Sep 13, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • California approved a statewide rent control bill on Wednesday that limits annual rent increases to 5% after inflation and offers new barriers to eviction for landlords. (NYT)
  • WeWork will list its shares on the Nasdaq and is planning sweeping changes in its governance ahead of its IPO. (WSJ)
  • SmileDirectClub shares fell 28% in its opening day on the market, taking the company's value down by around $2.5 billion. (CNBC)
1 big thing: Mario Draghi's time is running out

Illustration: Lazaro Gamio/Axios

Mario Draghi's penultimate policy meeting as European Central Bank president was a bit like watching a past-his-prime boxer struggling through the late rounds of a fight. "Dovish" Draghi still has the moves, but it's obvious the game has passed him by and a new era has begun.

Driving the news: Draghi not only cut the ECB's already negative deposit rate to -0.5%, he also announced additional stimulus of 20 billion euros a month to continue indefinitely and lowered the central bank's inflation and growth forecasts.

What they're saying: "Lower rates and QE are unlikely to have much effect on the eurozone economy. Draghi knows that," Joseph Trevisani, senior analyst at FXStreet, tells Axios in an email. "By placing the onus for inaction on governments he distracts (as much as possible) from the probable failure of the ECB stimulus."

The big picture: Draghi's "whatever it takes" mantra has been credited with saving the eurozone, Europe and the euro currency, as the central bank has taken unprecedented steps to bring the economy back to life during his 8 years as its head.

  • However, it has been largely unsuccessful in generating inflation and allowing eurozone economies to stand on their own.
  • Draghi effectively admitted as much on Thursday, calling for politicians to take the reins and administer fiscal stimulus to help prop up their respective economies.
  • But he still pushed forward with exceptional measures, reportedly in the face of unprecedented dissent from the influential central bank governors of Germany, France, the Netherlands, Austria and Estonia, among others.

Be smart: "Central banks are loath to ever admit to reaching the limits of monetary policy, but that is more or less where we think the ECB is," Deutsche Bank chief U.K. economist Mark Wall and senior U.K. economist Peter Sidorov said in a note to clients.

Where it stands: Draghi also tried to placate the heads of Europe's consumer banks by instituting a tiered deposit system that would spare some banks from having to pay the central bank to park their reserves.

The bottom line: The measures will provide some relief for the banking system, Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research, tells Axios.

The big question: Will it actually be a sustainable solution for the underlying problems?

  • "Oh, no," Jones says, with a hearty laugh. "The problem is demand and how to stimulate demand in a world of aging populations, demographic challenges, a China slowdown, trade wars, all those things that really monetary policy can’t solve. They can only address what they can address."
2. Inflation could be making a comeback
Expand chart
Data: St. Louis Federal Reserve; Chart: Axios Visuals

Thursday's U.S. core CPI reading, which measures inflation excluding volatile food and energy items, rose 0.3% in August from July and 2.4% from a year earlier. That was the fastest year-over-year increase since October 2008, according to data from the St. Louis Fed's FRED system.

Why it matters: The costs of the U.S. tariffs on Chinese imports clearly made an impact on the reading, but wages also picked up notably last month as seen in the government's jobs report. The reading may indicate that inflation is making a sustained comeback.

The big picture: While it's not the Fed's preferred measure of inflation (the central bank is partial to the personal consumption expenditures index), the reading breaking above trend will likely motivate the central bank's hawks to dig in their heels in opposing rate cuts this month.

  • It also could make further cuts more difficult, and this could be a problem as the market shows investors already have factored significantly lower U.S. interest rates into asset prices.
3. Only a few states are at serious risk of recession
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Data: LendingTree; Chart: Naema Ahmed/Axios

There are growing worries about a global recession or a U.S. recession, but individual states are also at risk. While states generally move in concert with the country, not every state started and ended its last recession in line with the broader U.S. recession of 2007–2009.

Case in point: There have been 5 states where recessions have occurred between that recession and now. The most recent is Alaska, which was in recession from Q2 2016–Q2 2017, Lending Tree chief economist Tendayi Kapfidze notes in a recent post.

What it means: Kapfidze created a model to evaluate each state's current recession risk, specifically the likelihood that a state will have weak economic fundamentals as determined by the growth rate of that its coincident index.

  • "State coincident indexes — created by the Federal Reserve Bank of Philadelphia — gauge how well a state economy is doing," Kapfidze explains.
  • "If a state has a negative year-over-year growth rate in its coincident index, it’s likely that that state has weak economic fundamentals. If a state has a negative year-over-year growth rate in its coincident index for two or more consecutive quarters, then we’ve considered it to likely be in recession."

Threat level: Michigan, Hawaii and Montana all show a high risk for recession.

  • Nebraska, Oregon and Idaho have the lowest risk of recession, with all 3 states showing a 0% chance of having weak fundamentals in Q4.

The big picture: Overall, most states appear to be in good shape, Kapfidze says.

  • "Our model predicts that by Q4 of 2019, the probability of weak economic fundamentals in 42 states will be below 5%."
  • "Based on the conclusions of our model, it seems that — barring any drastic changes — most states aren’t in immediate risk of recession."
4. Walmart takes another swipe at Amazon

Walmart is unveiling a grocery delivery subscription service this fall, AP reports. The big box store is hoping to boost its constituency of time-starved shoppers looking for convenience, and attempting to move strongly into one of the fastest growing e-commerce sectors.


  • The service will charge an annual membership fee of $98 for subscribers to choose unlimited same-day delivery.
  • That price is $21 less than the cost of Amazon Prime.
  • The grocery services will be fulfilled by local stores and require a minimum order of $30. With same-day delivery, there’s a 4-hour minimum wait time between placing an order and having it delivered, AP reports.

Why it matters: Walmart's stock gained nearly 1% on Thursday, having recently touched a record high, as investors have gotten more bullish on the largest U.S. retailer in recent weeks.

  • With more positive trade war headlines helping push the overall market higher, investors are game to buy Walmart's latest challenge to Amazon.
5. Juul expands its presence in China

Axios' Caitlin Owens writes: At the same time Juul is facing a regulatory crackdown and damaging headlines in America, it's also entering the Chinese market — the world's largest market of smokers, per Reuters.

  • It has also launched its products in South Korea, Indonesia and the Philippines.
  • While China has more than 300 million smokers, it does already has several Juul competitors. The government has also launched anti-smoking campaigns and has said that China's e-cigarette laws will eventually resemble Europe's.

Meanwhile, the New York Times reports that the recently announced Trump administration plan to ban all e-cigarette flavors would have "a chilling effect" on the entire vaping industry and "severely dent" Juul's sales.

  • A Juul official told the NYT that it's considering challenging the ban on menthol and mint flavors specifically.
Dion Rabouin