Jul 19, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Happy Friday! Check me out on the TV/radio today. I'll be on Cheddar this afternoon, followed by a stop at "After the Closing Bell" on Fox Business and then chatting with my Uncle Kai Ryssdal on "Marketplace" this evening.

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Situational awareness:

  • Microsoft stock rose 2% after better-than-expected quarterly earnings and guidance, including a 64% revenue increase for its public cloud platform Azure. (CNBC)
  • The Justice Department indicated to Sprint and T-Mobile it will sue to block the companies' merger as soon as next week if they can't agree on a divestiture plan. (Reuters)
  • The likelihood Britain will leave the EU without a deal is the highest since October 2017, economists say. (Reuters)
  • Fallout from grounding its 737 MAX jet has already cost Boeing $8 billion, and the cost will continue to rise. (NYT)
  • WeWork cofounder Adam Neumann cashed out "more than $700 million" of company stock and debt ahead of its expected IPO (WSJ)
1 big thing: Banks don't need high interest rates to rake in cash

Illustration: Aïda Amer/Axios

Ally Financial was the latest bank to declare a major profit windfall in its second quarter earnings report, as the U.S. banking industry's largest auto lender reported a profit increase of 67%.

Why it matters: Americans are borrowing record sums to buy new vehicles — and used ones — and they continue to pay relatively high interest rates. Banks are seeing big profits as a result.

The intrigue: U.S. Treasury yields have fallen to their lowest level in more than 2 years, pushing down interest rates on bonds and savings accounts. Yet, Fed data shows auto loan rates in Q2 remained well above their average over the past decade, and even higher than in the fourth quarter of 2018 when Treasury yields reached their highest since 2011.

  • The interest rates banks charge for loans are typically tied to the yield on Treasuries, as banks adjust their rates in conjunction with movement in the bond market to remain competitive for customers.
  • However, as rates in the U.S. and globally have fallen in 2019 that traditional correlation has not yet materialized.

What's happening: U.S. consumers are scaling back on new vehicle purchases and even buyers with top tier credit are opting for used instead of new, data shows, but the banks continue to squeeze big profits.

  • Ally's stock rose 6.5% to an all-time high of $33.49 a share Thursday as retail auto loans clocked $72.3 billion, up from $69.9 billion in the year-earlier period. Its average yield on retail auto loans increased to 6.58% from 6.08%.

Where it stands: Experian, which tracks millions of auto loans each month, said the average amount Americans are borrowing for a new vehicle rose to a record high of more than $32,000 last month.

  • Americans also are paying record high average monthly payments for both new and used vehicles.

"We have not seen a slowdown in loan demand. In fact, volume for new and used loans is up from previous years," Melinda Zabritski, senior director of automotive financial solutions for Experian, told CNBC in June.

The bottom line: Investors have worried that lower rates will hurt banks' profit margins and income. So far, that hasn't been the case.

Bonus: Credit cards, too

Fed data shows credit card assessed interest hit a fresh all-time high in Q2, rising to more than 17% for the first time ever.

  • Credit cards and auto loans were a major part of the consumer banking success touted by big banks like JPMorgan, Citigroup and Bank of America in their latest earnings.
  • That helped banks offset the worst first-half trading revenue in more than a decade.
2. Average starter home in West Virginia is only $42,000
Expand chart
Adapted from howmuch.net; Chart: Axios Visuals

While credit card and auto loan rates aren't falling, mortgage rates are.

What's happening: U.S. mortgage giant Fannie Mae said in a recent report it expects average U.S. 30-year fixed-rate mortgages rates will drop to 3.7% in the second half of 2019, lowered from expectations of 3.9% in the second half analysts predicted just a month ago.

  • Mortgage rates averaged 4.4% in Q1 and 4% in Q2.

And while the housing market remains out of reach for many Americans, there are some locations where so-called starter home prices remain significantly below the national average.

  • West Virginia has the lowest median starter home price in the country, while Washington, D.C. has the highest.
3. Manufacturing is rebounding from its June swoon
Expand chart
Data: Federal Reserve Bank of Philadelphia; Chart: Axios Visuals

The Fed's regional manufacturing indexes are bouncing back in July after an awful June swoon, none more so than the Philadelphia region, which rose to 21.8 from a 0.3 reading in June.

  • It was the highest result in a year for the survey.

Details: Many of June's regional Fed surveys were conducted during the week President Trump threatened to impose tariffs on imports from Mexico in addition to tariffs on $200 billion worth of Chinese goods.

  • "A July rebound, therefore, was always likely but this is a gratifyingly big increase," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients.
  • The strong rebound in the Philly Fed number, following a modest gain from the New York regional Fed, doesn't promise a pickup in overall U.S. manufacturing, "but it does make it much more likely," Shepherdson added.
4. Fed wants to "vaccinate the economy" with rate cuts

If there was uncertainty about whether the Fed planned to lower interest rates at its policy meeting this month, New York Fed President John Williams, St. Louis Fed President James Bullard and Fed Vice Chair Richard Clarida all but ended it Thursday afternoon.

The big picture: The Fed has been setting up this rate cut since April. Since then policymakers have been shifting the focus from being "data dependent" to worrying about the unknown impacts of the U.S.-China trade war and slowing global growth, which has been happening since the year began, but wasn't highlighted until recently.

What they said: "The U.S. economy is in a good, good place," Clarida told Fox Business. "We have a solid growth rate. We have a strong labor market. Inflation is stable."

But, but, but: "The global economy's slowing, business investment has been soft. There [are] disinflationary headwinds abroad and these uncertainties are something that we talked about in our June meeting. We'll talk about them again in July."

  • Clarida added: "You don't need to wait until things get so bad to have a dramatic series of rate cuts.
  • "We need to make a decision based on where we think the economy may be heading and, importantly, where the risks to the economy are lined up."

New York Fed's Williams made the case for pre-emptive cuts during a speech in New York, saying, "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."

  • Cutting rates before there are problems, Williams said, "should vaccinate the economy and protect it from the more insidious disease of too low inflation," New York Times' Jeanna Smialek reported.
  • Williams' office made a point to clarify that his remarks were an academic discussion and not a commentary on the Fed's upcoming decision.

St. Louis' Bullard —who dissented at June's meeting, calling for a 25-basis-point cut — said in an interview that a couple rate cuts would likely prove warranted this year because of "trade uncertainty," which President Trump has moved "to the front burner."

What's next? The Fed begins its blackout period this weekend, so these were some of the last comments from Fed officials before their policy meeting on July 30–31.

Dion Rabouin