May 14, 2020

Axios Markets

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ūüéô "I always keep a ball in the car. You never know." - See who said it and why it matters at the bottom.

1 big thing: Powell joins the battle over fiscal spending

Illustration: Eniola Odetunde/Axios

After the House of Representatives released a proposed $3 trillion relief bill on Tuesday, Fed chair Jerome Powell weighed in, backing calls for Congress to do more to battle the economic impact of the coronavirus pandemic.

Why it matters: Expectations for the pandemic-fueled recession are morphing from a short-term downturn to a potentially yearslong slog and economists are urging policymakers to adjust government spending accordingly.

  • Powell's comments Wednesday made him the latest and perhaps most influential voice in a chorus advocating more fiscal spending.

Driving the news: In pre-written remarks, Powell detailed the harms of "deeper and longer" recessions, warning that "the recovery may take some time to gather momentum and time can turn liquidity problems into solvency problems."

  • "Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery," Powell said during a webcast with the Peterson Institute for International Economics.

Between the lines: "Fed officials are unanimous on this ‚ÄĒ they are all in on, 'Congress has to do more,'" Claudia Sahm, a former top Fed economist and now director of macroeconomic policy at the Washington Center for Equitable Growth, said during a separate online event.

What's happening: Recent economic studies and business developments are starting to back Powell's worries that the Fed and Congress will need to provide assistance to the U.S. economy for some time.

  • In addition to the record high unemployment rate, thousands of business closures and wave of bankruptcies, new academic research estimates that 42% of recent layoffs will result in permanent job loss.

Yes, but: "Right now in the White House, we’re in wait and see mode," White House economic adviser Kevin Hassett said during a briefing with the Brookings Institution Tuesday.

  • Hassett argued that some of the big-ticket items in the House's so-called Heroes Act ‚ÄĒ which includes nearly $1 trillion for states and municipal governments, a second round of $1,200 direct payments for individuals, a $175 billion housing assistance fund, a 15% increase in food stamps and more ‚ÄĒ could be "putting the cart before the horse."
  • Republican senators also point to the annual U.S. budget deficit that has already topped $4 trillion as a reason for patience.

Yes, but, but: "We are in an election year and have had bipartisan support for lots of spending already," Kevin Barry, CIO of investment adviser CAPTRUST, tells Axios.

  • "Do I think there will be significant political interest in additional support? The answer is yes."
2. Catch up quick

Economists predict 2.5 million more people applied for unemployment benefits last week, bringing the total number to more than 36 million since March 21. (Reuters)

The outlook for global oil markets has ‚Äúimproved somewhat,‚ÄĚ with demand a little stronger than expected and supply falling to a nine-year low, according to IEA. (Bloomberg)

Protectionist restrictions, transport disruptions and processing breakdowns have dislocated the global food supply and put the planet’s most vulnerable regions in peril. (WSJ)

Chinese tech giant Tencent's stock hit a two-year high after reporting earnings that showed revenue up 26% thanks to a big increase in online game revenue as millions were at home during the lockdown in Q1. (CNBC)

China is "extremely dissatisfied" with lawsuits filed over the coronavirus pandemic by U.S. elected officials like Missouri attorney general Eric Schmitt, and is "mulling punitive countermeasures" state-run news reports. (Global Times)

3. Economic sentiment is being pulled in both directions

Data: Hamilton Place Strategies and CivicScience; Chart: Axios Visuals

The latest reading of a daily economic sentiment indicator from data firm CivicScience and consulting firm Hamilton Place Strategies finds Americans' overall confidence has reached a crossroads and is holding steady.

What it means: The index is made up of confidence readings in different sectors and responses have sharply diverged in recent weeks.

  • Confidence in the housing market increased for a second straight week, as did confidence in making a major purchase and buying a new home.
  • Confidence in the overall economy led the falling readings, reversing a previous eight-week rebound, along with declining confidence in personal finances and confidence in the job market, which fell to its lowest level since the inception of the ESI.
4. Producer prices drop by the most since 2009

Data:; Chart: Axios Visuals

Costs for American vendors fell by the most since 2015 on a year-over-year basis and by the most since 2009 when measuring the month-over-month change last month.

Why it matters: The decline in U.S. producer prices was far more than expected and could bolster some economists’ predictions for a brief period of deflation as the novel coronavirus depresses demand.

  • April marked the third straight month producer prices have fallen.
  • That could bolster the case for more stimulus measures from the government or additional monetary policy response from the Fed.

Stay woke: The PPI is considered when adjusting prices in long-term purchasing agreements.

5. Fitch expects record ratings downgrades in 2020

Fitch is expecting to cut the ratings on a record high number of companies this year as the pace of downgrades has "dramatically increased, owing to the economic crisis caused by the coronavirus pandemic," analysts note in a recent report.

State of play: After just 58 downgrades in the first 10 weeks of 2020, there have been an additional 347 corporate and financial institution issuers downgraded for a total of 405 through the end of April.

  • There were a total of 1,068 negative rating actions taken in corporate and financial institutions during that time.
  • And though downgrades accounted for less than 40% of the negative actions, the increased level of negative rating outlooks "signal more downgrades are likely during the remainder of 2020 and into 2021," per the report.

Why it matters: Lower credit ratings make it more expensive for companies to borrow money and can lead to bankruptcy and insolvency for some firms.

6. Auto sales look surprisingly resilient after coronavirus hit

Data: J.D. Power; Chart: Naema Ahmed/Axios

Axios' Joann Muller writes: U.S. auto sales, which tanked at the end of March amid widespread stay-at-home orders, have been steadily recovering, fueled by strong demand for trucks and generous incentives.

Why it matters: As economists debate the shape of a U.S. economic recovery, auto sales could be an important barometer. The auto industry represents about 3% of GDP, and a healthy rebound in car and truck sales could be encouraging for other consumer sectors.

Driving the news: With consumers confined to their homes, carmakers have bent over backward to accommodate shoppers whose leases are expiring or who need to buy cars in a hurry.

Between the lines: Pent-up demand and big incentives account for much of the sales recovery.

  • Some brands are offering 0% interest rates on 7-year loans, and waiving payments for buyers experiencing financial distress.

Yes, but: Incentives can be an addictive drug.

  • If carmakers get too aggressive in their efforts to stimulate demand, they could cripple their pricing power for years to come, writes Boston Consulting Group's Karen Lellouche Tordjman in a new report.
  • After the global financial crisis of 2008, she notes, carmakers doled out big discounts, kicking off a price war that hurt the industry's profit margins for years.

What to watch: The biggest worry now is low inventory levels in many parts of the country.

  • Factories stopped production in mid-March and are just now starting to make cars again. The ramp-up will be slow to ensure worker safety.
  • GM and others say they'll focus on replenishing dealer stocks in markets where sales have been strongest, like Texas and Arizona.

The bottom line: It's clear the auto industry's 10-year boom has ended, but the landing might not be as rough as many had feared.

  • J.D. Power is now forecasting auto sales of 13.5 million to 14.5 million for 2020, down from its previous forecast of 16.8 million.

Thanks for reading!

Quote: "I always keep a ball in the car. You never know."

Why it matters: Hakeem "The Dream" Olajuwon is a two-time NBA champion and NBA Finals MVP. The Dream often did not eat or drink during NBA games when Ramadan took place during the season, including during the NBA playoffs.