Jul 25, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • China’s industrial sector has lost 5 million jobs in the last year, 1.8 million–1.9 million jobs because of the trade war with the U.S., according to a leading Chinese investment bank estimate. (SCMP)
  • Tesla announced its latest departure: Co-founder and CTO J.B. Straubel will leave the company after netting about $30.1 million from stock sales in less than 9 months. (Bloomberg)
  • Puerto Rico's Gov. Ricardo Rosselló announced his resignation, effective Aug. 2, after days of massive protests over leaked messages and a growing economic crisis. (LA Times)
1 big thing: Greenspan backs Fed rate cuts

Alan Greenspan speaks via video conference at the International House in New York City. Photo: Andrew Renneisen/Getty Images.

Former Fed chair Alan Greenspan endorsed the central bank's expected rate cut at this month's FOMC meeting during an interview with Bloomberg TV on Wednesday.

Why it matters: Current Fed chair Jerome Powell has shown admiration for Greenspan and getting his stamp of approval likely means a rate cut for July is a lock. Powell also could feel emboldened to adopt an even more dovish stance, acquiescing to the market's expectation of 75 basis points of cuts within the next year.

What he said: Greenspan said the idea of a rate cut in the face of possible risks to the economy — in this case the U.S.-China trade war — could be a good idea.

  • “Forecasting is very tricky. Certain forecast outcomes have far more negative effects than others. It pays to act to see if you could fend it off.”

Background: Powell paid fawning tribute to Greenspan during his speech at the Fed's Jackson Hole gathering last year, lauding the longtime Fed chief's insight, patience and strategy.

  • Despite criticism laid on Greenspan for his loose views on regulation and policy that many argue were a major cause of the global financial crisis, Powell clearly reveres him, and so do other members of the Fed.

Between the lines: Vice chair Richard Clarida and Chicago Fed president Charles Evans, both FOMC voters, highlighted the Fed's decision to cut U.S. interest rates in September 1998 as prescient, even though unemployment had fallen to 4.5% and there were worries about inflation.

Flashback: At the time, the Fed was worried about the potential of the Russian financial crisis and the collapse of Long-Term Capital Management negatively impacting the U.S., much the way Powell and Co. have focused on negative developments from the trade war and weakness in Europe and Asia as potentially justifying a cut this year.

  • “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress,” Greenspan said of his reason for cutting rates multiple times in 1998 despite the strong economy.

Yes, but: The Fed ended up backtracking on the cuts and raised rates in 1999 and 2000 ahead of the 2001 recession.

2. Stocks hit all-time highs again

Bad news was good news and good news was good news Wednesday on Wall Street, as the S&P 500 and Nasdaq both rose to all-time highs.

The bad news: Weak readings on manufacturing in the U.S. and Europe — where eurozone PMI fell to its lowest in 11 years — helped cement expectations of rate cuts at upcoming meetings from the Fed and the ECB.

  • “Equities have largely brushed off weaker global conditions given the prospects for central bank easing, and an earnings season that has so far seen around 78% of S&P500 companies beating estimates,” Tapas Strickland, director for economics and markets at National Australia Bank told Reuters.

The good news: Texas Instruments wildly outperformed earnings expectations, suggesting the slowdown in semiconductor demand has not been as bad as feared. That pushed its stock up 7.4%.

  • UPS shook off the ongoing U.S. transportation and manufacturing recessions to top analysts' expectations on earnings, sending its stock up more than 8%.
  • AT&T shares rose 3.6% after the company reported net phone subscriber growth that topped estimates.
  • After the market closed, Facebook announced it had beaten Q2 revenue estimates, sending its shares higher in after-hours trading.
3. Boeing and Caterpillar spoil the party for the Dow

The 2 stocks that have been the unfortunate face of the U.S.-China trade war released weak earnings reports that missed expectations and sent shares tumbling Wednesday.

  • Caterpillar blamed higher material costs, including tariffs and lower demand in China, that dented its profits during the quarter. The company also lowered full-year earnings guidance. Shares fell nearly 4.5% on the day.
  • Boeing, the largest American exporter, which counts China as its top export market, reported its worst-ever quarterly loss — $2.9 billion — as its flagship 737 Max jet remains grounded after two fatal crashes. Boeing lost $5.82 a share, with revenue falling to $15.8 billion. The stock fell 3.1%.

The 2 major components brought the Dow Jones Industrial Average down 0.3%, despite broad gains in other segments of the market.

4. A German recession "looks unavoidable"
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Data: Investing.com; Chart: Axios Visuals

Germany's manufacturing sector has been contracting all year, and its economy is at serious risk of falling into recession.

What's happening: In April, analysts at IHS Markit warned that the manufacturing sector was "clearly in deep recession" and companies had begun laying off workers.

Things continue to worsen for Europe's largest economy. This month its manufacturing sector showed its worst reading in 7 years, a continuation of a crumbling industry that just last month saw the sharpest slide in factory orders since the financial crisis.

  • "A large fall in the PMI is of course worrisome, particularly if it is a fall from a level that was already low," Jeromin Zettelmeyer, a senior fellow at the Peterson Institute for International Economics, tells Axios. "There is volatility in these numbers, so I would not panic, but I am indeed worried."

The big picture: The news is particularly bad, given that the EU Commission had just written Germany's expected 2019 GDP growth down to 0.5%, and that was including higher expectations for July's manufacturing numbers.

What's next: Finance ministers from across Europe implored Germany to unleash fiscal stimulus measures in a report from the European Fiscal Board earlier this month. But calls for increased spending from Germany have been coming since February and thus far have not been heeded.

  • “The high dependence on exports and the Chinese sales market is increasingly becoming a burden and the trade dispute hangs like a sword of Damocles over the one-time poster boy of the euro region," said Patrick Hussy, a director at global investment research group Sentix. “A recession looks unavoidable.”
5. Atlanta, NY Fed see weaker Q2 GDP
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Data: New York Fed and Atlanta Fed; Chart: Axios Visuals

Ahead of today's second quarter U.S. GDP report, estimates from economists and market analysts have varied from as low as 1% to higher than 3% after a strong first quarter.

  • The forecasts from the Atlanta and New York Fed ended up uncharacteristically close to one another, suggesting a major slowdown from Q1's 3.1% year-over-year GDP gain.
6. Consensus grows that Trump may weaken the dollar

More Wall Street currency strategists are positing that President Trump may take action to weaken the dollar.

Yesterday, the Wall Street Journal's Justin Lahart wrote, "Investors should be prepared for the possibility" that President Trump takes action to weaken the dollar.

  • On July 8, Bloomberg's Katherine Greifeld wrote, "A growing chorus of Wall Street foreign-exchange analysts is writing about the risk that U.S. President Donald Trump may move beyond words in his quest for a weaker dollar."
  • On Aug. 10, 2018, then a Yahoo Finance reporter, I wrote, if Trump was "unable to bring China to submission with tariffs, it’s possible and 'highly likely' his administration would launch a currency war," weakening the dollar.


Dion Rabouin