Sep 18, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here. (Today's Smart Brevity: 1,123 words, ~ 4 minutes.)

Situational awareness:

  • E-cigarette maker Juul's sales have been halted in China without explanation, just days after it started selling products on JD.com and Alibaba's Tmall.com. (WSJ)
  • FedEx shares dropped more than 9% in post-market trading after the company missed quarterly earnings estimates and lowered 2020 guidance. (CNBC)
  • Saudi Arabia said it would restore most of its oil output and return to normal production levels by the end of the month. Oil prices fell 5% on Tuesday. (WSJ)
  • The next Bank of England governor may not be appointed until after British elections, and Mark Carney may be asked to extend his term if Brexit is delayed again. (FT)
1 big thing: Banks don't have enough money

Illustration: Aïda Amer/Axios

Today's interest rates decision in the face of global economic turmoil but strong U.S. data is going to be dicey enough — but Fed chair Jerome Powell and the FOMC may also need to announce a comprehensive bond-buying program on top of that.

Driving the news: Following an emergency $53 billion repurchase agreement operation on Tuesday, the New York Fed announced it would hold another repo auction today for as much as $75 billion.

  • Interest rates jumped as high as 9% Tuesday, well above 2.25%, which is the top of the Fed funds rate that should guide the market.
  • The New York Fed was forced to intervene, something it hasn't done since 2008.

Why it matters: Market participants worry this is a sign there's a widespread lack of liquidity in the repo market, which is used by large, systemically important financial institutions to quickly borrow cash in exchange for securities like U.S. Treasuries.

  • A lack of liquidity starts to break markets down as the trading and pricing of assets becomes increasingly difficult. This happened to the repo market during the 2008 financial crisis.

The big picture: The Fed could indicate it plans to stabilize the level of reserves at today's FOMC meeting, meaning it increases its bond purchases, a process that "will look, walk and talk like quantitative easing," says Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, a primary dealer that does business directly with the Fed.

What they're saying: Tuesday was the fourth time in the past year the repo rate has jumped to abnormally high levels, following episodes in December, April and on Monday.

  • Analysts say the culprit is a scarcity of bank reserves, which have been declining since 2014 and are expected to fall further.
  • "None of this was a shocker to anyone, so the question is why did the market panic," Goldberg tells Axios. "You’ve had enough of these repo events to suggest that we are getting to the point where there isn’t enough liquidity in the system."

What's next: Analysts at Bank of America Merrill Lynch see "substantial risks" that the Fed announces outright bond purchases to stabilize the repo market. That could mean $150 billion of additional Treasury purchases, bringing the total to $400 billion in the next year.

  • "Such a statement would imply that permanent balance sheet growth and outright purchases are necessary," BAML rates strategists said in a note to clients.
2. Will the data-dependent Fed fight the data?
Expand chart
Data: CME Group; Chart: Andrew Witherspoon/Axios

If Powell cuts U.S. overnight interest rates today, not only will he be fighting hawkish members of his rate-setting committee, but the supposedly data-dependent Fed will be fighting the data as well.

What's happening: Geopolitical tensions in the Middle East are rising and economic readings from China and the eurozone have continued to deteriorate since the Fed's last meeting — but U.S. data has been strong and even potentially inflationary.

  • The University of Michigan's consumer sentiment index rebounded in September after hitting a 3-year low in August.
  • U.S. retail sales rose 0.4% in August, doubling estimates from economists, after a strong 0.8% rise in July.
  • The core consumer price index, a measure of inflation excluding volatile food and energy items, rose 2.4% year over year, the biggest jump in more than a decade, according to St. Louis Fed data.
  • August's U.S. jobs report missed expectations for employment gains, but average hourly earnings increased by 0.4% for the month and 3.2% from a year earlier, both near their highest marks in a decade.

Now what? While most analysts and money managers say they still expect a rate cut, Fed fund futures prices show the market is growing less certain.

  • Traders went from seeing a 0% chance the Fed will hold rates steady at today's meeting a month ago to a near 50-50 shot on Tuesday.
3. Industrial production is the latest piece of strong U.S. data
Expand chart
Data: Board of Governors of the Federal Reserve System; Chart: Axios Visuals

U.S. industrial production jumped by the most in a year last month, rising by 0.6% and showing that perhaps the trade war isn't having as dire an impact on the U.S. economy as feared.

  • Industrial production is a measure of factory, mining and utility output, and came in well above economists’ expectations.
  • “This sector cannot be considered strong, but damage from slow growth abroad and trade tensions has not been severe so far,” Daiwa Capital Markets economist Michael Moran said in a note to clients.

The big picture: The U.S. manufacturing sector remains in a recession, largely as a result of the U.S-China trade war, but Tuesday's numbers show that it has not yet fallen off a cliff.

  • The Fed's industrial production index also remains above where it was as recently as 2015 when it last experienced a sustained downturn.

Between the lines: The pickup in August's data was due almost entirely to the mining sector, which rose 1.4%. The GM strike could complicate things for the September reading, as it could idle factories and impact the overall reading.

4. Ghosting for better gigs

The labor market is so strong that not only are millennial and Gen Z employees ghosting their employers as they leave jobs, but they're also ghosting new jobs because they've gotten a better offer, CNN reports.

What's happening: "People are getting multiple offers in a market like today, and they are not showing up on their first day of work," Paul McDonald, senior executive director at staffing firm Robert Half, tells CNN's Kathryn Vasel.

By the numbers: Research from recruitment firm Randstad US found that 66% of U.S. managers have had an experience with candidates who accepted a job offer and then backed out or simply disappear before their start date. The practice was dubbed “ghosting” after gaining notoriety in online dating, CNBC notes.

  • "According to Randstad’s study of 1,202 U.S. managers and employees, more than a third (43 percent) of Gen Z employees — those aged 22 and under — say they’ve accepted a job but then not taken the job."
  • "That figure dips to 26 percent for millennials (those aged 23-38) and Gen X-ers (those aged 39-54). For baby boomers — or those between the age of 55 and 74, it falls to 13 percent," per CNBC.

My thought bubble: Kids these days have no respect.

5. Foreign buyers loaded up on U.S. stocks, sold Treasuries in July

Major foreign investors added to their holdings of U.S. stocks but slightly cut their Treasury bonds in July, data from the Treasury department released Tuesday shows.

Of note: China reduced its share in July and foreign holders overall cut their Treasury holdings to $6.63 trillion.

  • China has been gradually paring down its holdings for some time, but most analysts don't see the reduction as part of a strategy to dump Treasuries as a trade war weapon.
  • However, China has been looking to reduce its dependence on the U.S. dollar and other financial instruments.

Worth watching: Japan increased its holdings of U.S. Treasuries to $1.13 trillion, a 3-year high, maintaining its spot as the largest single foreign holder of U.S. government debt for a second straight month.

Data also showed that foreigners purchased a net $24.26 billion in U.S. stocks, adding to their American equity exposure for a second straight month. Prior to June, foreign investors had sold U.S. stocks for 13 months in a row.

Dion Rabouin