Axios Markets

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March 01, 2019

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Situational awareness:

  • Canada likely will announce today that an extradition hearing against Huawei's CFO Meng Wanzhou can proceed. (Reuters)
  • Elon Musk adjusted Tesla’s vehicle production forecast again and told reporters the company will make between 420,000 and 600,000 cars in 2019. (Bloomberg)
  • U.K. factories stockpiled goods at the fastest pace on record last month, citing Brexit uncertainty as the reason. (Reuters)
  • A group of New York politicians and business leaders are calling on Amazon to rethink its HQ2 pullout. (Axios)

1 big thing: As good as it gets?

Illustration of confetti and party balloons that spell out "MEH."

Illustration: Aïda Amer/Axios

The Trump administration said tax cuts would push businesses into an all-out spending spree, turbo-charging wages and investments in growth. Instead, corporate buybacks hit a new record, Axios' Courtenay Brown reports.

What's happening: Thanks to the Q4 GDP report, we know how much businesses used their tax windfalls to invest in buildings, machinery or intellectual property since the lower corporate tax rate took effect.

Why it matters: Going forward, that leaves the U.S. economy largely dependent on the labor force for an economic boost, which may also be tapped out soon.

  • U.S. productivity, typically jump-started by strong business spending, also may be a non-factor in the growth picture if business investment peaked in the middle of last year.
  • More fiscal stimulus from the government also is unlikely.

What they're saying:

  • "[Business investment] was okay, but certainly not the promised boom. Should be well into double digits," Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank, tweeted.
  • "It was a confident year for business expansion, though not quite as strong at the end as the start," tweeted Patrick Chovanec, chief strategist at Silvercrest Asset Management.

What to watch: "We would not be surprised to observe downward revisions in the estimate to business investment given the outright weakness in industrial production and durable goods data through the end of 2018," Joe Brusuelas, chief economist at RSM, a consulting firm, wrote in a note to clients.

Bonus: Capital spending's share of GDP

Contributions of nonresidential fixed investment to percent change in real GDP; Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals
Contributions of nonresidential fixed investment to percent change in real GDP; Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Capital spending contributed the second most to GDP in the fourth quarter of 2018, but nowhere near as much as it added to economic growth in 2011, its peak since before the financial crisis, Courtenay writes.

What's going on: "Labor has become the new capital in this [economic] cycle," Megan Greene, chief economist at Manulife Asset Management, tells Axios. "Companies can buy a fancy new machine or, because labor is cheap, they can just hire more people."

Also of note: Once a big boost to economic growth, housing has become a drag since the financial crisis, as the New York Times' Ben Casselman points out. Housing contributed -0.01 percentage points to last year's 2.9% GDP growth.

2. Q4 GDP: "Overall, it was just OK"

The initial fourth quarter U.S. GDP reading beat expectations, rising 2.6%, which puts the annualized figure at 2.9% (or 3.1% depending on whom you ask).

DRW Trading strategist Lou Brien breaks the report down for Axios.

By the numbers:

  • Personal consumption was +2.8%, missing expectations. Goods consumption was +3.9% and services consumption was +2.4%.
  • Gross private investment was +4.6%.
  • Net exports were -$963.2 billion, the largest deficit on record, but little changed from the previous quarter which was the previous record deficit.

The big story may have been intellectual property, which saw a 13.1% increase on the quarter, registering the second highest reading since 1999, and contributing 0.56% of the report's total.

  • The Q4 GDP Deflator was +1.8% and the PCE core inflation measure was +1.7% on the quarter, both a tenth higher than forecast.

The big picture: "Overall, it was just OK; unremarkable except for a few data points," Brien said.

  • "Seventy-four percent of the GDP increase was personal consumption. The inventory buildup was large, but it was large in the previous quarter as well, so this sector added just 0.13% to the total."

Relity check: "Net exports were a record deficit, -$963.2 billion, but it was not too much worse than the previous quarter (the previous record deficit), so there was only a slight drag on the report, just -0.22%, whereas the previous quarter was about -2%."

On the other hand: "The inventories were quite high. But then, after two large accumulations in consecutive quarters, maybe this is ready for a down quarter and that could hit the upcoming GDP reports; we'll have to see."

The bottom line: "Annualized rate for 2018 was 2.9%, matching the best year during the Obama Administration."

3. Tesla just saw $920M of cash disappear

 Data: FactSet; Chart: Naema Ahmed/Axios
Data: FactSet; Chart: Naema Ahmed/Axios

Tesla's convertible bond payment is due today, and the bonds won't convert to equity. Shareholders won't be crying.

By the numbers:

  • Tesla's $920 million in convertible senior notes expire at a conversion price of $359.87 per share.
  • Tesla shares are well below the conversion price, so the company will have to pay that debt in cash.

It may be a good thing that Telsa won't have to give its underpriced stock to bondholders, Axios' Felix Salmon writes.

  • The company had $3.7 billion in cash on its books at the end of last year, WSJ notes, including existing deposits. Tesla also had more than $5 billion in accounts payable and accrued liabilities along with nearly $10 billion in long-term debt, not including today's convertible bond payment.

Between the lines: When Tesla's 2019 bond was trading over par in late 2014, the stock wasn't anywhere near the $360 conversion price.

Why it matters: If Tesla was going to issue dilutive new equity, it would want to do so in a way that actually brings in cash for the company.

4. Emerging markets are hot again

Data: Haver and IIF; Chart: Axios Visuals
Data: Haver and IIF; Chart: Axios Visuals

Investors look to have rekindled their love affair with emerging markets in the first 2 months of the year.

What's happening: The dovish shift from the Fed and global central banks, and de-escalating China-U.S. trade tensions are bringing investors back to the asset class after a rough 2018 performance.

  • "These events look likely to restart a Wall of Money to EM and our high frequency flow trackers are picking up a sharp spike," Jonathan Fortun, an economist, and Tariq Khan, a researcher, at the Institute of International Finance, said of the organization's recent findings.

Details: EM securities attracted $26.3 billion of foreign capital in February.

After 5 consecutive months of outflows, IIF analysts estimate that net capital flows, including banking and foreign direct investment, to emerging markets was $20.9 billion in January.

  • In particular, large flows into South Africa ($16.4 billion) and India ($13.3 billion) were behind the surge in overall inflows.

5. MSCI CEO Henry Fernandez on China

MSCI said Thursday it would quadruple the percentage of access foreign investors can get to stocks from mainland China in its widely tracked emerging-markets index, which is tracked by nearly $2 trillion of funds.

Analysts say the decision could push from $80 billion to $125 billion into China's equity markets.

"We like what we see in China, the evolution and all that.
"I actually think if there is a trade war with the U.S., China would double down on the capital account in a positive way. I spent a lot of time with senior leadership of the Chinese government and it's going to take decades to balance the trade relationship with the U.S.
"One way to cure that is to do it through the capital accounts, to say, 'Look, we're going to let a lot more American money or Western money come flood the capital markets in China.'
"We're lucky that China is going slow in opening up because it would create enormous disruption.
"Think about this, would you invest in German 10-year bonds at 15 basis points rather than Chinese 10-year bonds at 3%? Germany's pretty good but China’s reserves are a lot bigger and they will deliver on their obligation to pay.
"So there would be a lot of selling of German bonds and a lot of buying of Chinese bonds if it were a completely fungible market.
"The smart people in emerging markets are saying, 'Wow, a whale is about to jump into the pool here.'"
— Henry Fernandez, Chairman and CEO of MSCI, at a press conference in Manhattan

P.S. ... Fernandez tells Axios a WSJ article alleging MSCI added China A shares to its index "after it came under heavy pressure from the Chinese government, which tried to curtail the company’s business in the country" is totally false.

Fernandez says MSCI is staunchly independent and its process is very long and transparent. "So, to think we do all of that and then in a dark room we’re going to be subjected to influence that goes this way or that way is just dumb. It’s just naïve."

Bonus History: Jordan Michael Houston is an artist, record label owner, entrepreneur and producer from Memphis, Tennessee.

Houston won an Academy Award in 2006 and is the only Oscar winner in history to also be nominated for an American Music Award, BET Hip Hop Award, MTV European Music Award, Grammy Award, Nickelodeon Kids' Choice Award and a World Music Award.

Houston is known professionally as Juicy J.


Thanks to everyone for all the positive responses to this little addendum via email and Twitter (if you haven't yet, feel free to reply to this email or @ me any time with your thoughts). A quick note about the previous month's Black History Month factoids:

I wrote back in 2013 about what a failure BHM has been. Rather than use the time to illuminate little-known portions of black history, the month generally is spent talking about Jackie Robinson and Martin Luther King and the 8 other black people everyone already knows. My goal was to show that black history is more than entertainers, athletes and a bus boycott once upon a time.

Our history also includes kings and queens and presidents and dignitaries and intellectuals who changed and shape the world we live in today. It includes billionaire investors and inventors, luminaries and legends.

Throughout history, we have created things — inoculations, the cure for leprosy, the filament that made the light bulb an every-household product. And more often than not — in fact, in almost every case — we don't get credit until decades later, if ever.

Anyway, I'll be switching this up to something I hope will be a bit more interactive and easy to come up with in the early hours of the morning. Thanks for reading.