the year as the top sector for buybacks, tech companies have dramatically slowed their pace as the trade war has escalated, data provided to Axios by Catalyst Funds COO Michael Schoonover shows.

  • Tech accounted for more than one-third of last year’s buybacks, but has dropped to just 22% of a smaller total this year as companies have lost confidence that buybacks are an effective use of capital, Schoonover says.

Be smart: The lack of confidence is evidenced by the significant drop in buybacks starting in May after President Trump escalated the trade war by raising tariffs on $200 billion worth of Chinese imports.

Why it matters: "Given the state of the economy, what this really means is that companies are probably likely more concerned now than they were last year that conditions could get far worse and therefore aren’t too excited to start large buyback programs," Schoonover tells Axios in an email.

On the other hand: The data shows that the 4 tech companies that bought back large amounts of their stock saw significant outperformance versus the market.

  • JP Morgan analysts last month noted in a white paper that as fewer companies choose to buyback stock, those who do will likely see higher returns.
4. Toy makers: Tariff delay "saved the holiday season"

Illustration: Aïda Amer/Axios

There was joy in toyland this week — albeit muted — after the Trump administration said it would postpone tariffs on toys made in China until after the holiday rush, Axios managing editor Jennifer Kingson writes.

Why it matters: The industry, still recovering from the demise of Toys “R” Us, had feared a 10% tariff would force it to raise prices, hurting consumers and killing profits. But a sudden reprieve will let toy companies focus instead — for now — on big holiday trends, like unicorns, collectible dolls, scented slime and electronic finger-puppets.

The big picture: While toy sales have slumped, the second half of 2019 is expected to bring “a complete reversal of the negative trends,” according to Juli Lennett of the NPD Group, who tracks the sector.

  • Several “license-friendly” movies are being released, most notably “Frozen 2” in November.
  • Popular video games like Fortnite are spinning off toys.
  • Hot products like L.O.L. Surprise! dolls, which children must “unbox” to see what they're getting, are driving sales.
  • Grown-ups are pushing children toward playthings instead of screens. “We have this generation of parents on our side,” Steve Pasierb, head of the Toy Association, a trade group, tells Axios.

Walmart, Amazon and Target have picked up some slack from the liquidation of Toys “R” Us last year, which cost 33,000 retail jobs.

  • Target has expanded floor space for toys and baby goods.
  • Kohl’s, Wegmans, Meijer and other retailers have pitched in, too.
  • Amazon published a big holiday toy catalog last year.

But: While 75% of sales volume from Toys “R” Us has migrated to other channels, 25% “has been lost,” Pasierb says.

  • Sales in the U.S. toy industry dropped 9%, to $7.4 billion, in the first half of 2019 compared with 2018, according to NPD.

What’s next: The Trump administration’s tariff reprieve is set to expire Dec. 15, after which all bets are off.

  • "Toymakers are already looking ahead to next year’s holiday season, and fretting about the crippling uncertainty that the president’s on-again, off-again trade policy has created for them," according to the NYT.
  • The toy industry will keep lobbying against tariffs. "If you're going to buy shoes and clothing and back-to-school stuff for your kids, how much money is left for toys if everything is more expensive?" Pasierb tells Axios. "That collection of toys under the Christmas tree is going to get smaller."
Dion Rabouin