Jun 11, 2020

Axios Markets

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🎙 “We face, therefore, a moral crisis as a country and as a people. It cannot be met by repressive police action. It cannot be left to increased demonstrations in the streets. It cannot be quieted by token moves or talk. It is time to act." - See who said it and why it matters at the bottom.

1 big thing: A Powell put for the people

Illustration: Rebecca Zisser/Axios

A host of institutions from local governments and police departments to sports leagues like the NFL and Nascar have started taking real action to address systemic inequality in the wake of nationwide protests over police brutality and racism.

  • The Federal Reserve may not be immune.

Driving the news: Chair Jerome Powell chafed at a question during the Fed's latest policy meeting about the way the central bank's policies have contributed to wealth inequality — a longtime grievance of politicians and market watchers, but a subject rarely broached at Fed press conferences.

  • If the Fed pulled back its support for the economy because it was worried about its impact on equity prices, "What would happen to the people that we’re actually, legally supposed to be serving?" Powell huffed.

Background: In his time as Fed chair, Powell has worked to change the image of the Federal Reserve from a clandestine vessel of Wall Street to a force to uplift all Americans.

  • He's made the Fed more visible with more press conferences and media appearances, started the national "Fed Listens" tour and created the first-ever Main Street Lending Program.

Yes, but: The striking dissonance between the fortunes of Wall Street and Main Street over the past two months has been a clear reminder of just how much the Fed has helped big banks and wealthy investors and how little it has provided directly to average Americans.

That could change. The Fed is slowly pushing the envelope on its special purpose vehicles so that they serve more functions that would typically require funding from elected officials.

  • The Fed's Main Street Lending Program and its Municipal Liquidity Facility will allow the Fed to get money to cities and states as well as medium-sized businesses, and the Fed recently has expanded eligibility for both.
  • That money can help avert layoffs for local government workers like teachers and firefighters and provide a lifeline to struggling business owners.

What we're hearing: "They’re not necessarily done yet," Vincent Reinhart, chief economist at Mellon who previously spent 20 years at the Fed, tells Axios.

  • The Fed could use the Main Street facility or a similar special purpose vehicle to get money to working families or small business owners through a series of packaged or collateralized loans from banks and get the same favorable lending terms and features.
  • "That’s not out of the question," Reinhart says. "They may go down that road."
Bonus content: The history of Humphrey Hawkins

A radical change at the Fed spurred by civil rights upheaval and designed to battle systemic inequality would not be unprecedented.

  • The Fed's dual mandate of price stability and full employment (the only central bank dual mandate on earth) is in part the result of Coretta Scott King's work on passing the landmark 1978 Full Employment and Balanced Growth Act, also known as the Humphrey-Hawkins Act.

What it means: The Humphrey-Hawkins Act "clarified the role that monetary policy can play in improving the employment picture and required the Fed to weigh the impact that its interest rate policy would have on the job market," a policy paper from the Center for Economic and Policy Research notes.

Go deeper: Coretta Scott King and the Fed's full employment mandate

2. Catch up quick

Treasury Secretary Steven Mnuchin said the U.S. "definitely" needs additional fiscal stimulus, and should include help for travel, retail and leisure businesses, and possibly more cash for American families in congressional testimony Wednesday. (Reuters)

Patagonia CEO Rose Marcario is leaving the company and a search to replace her has just begun. (Bloomberg)

Amazon announced it would stop supplying U.S. police departments with its facial recognition technology for one year amid a nationwide push for police reform. (Amazon)

European Central Bank officials are working on a proposed “bad bank” that would potentially house trillions of euros in unpaid eurozone debt. (Reuters)

3. CPI falls for a third straight month, raising deflation fears
Data: Bureau of Labor Statistics; Chart: Axios Visuals

The U.S. consumer price index fell for the third straight month in May with a gauge of the index that removes volatile food and energy prices also negative for a third month in a row.

  • It was the first time in the history of the series, which dates back to the 1950s, that the CPI has declined for three straight months.
  • April marked the lowest that the core CPI has ever fallen, touching -0.4%.

Why it matters: The reports fan worries that the coronavirus pandemic could spark deflation, further eroding U.S. growth.

  • May's CPI also showed the smallest year-over-year increase since 2011, at 1.2%, and followed another historically small increase in April.

Watch this space: May's CPI was the latest government report to come with a warning. The Labor Department said it was hampered by the coronavirus pandemic, as in-store data collection has been suspended since March 16.

  • The department added that data collection last month was also impacted “by the temporary closing or limited operations of certain types of establishments,” leading to “an increase in the number of prices being considered temporarily unavailable and imputed.”
  • BLS said the same thing in its CPI report last month and noted a “misclassification error” in its highly followed jobs report released last week.
4. More price-fixing lawsuits hit generic drug industry

Axios' Bob Herman writes: A coalition of state attorneys general has sued more than two dozen generic drug companies and high-ranking executives, accusing them of conspiring to fix prices of their prescription pills and creams. Health insurer Cigna similarly filed a lawsuit of its own, arguing the price-fixing schemes led to massive "overcharges."

The big picture: These lawsuits build on previous ones, as well as three criminal admissions of guilt, and paint a bleak picture of the industry's practices.

Between the lines: The central argument of the lawsuits is the same as the others before them: These generics companies broke foundational antitrust law by colluding on price hikes and divvying up market share.

  • For example, Teva, Mylan and Sandoz all raised the price of blood pressure medication nadolol by more than 700% within six months of each other, according to allegations in Cigna's lawsuit.
  • Generic drug companies routinely shared sensitive competitive information with each other to make sure each company was satisfied with its "fair share" of the market for various drugs, according to the new multistate lawsuit.

What they're saying: The drug companies believe they did not break any laws, per Reuters.

  • But at least one company, Teva, believes the federal government won't charge it with federal price-fixing crimes in the middle of a pandemic, the New York Times recently reported.
5. Tesla close to becoming world's most valuable car company
Data: Investing.com; Chart: Axios Visuals

Tesla's stock rose to more than $1,000 a share for the very first time Wednesday, lifting its valuation above $190 billion.

Why it matters: Given its pace of growth this year, Tesla is now closing in on car industry leader Toyota's $216 billion, according to the WSJ.

  • The company's market cap has risen by nearly $40 billion in the last month and by $70 billion in the last three months.

What happened: The price jump followed news of an internal memo from CEO Elon Musk that it's "time to go all out" and bring its long-planned semitruck into "volume production."

Of note: Musk's note about Tesla's electric trucks follows a surge in the stock price of electric truck manufacturer Nikola, which has tripled its price since it began trading last week.

  • The jump pushed the company's market cap briefly above both Ford and Fiat Chrysler, despite the fact that Nikola hasn't sold a single vehicle.

Thanks for reading!

Quote: "We face, therefore, a moral crisis as a country and as a people. It cannot be met by repressive police action. It cannot be left to increased demonstrations in the streets. It cannot be quieted by token moves or talk. It is time to act.”

Why it matters: In a televised address to the nation on June 11, 1963, President John F. Kennedy called for the end of segregation in the United States.