Jul 31, 2019

Axios Markets

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Situational awareness:

  • Apple reported earnings and revenue that beat estimates but had continued weakness in iPhone sales and in China. (Axios)
  • Credit Suisse reported net income of nearly $940 million, more than $200 million more than expected, in its second quarter earnings report. (CNBC)
  • Samsung's operating profits fell more than 55% in Q2, the world's top phone-maker reported. (CNBC)
  • GrubHub CEO Matt Maloney accused rivals DoorDash and Postmates of "price gouging" consumers on the heels of the company's disappointing earnings report that sent shares down 12.3%. (Axios)
1 big thing: Why the Fed wants higher inflation

Illustration: Rebecca Zisser/Axios

Axios' Courtenay Brown writes: Low inflation may sound good to consumers, who like what it suggests about the prices they'll pay. But the Federal Reserve — which will likely cite the lack of meaningful price increases as a motive for cutting interest rates today — has reasons for concern.

Why it matters: Inflation has come in below the Fed's "sweet spot" — 2% inflation — throughout much of the record-long economic expansion, and consumers have benefited from low prices accompanied by low borrowing costs.

  • But Fed chair Jerome Powell has pivoted to warn of the dangers of weak inflation — a shift from the more common fear of rising inflation, like the type of soaring prices seen in the late 1970s and early '80s.

What's happening: The Fed's preferred measure of inflation came in at an annualized pace of 1.6% in June — below the 2% target, though a rebound from prior months. Indeed, the Fed "has failed to convincingly reach the goal" since formally adopting its inflation policy in 2012, despite already low interest rates, the Wall Street Journal points out.

  • While it may seem like a slight miss, the Fed is concerned that low inflation will cause expectations for inflation to fall even further.
  • That would make it more difficult for the Fed to step in and cut interest rates in an effort to push inflation higher, leading to a deflationary environment.
  • "We’ve seen it in Japan. We’re now seeing it in Europe. ... That road is hard to get off," Powell told Congress earlier this month.

The fear of higher inflation may feel like more of a risk, because it's more recent in consumers' memory. By contrast, the last deflationary period in the U.S. was in the 1930s.

  • But "deflation is more painful for the economy and for individuals than inflation," Nathan Sheets, a former Fed official and current economist at PGIM, tells Axios.
  • "When you're in a period of deflation, what it's doing is it's sucking down the power of prices. Wages are falling and prices are falling. A deflationary environment tends to transfer resources from debtors to creditors," says Sheets.
Bonus: Powell on inflation
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Data: Axios analysis of Powell's speeches; Graphic: Andrew Witherspoon/Axios

Courtenay writes: Powell has spoken a lot about the risk of inflation overshooting its 2% target, but only recently has he discussed the risk of a persistent undershoot.

The bottom line: Economists are wary that a 25 basis point cut — which many people expect the Fed to announce today — will be enough to trigger the type of inflation the Fed wants to see in order to prove that its 2% target is not, in fact, a ceiling.

  • Chicago Fed president Charlie Evans, a voting member of the Fed's rate-setting committee, said this month that on the "basis of inflation alone, I could feel confident in arguing for a couple of rate cuts before the end of the year."
2. Delinquencies spike with record high credit card interest rates
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Data: St. Louis Federal Reserve; Chart: Axios Visuals

Since 2014, credit card interest rates have risen 4.4 percentage points, representing a 35% increase in costs for consumers, data from NerdWallet shows, despite the fact that U.S. interest rates remain at historical lows.

Why it matters: That adds significantly to the interest costs for consumers who carry credit card debt from month to month, and the average household now pays more than $1,150 a year in credit card interest.

On the bright side: Consumers may get some respite from a Fed rate cut. Credit card rates are legally tied to the so-called prime rate that banks charge their best customers, which is based on the U.S. overnight interest rate set by the Fed.

But, but, but: The Fed funds rate has diverged a bit this year from the prime rate and the credit card rate since the Fed paused its hiking cycle.

  • While the Fed rate hasn't moved since December 2018, the prime rate rose 15 basis points in January to 5.5% and has remained there, and the commercial credit card interest rate has risen 28 basis points to an all-time high of 17.14%.

Between the lines: NerdWallet's data also finds almost half of Americans (47%) do not pay their credit card bill in full each month and 38% of U.S. credit card holders don't know the interest rate on their cards.

3. Beyond Meat short sellers keep adding to their losses
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Data: S3 Partners; Chart: Axios Visuals

Beyond Meat short sellers haven't let a little thing like nearly $1 billion in losses deter them from their bets against the fake meat company's stock.

What's happening: Prior to Tuesday's big losses, which followed the announcement that Beyond Meat would sell an additional 3.25 million shares in a secondary offering, the stock had been on quite a run.

  • Shares are still up well over 500% since its IPO in early May, which caused $970 million in losses for short sellers, including $441 million this month, according to data from S3 Partners.

But the short sellers have refused to quit, adding to positions in spite of extraordinary losses and the 138% borrow fee for existing shorts and 160%–240% fee for new short sales.

  • Nearly half of Beyond Meat's float — or outstanding available shares — is being rented by short sellers (44.5%), by far the highest short interest rate among all packaged foods and meats companies that S3 tracks.

It could get worse: Short sellers are likely in for a squeeze, S3's managing director of predictive analytics Ihor Dusaniwsky said in a note.

  • "Shorts are paying over $4.4 million in daily stock borrow financing costs; stock borrow rates continue getting more expensive; stock loan recalls keep hitting the streets; there is virtually no stock borrow supply left on the street to cover those recalls; and shorts are still down a significant amount of mark-to-market losses even with today’s price drop."