Oct 9, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Today's newsletter is coming to you from Denver International Airport, the world's flyest airport, as I head back to New York.

(Today's Smart Brevity count: 1,134 words, ~ 4 minutes.)

Situational awareness:

  • Last year, for the first time in history, America’s wealthiest 400 families paid a lower effective tax rate than the bottom half of American households. (Wash Post)
  • J&J was ordered to pay $8 billion in damages to a Maryland man who said his use of Risperdal as a child caused enlarged breasts. (WSJ)
  • The State Department imposed visa bans on Chinese officials and their families linked to the mass detention of Muslims. (Bloomberg)
  • More Chinese companies have suspended ties with the NBA after a tweet supporting Hong Kong protesters by Rockets' GM Daryl Morey. (Bloomberg)
1 big thing: The world according to Powell

Photo: Zach Gibson/Getty Images. Illustration: Aïda Amer/Axios

The U.S. economy looks good to Jerome Powell.

The Fed chairman laid out his rose-colored vision of the country on Tuesday at the National Association for Business Economics conference: The economy is neither too hot nor too cold, inflation is under control, productivity is increasing, the job market is booming and the Fed is not (repeat, not!) engaging in a new quantitative easing program.

What's happening: It's becoming clear to more economists and market participants that the Fed's toolkit is losing its effectiveness and monetary policy may be powerless to protect the economy if there's a recession. So Powell has deployed a central bank's most consistent weapon: communication.

What he's saying:

1. About the unprecedented level of U.S. debt:

"Households are in good shape. Businesses are borrowing a lot and it’s something we’re monitoring carefully, but again the vulnerabilities are moderate."

2. About the possibility the Fed's loose monetary policy could overheat the economy:

"This just feels very sustainable. There’s no aspect of the economy that is booming. You’ve got a solid consumer sector where wages are going up at the level of productivity plus inflation, job creation is healthy, there’s no one sector like a housing bubble, there’s nothing like that."

3. About growing worry from investors and the business community:

"There are concerns about business investment and manufacturing and trade, of course. We don’t get to see the 11th year of an expansion a lot and there’s a lot to like about it, particularly for people at the lower end of the wage scale who are getting now the highest raises. And it’d be great to continue."

4. About why the Fed is cutting interest rates:

"I look at this as akin to the two instances in the 1990s when the Fed cut and then cut again and cut a third time. ... It provided some support for the economy and the economy took that accommodation onboard and gathered steam again and the expansion continued. That’s the spirit in which we’re doing this."

5. About the Fed injecting around $300 billion of cash to buy U.S. Treasuries in the repo market and plans to continue indefinitely. Isn't that quantitative easing?

"This is not QE. In no sense is this QE. This is nothing like it at all."

The big picture: With consumer confidence falling, leading economic indicators turning negative, the systemically important repo market in disrepair, major European economies likely in recession, the outlook for the trade war deteriorating and stock market volatility popping, Powell is doing his best to infuse confidence into the market.

Bonus: Powell's inflation flip

Fed chairs have typically worried about inflation getting too high, but Powell confirmed on Tuesday that he is instead focused on keeping inflation from getting too low.

"It feels like the problem of this era is to keep inflation from moving down and try to keep it at 2%."
"We want inflation expectations centered right at 2%, and we really want to hammer that point and make sure that they are because we look around the world and we see disinflationary forces."
"In Japan and Western Europe where you see inflation moving down, expectations move down ... and it’s been very, very hard for economies to get off that road once they’re on it. So we don’t want to get on that road. We don’t think we’ll be exempt from these disinflationary pressures over time. For that reason we want to keep inflation at 2%."
"It’s not easy to explain that to the general public who doesn’t care whether inflation is at 1.7 or 2%. In our case, we think to serve them better we need to anchor inflation at 2% so it doesn’t begin that inexorable slide down."
2. U.S. wholesale prices hit 3-year low
Expand chart
Data: Investing.com; Chart: Axios Visuals

September's producer price index reading was significantly weaker than forecast. The index of wholesale goods and services came in well below expectations on both month-over-month and year-over-year metrics.

By the numbers: The overall headline reading fell to its lowest level in 3 years, while the core figure, which strips out volatile food and energy prices, reached its lowest level in 2 years.

  • The PPI for goods was -0.4% on the month and the services reading was -0.2%.
  • Energy prices fell -2.5% for the second month in a row.

The big picture: The weak reading on wholesale prices is the latest sign that inflation is not picking up and could provide more ammo for the Fed to cut U.S. interest rates this month.

Watch this space: "This series doesn't include tariffs, so the takeaway is a bit misleading," BMO Capital Markets VP of U.S. rates strategy Jon Hill said in a note to clients.

  • "Any evidence of feed through into CPI will be of core focus on Thursday."
3. The cost of Trump's tariffs
Expand chart
Data: U.S. Census Bureau via Tariffs Hurt the Heartland; Note: Lists 1-3 refers to USTR designation of Chinese imports subject to tariffs; Chart: Andrew Witherspoon/Axios

Axios' Courtenay Brown writes: Tariffs imposed by President Trump have so far cost U.S. corporations $34 billion, according to data compiled by Tariffs Hurt the Heartland — a coalition of businesses and trade groups that oppose the tariffs — provided first to Axios.

By the numbers: The $34 billion hit that U.S. companies have taken from the Trump tariffs doesn't include the 15% tax on $112 billion worth of Chinese imports — including clothes and shoes — that went into effect on Sept. 1.

  • Next week: U.S. tariffs on $250 billion worth of Chinese goods are scheduled to rise to 30% from 25%.
  • While consumer confidence remains at elevated levels, Tariffs Hurt the Heartland points to Wall Street research that projects households would see costs rise by $1,000 per year after the most recent round of tariffs takes effect — offsetting most of the benefit consumers got from the tax cuts.

What they're saying: Jennifer Safavian, head of government affairs at the Retail Industry Leaders Association, a lobbying group that includes Walmart and Target, said in a press release...

"Confidence in the U.S. economy is waning, and leading retailers can’t successfully plan for the future when their supply chains continue to be distorted by tariffs."
4. White Claw may have actually outsold Budweiser

A September article from The Daily Beast trumpeted the above claim that White Claw's alcoholic pond water had managed to outsell Budweiser in July.

Surprise: That may be true, Bart Watson, chief economist of the Brewers Association, told Axios at NABE.

  • "Yes, there are particular points where White Claw looks like it outsold Budweiser, the specific brand. ... White Claw had a very huge summer."
  • "Hard Seltzers in general were taking 4 to 5% share of the market by volume, 5 to 6% share in dollar sales at various points this summer."

Yes, but: When looking at the specific Budweiser brand, White Claw may have outsold it, but "only in very specific weeks," Watson said.

  • "We don't have a ton of data. Hard seltzers are new, they're emerging. They appear to have very strong seasonality, so late summer they really seem to have peaked and I think were taking some share from particularly light beers and other kind of macro lagers."
  • "But Budweiser is probably the third biggest brand in Anheuser-Busch's portfolio."
Dion Rabouin

Was this email forwarded to you? Sign up here.