Feb 11, 2019

Axios Markets

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I'll be on Fox Business today at 3:45 pm ET on "Countdown to the Closing Bell" with Liz Claman.

Situational awareness:

  • President Trump's advisers have informally discussed holding a summit at Trump's Mar-a-Lago resort next month with Chinese President Xi Jinping. This comes as talks for a renewed government funding deal with Congress fell apart over the weekend. (Axios)
  • Apollo Global Management is nearing a roughly $3 billion deal to acquire Cox Enterprises’ 14 regional TV stations. (Reuters)
  • Apple’s Chinese smartphone shipments fell an estimated 20% in the fourth quarter of 2018. Apple's fall was about twice the overall contraction of the Chinese market. (Bloomberg)
  • The U.K. economy grew at its slowest pace in 6 years in 2018. Economists now see a more than 30% chance the country falls into recession. (Reuters)
  • Morgan Stanley will pay $900 million to acquire Solium Capital, which manages stock corporate employees receive as part of their pay. It's the bank's largest buy since the financial crisis. (WSJ)
1 big thing: Grading the tariffs' impact

Illustration: Lazaro Gamio/Axios

New analysis shows that U.S. tariffs on Chinese goods are chipping away at the trade deficit with China. But there are other questions to answer when it comes to whether the tariffs are having their desired effect.

Are they reducing the U.S.-China trade imbalance? Yes.

After accounting for frontloading to get out in front of the tariffs early in the year, the rate of tariffed goods exported from China slowed, a new report from the Institute of International Finance shows, and will likely continue to slow without a resolution.

  • China's reciprocal tariffs on U.S. goods are slowing American exporters' sales too.
  • But because the U.S. imports more from China than it exports there, tariffs should continue to lessen the trade deficit.

Are they helping American businesses? No.

Remember, U.S. companies that import Chinese goods pay the tariffs. When the full slate of tariffs went into effect in October, tariff collections topped $5 billion, the highest amount ever recorded. The amount of tariffs paid by these American companies has doubled since May, including an increase of more than 30% from August to October.

Businesses are not moving back to the U.S.

  • CNNBusiness reported in November that a recent survey by 2 American chambers of commerce in China showed a third of the companies surveyed were looking to leave China because of the trade war. However, only 6% said they were considering moving back to the U.S.

Have they hurt China? Sort of.

IIF's analysis of 7,000 individual products subject to new tariffs shows that there has been a measurable slowdown in purchases from both nations. However, both Chinese and American firms are largely finding substitutes or eating the price increases instead of passing them on to consumers, IIF economists tell Axios.

  • While economic metrics have fallen, along with the country's stock market, the pullback has been in line with expectations for the country's move from an export- to service-driven economy.

Who is benefiting? India, Brazil, Cambodia and other countries who can offer substitute products and locations.

  • India's exports to China from June-November 2018 increased by 32% and rose 12% to the U.S.
  • Brazil, the world's second largest soybean producer, more than doubled its shipments to China, the world's largest soybean importer in October, while China imported just 66,955 tons of American soybeans that month, compared to 1.33 million tons a year earlier.
1 bonus chart: The U.S.-China trade deficit
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Data: U.S. Census Bureau; Chart: Naema Ahmed/Axios
"Tariffs reduce imports and, all else equal, reduce the U.S. bilateral trade deficit. The complication lies in the fact that China retaliates by reducing imports from the U.S., thus pushing up the bilateral deficit. In addition, the tax cut boosted domestic demand in the U.S. for imports from China and everywhere else. If tariffs hadn’t changed, the bilateral deficit would have likely widened anyway because of the tax cut.
"If tariffs remain in place in some sort of 'extended truce' we would see a more apparent decline in U.S. imports from China as frontloading will soon be water under the bridge. If all tariffs are removed (the consensus is that this is unlikely) chances are imports would normalize, reversing most of the decline we’ve seen so far.”
— Gene Ma, Head of China Research, Institute of International Finance
2. Talk of a recession is up, but still less than previous years
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Data: Sentieo; Chart: Harry Stevens/Axios

S&P 500 executives are talking about a recession much more frequently than they were last year, Axios' Courtenay Brown reports.

  • There were 115 mentions of "recession" or "macroeconomic conditions" last month — more than 3 times the 35 mentions during the same time frame in 2018, according to an analysis of earnings calls by research platform Sentieo.

What they're saying:

  • "Geopolitical and macroeconomic conditions have contributed to our customers having a more cautious outlook." — Stephen Milligan, Western Digital CEO
  • "We are undertaking and accelerating a number of initiatives to improve our results. It's not in our DNA to just stand around and wait for macroeconomic conditions to improve." — Tim Cook, Apple CEO
  • "If throughout the year, we see a change of those assumptions that there is in fact a recession and a bear market is coming, we’ll wait a bit, before we see evidence – total evidence of that, and we’ll adjust our expenses." — Henry Fernandez, MSCI CEO

Last year, mentions hit a high with 194 in November. Before that, the number of mentions hit 360 in February of 2016, after widespread concern about slowing growth in China.

  • Yes, but: Talk of a recession remains well below levels seen during and after the financial crisis, with executives mentioning the word "recession" 762 times in January 2009.

If history is a guide: S&P executives will ramp up talk about a recession when there's actually one underway — not beforehand.

3. A yield curve inversion is in the Fed's hands
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Data: Treasury; Chart: Chris Canipe/Axios

The S&P 500 has risen more than 8% in less than a month and a half this year, but the benchmark 10-year Treasury note is almost unmoved from its Jan. 1 levels. That's a reversal from 2018 when bond yields jumped in tandem with stock prices.

  • That's because the current rally in stocks is not based on positive growth expectations for the economy, says BMO Capital Markets interest-rate strategist Jon Hill, but on expectations that the Fed will not raise interest rates. There's no faith in long-term growth or inflation.

What it means: This disconnect between stocks and Treasury yields reflects "the extent and speed and depth of the U-turn the Fed executed between December and January," Hill tells Axios.

  • The biggest catalyst was not necessarily the Fed's calls for patience, but the fact that central bankers removed all guidance surrounding when they would raise rates again. That suggests to the market that not only is the Fed unlikely to raise rates this year, they may have reached the conclusion of the hiking cycle started in 2015.

Go deeper: This makes sense given that despite President Trump's tariffs on $250 billion worth of Chinese goods and a historically low U.S. unemployment rate, inflation has hardly budged. Both major metrics — CPI and PCE — were right around the Fed's 2% target in 2018. In fact, prices fell in December.

That puts the Fed in an interesting position. If economic data does start to improve and suggest inflation could rear its head, the Fed will need to raise interest rates.

But: "Even if the economy gets better in the short term, longer run growth and inflation expectations aren’t going to change," Hill says.

If longer-dated Treasury yields don't move and shorter-dated yields do because the Fed is hiking that will lead to a yield curve inversion, which has preceded every U.S. recession since 1955, with a lag time ranging from 6 to 24 months.

  • "Ironically," says Hill, "the Fed owns the inversion."
4. Health insurance is as big as Big Tech
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Data: Company filings and FactSet; Chart: Naema Ahmed/Axios

The 5 largest conglomerates combining health insurance and pharmacy benefits are on track this year to be bigger than the 5 preeminent tech companies, Axios' Bob Herman writes.

The big picture: Anthem, Cigna, CVS Health, Humana and UnitedHealth Group cumulatively expect to collect almost $787 billion in 2019, compared with $783 billion of projected revenue for Facebook, Amazon, Apple, Netflix and Google.

Yes, but: The tech companies cumulatively were 5 times more profitable than the health care companies in 2018 and are projected to be 3.5 times more profitable this year.

  • There's more money to be made selling smartphones and online ads than acting as a health care middleman.
  • Health insurers and pharmacy benefit managers pay out a vast majority of their revenues to hospitals, doctors and drug companies.
  • But insurers and PBMs are still turning large overall profits. And a delay in an Affordable Care Act tax is expected to create a big windfall for the insurance industry this year. Companies are working behind the scenes to get that tax delayed again for 2020 or permanently repealed.

It's also worth remembering health insurance giants today do a lot more than just paying out claims for medical care and prescriptions.

  • UnitedHealth owns surgery centers, doctors' offices, consulting shops and data-analyzing services.
  • CVS, which just bought Aetna, brings in a lot of money through its retail pharmacies and in-store clinics.

Go deeper: The consolidation of health insurance and drug benefits is back

History: Commonly known as the warrior queen, Queen Amina of Zaria was the first woman to be recognized as Sarauniya, or supreme ruler, of her people. As queen, she took command of an army of 20,000 men and is rumored to never have lost a battle.

In present day Nigeria, she expanded the territory of the Hausa people to its largest in history. She also made Zaria a center for international trade.

Amina also is credited with introducing the cultivation of kola nuts in the area. Her legendary stature and importance in Nigerian history led to the erection of the Queen Amina Statue at the National Arts Theater in Lagos State, and multiple educational institutions have been named after her.