Dec 16, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

👋 Welcome back and happy Monday! While Dion is away, I have the keys to Axios Markets. (By the looks of it, he's doing just fine.)

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1 big thing: U.S. pork industry wants to cash in

Illustration: Eniola Odetunde/Axios

The U.S. pork industry — whose commodity was among the hardest hit by China's retaliatory tariffs — breathed a sigh of cautious relief following news of a deal that winds down tensions between the U.S. and China.

Why it matters: The deal in theory is a reprieve for farmers, a key part of President Trump's base who have borne the brunt of the trade war. China's purchases of goods like soybeans and pork have waned in the nearly two-year battle — pushing rural America into a financial tailspin in an otherwise solid economy.

Driving the news: U.S. officials said China would up annual purchases of U.S. farm goods to at least $40 billion over a period of two years.

  • But there are no details yet on which goods it'll buy or how China plans to absorb that level of imports. The most China ever purchased from U.S. producers was $29 billion in 2013, per Bloomberg.
  • Hog futures — along with other commodities — rose 1% on news of the deal.

Industry experts say the ceasefire could create new prospects for farmers — but won't undo the missed opportunity to cash in on China's pork shortage, partly due to African swine fever.

  • Pork exports to China haven't "accelerated at the rate that it could have if we didn't have these [trade] obstacles," Joe Schuele, head of communications at the U.S. Meat Export Federation, an industry trade group, tells Axios.

The backdrop: The trade war coincided with a breakout of African swine fever, a deadly pig disease that killed hundreds of millions of hogs in eastern Asian countries, as Axios' Jacob Knutson reported earlier this year.

  • The epidemic had China — the world's top pork consumer — looking offshore to fill the supply gap, a potential goldmine for U.S. farmers.
  • U.S. ramped up herds in anticipation of more demand, with processors slaughtering about 1 million more pigs per week than a year ago, per Reuters.

Yes, but: The U.S. pork industry faced three rounds of retaliatory tariffs. In 17 months, tariffs on pork exports to China increased sixfold (from 12% to 72%).

  • That made it less palatable for Chinese buyers to turn to the U.S. for help, but not totally out of the question.
  • Those that did import from the U.S. sometimes pushed the price hikes back onto U.S. packers and producers — making it less profitable to export to China, Schuele says.

As a result, European suppliers have capitalized much more on China's pork shortage. So has Brazil.

What's next: "We're encouraged that a deal has been reached and we're anxious to get the details," Schuele says — a sentiment echoed by the industry's most prominent trade groups.

  • There may be some opportunity to take advantage of China's upcoming all-important Lunar New Year celebration, which tends to be the country's biggest period of pork consumption.
Bonus: The jump in pork prices
Expand chart
Data: China's monthly consumer price index via FactSet; Chart: Axios Visuals

Check out pork prices in China for a clue of just how bad the country's shortage is. Prices surged triple digits from the prior year in November.

  • The jump in prices pushed China's overall inflation index to rise at the quickest pace in about eight years, per the latest data from the Chinese government.
2. What to watch: Potential shutdown of 737 MAX production

Photo: Stephen Brashear/Getty Images

Boeing is considering cutting or halting production of the 737 MAX — the troubled jet that was once the company's biggest moneymaker, according to multiple reports.

  • An announcement, which would follow a regularly scheduled meeting of the company's board, could come today or tomorrow.

Why it matters: The decision could have negative spillover effects for both the "600 firms, plus hundreds of smaller subcontractors" that depend on the plane's steady production (per WSJ), and, ultimately, the economy.

  • One example: Southwest Airlines, which flies more 737 MAX jets than any other U.S. airline, struck a confidential deal with Boeing last week to be compensated for its losses from the jet's grounding.

The backdrop: It's the latest setback for Boeing as lawmakers and regulators question what the company knew about faulty technology that played a role in two fatal crashes that killed a total of 346 people.

Between the lines: Boeing is now producing about 42 planes a month — already cut from the prior 52-per-month rate. CEO Dennis Muilenburg has previously warned the company could scale back or halt production of the jet altogether.

  • But the timing of the reports — days after the FAA threw cold water on Boeing's expectations of the 737 MAX returning to service by the end of the month — is noteworthy.

What they're saying: "We will continue to assess production decisions based on the timing and conditions of return to service, which will be based on regulatory approvals and may vary by jurisdiction," a spokesperson tells Axios.

3. Catch up quick

Bankrupt utility PG&E is under a tight deadline to submit a revised restructuring plan that will appease California Gov. Gavin Newsom. (AP)

Argentina's new government hiked export taxes on farm goods to raise revenue needed to meet its debt obligations. (Reuters)

A lawsuit alleges that HSPX — which bills itself as a passive index fund — actively traded to outperform its benchmark. (Bloomberg)

4. Economists shrug off downbeat retail sales

Photo: Andrew Caballero-Reynolds/AFP via Getty Images

Wall Street's response to below-forecast consumer spending: ¯\_(ツ)_/¯.

What's happening: Rather than interpret the data as a sign that the all-important consumer is losing steam, some are blaming November's figures on a calendar quirk — and keeping faith shoppers will continue to open up their wallets.

  • Cyber Monday, during which Americans spent a record $7.4 billion in online sales, wasn't included in Friday’s report since it took place on Dec. 2, as Axios' Orion Rummler reports.
  • "The late Thanksgiving could also have thrown off the model that the government uses to strip seasonal fluctuations from the data, holding back sales," Reuters notes.

What they're saying: "Don't count the consumer out of the fourth-quarter GDP story yet," economists at RDQ Economics, a New York-based consulting firm, wrote in a note to clients on Friday. RDQ estimates November's data will be revised higher and December's figures will show a "solid gain" in spending.

  • "We expect a modest rebound to spending in December," Joe Brusuelas, chief economist at RSM U.S., wrote in a research note.
  • "For this reason, we will wait until we get that data to come to any conclusions about the condition of the consumer heading into 2020."

Yes, but: Retail sales — which came in at 0.2% in November, following October's upwardly revised 0.4% — have cooled considerably after rising by an average of 0.7% per month in the first eight months of this year, per Reuters.

  • Why it matters: The soft data comes at a time when consumer spending largely has largely acted as the U.S. economy's backbone as businesses delay investments.
5. 1 🎙️thing: Financial firms' podcast frenzy

Illustration: Sarah Grillo/Axios

All but two of the 10 biggest U.S. financial institutions (by revenue) have podcasts — and the majority debuted within the past year, according to data compiled for Axios by analytics firm Chartable.

The latest: Goldman Sachs is testing a new format for its "Exchanges" podcast — the first of which premiered on Sunday. It's a soft launch of what it plans to release more regularly in January. The firm launched another podcast, "Top of Mind at Goldman Sachs," earlier this year.

The bottom line: Financial firms' podcasts aren't exactly thrillers like "Serial," but rather another avenue banks use to push their brand and stable of experts — and maybe lure in new clients.

Keep reading

Dion Rabouin

Per the Washington Post, that was the slogan Felix Rohatyn installed when he helped turned around Avis, the car rental company that was struggling at the time.

  • Rohatyn, "one of America’s best-known investment bankers" who was said to have saved New York from financial ruin, died over the weekend.

Editor's note: The intro was clarified to show this was a slogan (not a direct quote).