Dec 4, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning. Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,125 words, ~ 4 minutes. )

Situational awareness: Chinese and European services data came in better than expected. Investors will now look to the U.S. ISM nonmanufacturing report later this morning.

"I'm not a businessman; I'm a business, man." - See who said it and why it matters at the bottom.

1 big thing: The market will need the Fed again in 2020

Illustration: Aïda Amer/Axios

The No.1 risk to the stock market continuing its strong performance next year is not President Trump or weak U.S. economic data or even China, senior analysts at John Hancock Investment Management say. It's whether or not the Fed continues to stimulate the economy through what they call "not QE."

What it means: Fed chair Jerome Powell has insisted the central bank's bond buying program — initiated after rates in the systemically important repo market spiked to five times their normal level in September — is not quantitative easing.

  • But "it walks and talks" like QE, analysts say, and has injected close to $1 trillion of liquidity into the repo market and added more than $260 billion to the Fed's balance sheet.

The intrigue: The new "not QE" program was "like a fourth rate cut this year," John Hancock co-chief investment strategist Matthew Miskin said during a media briefing Tuesday in New York. And it has given a boost to the stock market.

The big picture: "The equity market has benefited from a super aggressive Fed," Ethan Harris, head of global economics at Bank of America Merrill Lynch, told Axios during a separate event Tuesday at BAML headquarters.

  • "I mean the Fed basically anesthetized the markets to the trade war escalation this summer."
  • Because the Fed was able to mask the economy's pain from the market, a strong sell-off may be needed to motivate the Trump administration to secure what Harris calls a "skinny" trade deal with China and avert the Dec. 15 tariffs that will hit billions of dollars worth of consumer goods.

The converse is also true, Miskin argued.

  • "If things turn more sour because we're not getting a trade deal or the tariffs go on Dec. 15, the stress underpinning ... the market will re-emerge and the Fed's definitely going to have to be there," he told Axios.

The bottom line: Miskin and John Hancock co-chief investment strategist Emily Roland expect the Fed will continue to pump money into the market, pushing its balance sheet above the record $4.5 trillion it reached before it began unwinding in 2017. That will help buoy the stock market for further gains of 5%–10% next year.

  • "The challenge is if we run into a recession, could they be out of tools or could they end up in a BOJ or ECB position, which is totally unenviable," Roland said.
Bonus: Bringing back the balance sheet
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Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The Fed's balance sheet of U.S. government bonds and mortgage-backed securities expanded from $870 billion in August 2007 to $4.5 trillion in early 2015. The central bank then began cutting back on bond buying in a "normalization" process that began October 2017 and ended in August 2019, taking the balance sheet as low as $3.8 trillion.

  • Since September, it has risen to more than $4 trillion and the Fed has said it plans to continue buying short-dated bonds for the foreseeable future.

The big picture: Powell has said that the program is not QE or economic stimulus, but "the Fed is going to have to change their tune," Miskin told Axios.

  • "$4.5 trillion was the prior peak and at this pace we're going to hit that in the first quarter [of 2020] and then you might as well call it QE again."
Double bonus: More trade war fears = more rate cut expectations
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Data: CME FedWatch Tool; Chart: Axios Visuals

Investors had largely priced out more than one rate cut from the Fed in 2020, but Trump's comments Tuesday that he would prefer to wait until after the 2020 election to make a deal with China prompted investors to rethink those bets.

  • Fed fund futures prices show traders now are betting it's more likely the Fed cuts rates twice next year than that it holds steady through December 2020, as Powell has said the central bank plans to do.
2. Catch up quick

Consulting firm McKinsey recommended ICE cut spending on food for migrants and on medical care and supervision of detainees, plus looked to accelerate the deportation process at border facilities. (N.Y. Times)

Food-delivery startup Postmates has laid off dozens of employees and told those in Mexico City that it will close its office there. (CNBC)

Peloton shares fell by as much as 10% during trading on Tuesday, the most in about two months, as backlash mounted over the company's recent ad. (Bloomberg)

Saudi Aramco has received nearly 6 billion orders from institutional buyers, according to the lead bankers on the oil company's IPO. (Reuters)

The House of Representatives overwhelmingly approved legislation to impose sanctions on Chinese officials for human rights abuses against Muslim minorities in the country. (Bloomberg)

3. Investors cheer Pichai as Alphabet's CEO
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Data: Factset; Chart: Axios Visuals

The market responded positively in after-hours trading to the announcement that Sundar Pichai will take over as CEO of Alphabet in addition to his current role as head of the core Google unit.

  • Pichai will replace Larry Page, who, along with Google co-founder Sergey Brin, will remain "actively involved as shareholders and co-founders."
  • The stock rose by nearly 1% following the announcement, showing investors' confidence in the move.
  • Google shares have underperformed the overall Nasdaq index, year to date.

Between the lines: Page and Brin, who started Google in 1998, have been increasingly invisible in recent years, not even appearing at key Google events.

4. U.S. credit card burdens have geographic split
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Reproduced from CreditCards.com; Table: Axios Visuals

Americans living in Southern states will have the hardest time getting out of credit card debt, according to a CreditCards.com report that compares credit card debts and household incomes.

  • Nine of the 10 highest credit card debt burdens are in the South, though New Mexico holds the top spot.

Breakdown: A typical consumer from New Mexico carries $8,356 in credit card debt (23rd highest in the U.S.) but earns a median income of $47,169, which is the fourth lowest in the nation.

  • If the average New Mexican cardholder sticks to a recommended strategy of paying off debt with 15% of earnings, it would take 17 months to pay off their debt, and they will end up paying $1,339 in interest.
5. Reshaping the sell side

The combination of increased appetite for passive investment and financial regulations, particularly Europe's Mifid II, is underpinning a "profound reshaping" of what Wall Street research analysts do, Financial Times' Robin Wigglesworth writes.

  • It's a move into deep data and away from opinion-driven analysis.

What's happening: Because Mifid II mandates that asset managers and institutions pay for research directly rather than simply paying banks or researchers for their services broadly, there's a great "unbundling" happening throughout asset management.

  • “Not only has unbundling impacted US money managers, it is in the process of changing the whole nature of investment research,” Tabb Group, a markets consultancy, said in a recent report.

The intrigue: "Nowadays, analysts sift through non-traditional information such as satellite imagery and credit card data, or use artificial intelligence techniques such as machine learning and natural language processing to glean fresh insights from traditional sources such as economic data and earnings-call transcripts," per FT.

  • "Almost every bank is now exploring how newer technology can enhance their analysis, or even become a separate business line."

The bottom line: "For now, verbose reports remain the bread and butter of an investment bank analyst. But the form of the content is evolving," Wigglesworth writes.

  • "These days reports are often shorter and punchier, and research can come in the form of videos, 'charticles', live events and even podcasts, and are also distributed through social media and even messaging apps."
Dion Rabouin

Happy 50th birthday to Shawn Corey Carter, aka Jay Z, aka Young Hova, aka Hov, aka President Carter, aka Jigga.

  • He was "conceived by Gloria Carter and Adnis Revees who made love under the sycamore tree," which made him a more sicker MC.