Feb 20, 2019

Axios Markets

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Situational awareness:

  • Malaysia may postpone the extradition to the U.S. of a former Goldman Sachs banker to try him for criminal charges related to the 1MDB scandal there, Malaysia's home minister said. (Reuters)
  • All major Asian economies, with the exception of the Philippines, now see inflation rates at or below the lower end of their central banks' target. (Reuters)
  • Shares of CVS Health fell as much as 5% after the company's full-year 2019 guidance came in below analyst estimates. (TheStreet)
  • The Federal Open Market Committee's January meeting minutes will be released at 2 pm ET today. (FT)
1 big thing: Productivity is not the problem

Miniature people and three piles of coins. iStock photo/Getty Images

The issue driving income inequality in the U.S. has not been a lack of productivity by American workers, a new report from the Economic Policy Institute finds. Instead it is that the lion's share of gains from increased productivity have gone to a tiny segment of wage earners at the top.

The big picture: After tracking closely in the three decades following World War II, from 1979 to 2017 productivity grew 70.3%, while hourly compensation of production and nonsupervisory workers grew just 11.1%.

  • That means productivity grew six times faster than typical worker pay.

"The data show not only rising inequality in general, but also the persistence, and in some cases worsening, of wage gaps by gender and race," EPI says in its State of Working America 2018 report. Wage growth since the Great Recession has continued to follow this trend, "and this divergence is at the root of numerous American economic challenges."

The gender wage gap is closing among the poor and growing among the rich.

  • The gap for women who earn more than 10% of the population has narrowed since 2000. Men in this group make just 5.9% more than women.
  • Women who earn more than 95% of the population now earn 33.6% less than 95th-percentile men.

Other notable survey findings:

  • Throughout the wage distribution, black–white wage gaps were larger in 2018 than in 2000.
  • Hispanic workers have been slowly closing the gap with white workers in the bottom 80% of the wage distribution.
  • Among black workers, only college- and advanced-degree holders had higher wages than in 2000, but their wage growth was considerably slower than wage growth for white or Hispanic workers with those same degrees.
  • At nearly every education level, workers of color were paid consistently less than their white counterparts.
  • At every decile, wage growth since 2000 was faster for white and Hispanic workers than for black workers.

Watch this space: EPI caps its highest weekly earnings level at $150,000 a year. Workers in this category are growing their incomes so much compared to the rest of population that it is making it "increasingly difficult to obtain reliable measures of ... wages, particularly for male workers and white workers," researchers noted.

Bonus: So, where did the "excess" productivity go?
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Reproduced from Economic Policy Institute; Chart: Axios Visuals

"A significant portion of it went to higher corporate profits and increased income accruing to capital and business owners. But much of it went to those at the very top of the wage distribution," the Economic Policy Institute's Elise Gould writes.

"The top 1% of earners saw cumulative gains in annual wages of 157.3% between 1979 and 2017—far in excess of economywide productivity growth and nearly four times faster than average wage growth (40.1%).
"Over the same period, top 0.1% earnings grew 343.2%, with the latest spike reflecting the sharp increase in executive compensation."
2. Work is broken

Two new studies suggest we may be doing work all wrong.

First: A new survey finds that the average British office worker is only productive for 2 hours and 53 minutes out of the working day; with the rest largely spent on social media and news websites.

  •  The study, conducted by conducted by a U.K. coupon business Voucher Cloud polled 1,989 U.K. office workers all aged over 18 as part of research into the online habits and productivity of workers across the nation, according to the Guardian. All respondents worked full-time in an office role.

Second: Analysis of one of the biggest trials yet of the 4-day work week showed reduced stress and increased staff engagement as well as no reduction in output.

  • Perpetual Guardian, a New Zealand financial services company, took its 240-person staff off the 5-day week in November and maintained their pay. Productivity increased 20% in the four days they worked so there was no drop in the total amount of work done, a study of the trial released on Tuesday found.
  • Details of an earlier trial showed the biggest increases were in commitment and empowerment. Staff stress levels were down from 45% to 38%. Work-life balance scores increased from 54% to 78%.
3. Stocks go up

All three major U.S. stock indexes closed higher on Tuesday, with the Nasdaq in the black for a 7th consecutive day, adding to what has been a stellar year for U.S. equities.

What they're saying: Datatrek Research points out that the year's first month typically sets a trend for the first quarter:

  • "January's S&P 500 return of 7.9% put it solidly in the 'unusually strong' camp, more than 1 standard deviation (5.0 percentage points) above the mean monthly return (+1.1%)."
  • "In the 8 complete years back to 1958 when January has posted similarly strong results, February tacked on an average 1.3% further gain."
  • "Looking at the same 8 years, March returns averaged another 1.5% advance."
  • "In no case did any of these 8 years show a negative Q1 return."

Further, LPL Financial strategists note:

  • There were two 90% "up days" after the Dec. 24 market low, on Dec. 26 and Jan. 3. This means that 90% of all stocks on the New York Stock Exchange were higher and 90% of the volume was also higher on those days.

LPL chief investment strategist John Lynch argues that right now investors are optimistic but not overly so.

  • "We would expect to see more inflows and optimism before an ultimate market peak could take place," Lynch wrote in a note to clients.

Yes, but: DataTrek co-founder Nicholas Colas does point out one glaring issue: The bond market isn't buying it.

  • "Our largest worry is the remarkable complacency in long-dated Treasury yields," Colas said in a note.

Go deeper: BMO Capital Markets interest-rate strategist Jon Hill argues the current rally in stocks is not based on positive growth expectations for the economy, but on the Fed's reversal of its plan to raise interest rates.

4. The concentration of corporate debt
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Data: Wells Fargo Investment Institute; Chart: Andrew Witherspoon/Axios

Non-financial S&P 500 companies with the least cash are piling on the biggest loads of debt, Axios' Courtenay Brown writes.

By the numbers: More than half of the S&P 500's total cash is held within just 25 companies — or the top 5% — while the bottom 95% of companies hold 73% of the index's debt, according to the Wells Fargo Investment Institute.

  • The most "cash-poor" S&P 500 companies collectively have a cash-to-debt ratio of 18% — the lowest since the financial crisis. In other words, there's 18 cents of cash for every dollar of these companies' total debt.
  • Alternatively, the cash-to-debt ratio at the top 25 cash-rich companies is 61%.

What to watch: Corporate debt-loads haven't hit financial crisis levels but analysts at Wells Fargo write, "leverage is rising, and debt burdens may become too large for some companies as this economic cycle extends."

Go deeper: Keep an eye on corporate debt

5. The Fed's newly unified voice

Statements from Fed governors and regional presidents had often been calibrated based on an individual member's perceived hierarchy within the rate-setting FOMC and their dovish or hawkish leanings. And often they were outright ignored because only the chair's views were seen as important to the market.

But under Jerome Powell, the Fed has bucked that trend. Remarks by FOMC members have been largely in one unified voice.

Driving the news: New York Fed President John Williams said Tuesday U.S. interest rates are already about neutral and it would take some sort of shock to raise them. That came days after Fed Gov. Lael Brainard said the U.S. central bank should stop reducing its balance sheet by late this year.

Why it matters: Brainard and Williams appeared with Chairman Jerome Powell in Bloomberg's profile of "The Fed's nucleus" earlier this year, and are both making the case for an even more dovish Fed.

  • But even remarks by FOMC non-voting members like Atlanta Fed President Raphael Bostic have become remarkably indicative of what's to come.

The details: The first sign that there had been a sea change in the Fed's plans for 2019 came from Bostic on Jan. 7 when he projected just one interest rate increase for the year, saying his business contacts seemed less confident about the coming months, and that "clouds" had developed overseas.

  • Those comments were largely ignored at the time — Powell had signaled 2 rate hikes for 2019 at the December FOMC conference just weeks before. But they now look prescient — or calculated.

The big picture: As recently as November, the Fed had clearly articulated a plan to raise interest rates 3 times this year and to reduce its balance sheet by $50 billion a month, on "automatic pilot." That would have pulled U.S. interest rates to 3.00–3.25% and reduced balance sheet holdings to around $3.5 trillion. Those numbers are much closer to normal interest rates and balance sheet holdings throughout the Fed's history.

Be smart: The lower interest rate could be reflective of the lack of inflation currently in the economy, but the increased level of debt held by the Fed on its balance sheet suggests policymakers still feel the need to stimulate what Williams on Tuesday called an economy "in a very good place."

  • That's not how this is supposed to work.

Don't forget: The Fed isn't just holding $4 trillion in U.S. Treasuries and mortgage debt, it's actively buying new debt to replace bonds that mature.

(In his remarks earlier Tuesday, Williams said he expects the Fed to continue reducing its balance sheet this year.)

History: The concept of inoculation in the U.S. was introduced in the 18th century by Onesimus, an African-born man held as a slave by Puritan minister Cotton Mather.

Onesimus told Mather about the centuries-old African tradition of extracting material from an infected person and scratching it into the skin of an uninfected person, effectively exposing that person to the disease and allowing them to build a tolerance. Mather convinced Dr. Zabdiel Boylston to experiment with the procedure when a smallpox epidemic hit Boston in 1721 and more than 240 people were inoculated.

Onesimus' traditional African practice was used to inoculate American soldiers during the Revolutionary War.