Sep 16, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning. (Today's Smart Brevity: 1,183 words, < 5 minutes.)

Situational awareness:

  • OxyContin maker Purdue Pharma filed for Chapter 11 bankruptcy protection on Sunday night, days after reaching a tentative deal to settle some 2,000 opioid lawsuits. (CNBC)
  • China missed expectations for its industrial output, retail sales and fixed asset investment as its economy slowed further in August. (Bloomberg)
  • U.S. 30-year fixed mortgage rates saw the biggest short-term jump since the week following President Trump's election in 2016. (CNBC)
1 big thing: The great bond selloff
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Data: U.S. Treasury; Chart: Axios Visuals

Treasury yields jolted higher last week as investors bailed out of safe-haven U.S. government debt, pushing yields up by the most in one week since June 2013. The selloff that began Sept. 4 sent yields on the benchmark 10-year Treasury note from 1.45% to 1.90% in less than 2 weeks.

Be smart: While some have credited the spike in Treasury yields to renewed faith in the U.S. economy, the market is likely more worried about a return of inflation — a far greater ill for fixed income investors as it corrodes the value of already issued bonds.

What's happening: Readings on data that contribute to inflation have consistently surprised on the upside in the past few months, even as U.S. GDP estimates for the third and fourth quarters have trended below 2% and expectations for global growth have been pushed downward.

  • U.S. retail sales rose 0.4% in August after a particularly impressive 0.8% rise in July. Both readings were well above consensus estimates.
  • The core consumer price index, which measures inflation excluding volatile food and energy items, rose 0.3% in August from July and 2.4% from a year earlier, the biggest jump in more than a decade, according to St. Louis Fed data.
  • August's U.S. nonfarm payrolls report missed expectations for job gains, but average hourly earnings increased by 0.4% for the month and 3.2% from a year earlier, with both numbers beating expectations.

Further, investors have continued to pour money into money market funds, showing the desire for safe-haven assets has not diminished.

Between the lines: Growing worries about a bond bubble also have spooked bond investors in recent weeks, as money managers, including Guggenheim's Scott Minerd who oversees $240 billion of assets, have sounded the alarm.

  • Former U.S. Congressman Ron Paul even jumped on the bond bear train this weekend, declaring in a CNBC interview that the world is in "the biggest bond bubble in history, and it’s going to burst.”

The big picture: The latest 2-week trade war truce between the U.S. and China has provided cover for bullish investors to buy stocks, but will make little difference to the current downward trajectory of U.S. and global economic growth. Inflation, on the other hand, appears to be moving higher in a way it has not in some time.

Bonus: The highest quits rate in 18 years
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Data: BLS via Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The share of people who chose to leave their jobs, known as the quits rate, rose for the first time in a year, touching its highest since 2001 last month as some 3.6 million workers quit.

  • From June 2018 to June 2019, the quits rate remained at 2.3%, the longest streak on record.

The big picture: The high quits rate is an indicator of a strong economy and of potential inflation. If more Americans are voluntarily leaving their jobs, they are likely moving to higher paying opportunities or are confident in finding another job. This signals a likely increase in U.S. GDP but could also portend a pickup in inflation.

Of note: The quits rate rose to 2.6% among private-sector employees, a post 2008 recession high.

2. More job losses are likely in brick-and-mortar retail
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Reproduced from IIF report; Chart: Axios Visuals

The strong U.S. labor market continues to add jobs, but the retail sector has been moving in the opposite direction.

  • Brick and mortar retail is likely to keep shedding jobs for the foreseeable future because of an "efficiency gap" between traditional stores and e-commerce, according to economists at the Institute of International Finance.

What it means: IIF's economists assert that it takes significantly fewer employees to deliver the same amount of product for e-commerce businesses, meaning they will continue to deliver better profits and push out old-school retailers in large stores.

  • "This efficiency gap has persisted because ongoing job losses in brick-and-mortar retail are only just keeping pace with falling market share, which unfortunately means that downsizing is likely to continue for some time," IIF managing director and chief economist Robin Brooks and economist Jonathan Fortun say in a report published Thursday.

Details: They highlight a few key trends in the labor market between traditional and online retail...

  • "Job losses in the retail sector have been a persistent feature of the US labor market."
  • "This downsizing has so far only offset falling market share of 'brick-and-mortar' retail, and therefore not helped close the persistent efficiency gap that exists versus e-commerce."
  • "Department stores need 8 employees to generate $1 million in sales per year, while electronic shopping & mail-order houses, the category that captures e-commerce in the establishment survey, need as few as 0.6."
3. Oil prices remain elevated after drone attack

Brent crude oil futures spiked nearly 20% after a drone attack that hit a Saudi Arabian oil processing facility on Saturday, forcing the kingdom to cut its output in half. Oil prices remained near their high levels on Monday morning.

Where it stands: International benchmark Brent crude futures were still roughly 10% above their late Friday levels, trading around $66.39 this morning, with U.S. West Texas Intermediate crude futures up almost 10%, at $60.11 per barrel.

Yes, but: State oil company Saudi Aramco said it aims to restore about one-third of the lost crude output, or 2 million barrels by Monday.

What they're saying: “While in the short term the direct physical impact on the market might be limited, this should move the market away from its bearish macroeconomic cycle and raise the risk premium in the market as funds reduce their short positions,” Chris Midgley, global head of analytics at S&P Global Platts, says in a note to clients.

4. The GM strike is complicated

UAW members outside GM's plant in Flint, Mich., as workers go on strike early Sept. 16. Photo: Jeff Kowalsky/AFP/Getty Images

Axios' Joann Muller writes: The labor dispute that erupted overnight between General Motors and the United Auto Workers is about more than just the usual issues, as both sides try to score points away from the bargaining table.

Driving the news: About 46,000 hourly workers walked off the job at GM at 11:59 p.m. Sunday, the UAW's first national strike since 2007.

  • The financial impact will be costly for both sides, especially if the strike drags on.
  • An assembly plant shutdown costs an automaker an estimated $1.3 million every hour, according to the Center for Automotive Research.
  • UAW members, whose top wage is about $30 an hour, will take home $250 per week in strike pay.
  • In 1998, a 54-day strike at 2 factories shut down nationwide production, costing GM more than $2 billion.

The issues: The union wants higher pay, better benefits and increased job security, arguing it made sacrifices during GM's bankruptcy a decade ago, and now it deserves a share of the company's record profits.

  • GM wants to cut costs ahead of an expected industry downturn, so it can continue to invest in electric vehicles and self-driving technology.

The intrigue: GM is looking to drive a wedge between workers and union leaders while deflecting further attacks from President Trump over job cuts in swing states.

The investigation: UAW leaders appear to be playing hardball, in part to show rank-and-file members they are going to the mat for them amid charges that some union bosses were allegedly pocketing union training funds.

  • UAW President Gary Jones and his predecessor, Dennis Williams, have been implicated in a federal investigation, per the New York Times.
  • A criminal complaint alleges they helped current and former senior union officials embezzle member dues to buy personal luxuries, the Detroit News reports.
  • Neither Jones nor Williams have been charged with a crime.

Go deeper: Read the full story here.

Dion Rabouin

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