Jul 8, 2021

Axios Markets

Today's newsletter is 1,270 words, 4.8 minutes.

🎯 of the day: 1.0, the number of unemployed Americans per job opening in the U.S. economy.

1 big thing: Didi's hard-learned lesson

Illustration: AĂŻda Amer/Axios

China's leadership is deeply suspicious of the international financial system and wants to ensure that the Chinese Communist Party remains the absolute power in the land, unthreatened by fast-growing corporate giants, Axios Capital author Felix Salmon writes.

  • That lesson was learned the hard way this week by Chinese ride-hailing giant Didi, but the repercussions are likely to be much larger.

Why it matters: The core paradox of modern China — a hypercapitalist success story while remaining a Communist dictatorship — is resolving itself in favor of the latter. China's moguls, and foreign shareholders, should expect a lot more turbulence ahead.

Driving the news: China cracked down on Didi immediately after it went public in New York last week, hitting the company with a long-weekend triple whammy.

  • On Friday, China blocked Didi from adding new users, citing cybersecurity worries; on Sunday, it forced Chinese app stores to delete the app altogether; and on Monday, it leaked to the WSJ the explosive news that it had urged Didi to delay its IPO, but the company had gone ahead anyway.
  • In case anybody didn't get the message, China on Tuesday then announced "a system for extraterritorial application of capital market laws," with the stated purpose of avoiding "illegal securities activities."
  • In the crosshairs: The loophole that allows Chinese companies to go public in New York. Matt Levine has the best explainer.

By the numbers: Didi's shares closed at $11.91 on Wednesday, 15% below the $14 IPO price.

The big picture: The current crackdown should not come as a surprise to observers of Ant, or even Hong Kong, where home-town billionaire Jimmy Lai has been imprisoned for speaking out against the Chinese regime.

  • Hong Kong and much of the West spent decades convinced that the riches of capitalism were a tide that would carry freedom and democracy into China. We were wrong.
  • When an individual's wealth starts to become a rival power base, or when foreigners start owning Chinese property, Beijing will have no compunctions asserting its primacy.

The bottom line: When economics meets politics, politics always wins.

Go deeper with Axios Re:Cap on China's Big Tech Crackdown.

2. Catch up quick

The ECB is expected to redefine how it targets inflation. (Reuters)

Google faces an antitrust lawsuit over its Google Play store. (Axios)

The Bank of Japan is expected to cut its economic forecast as COVID-19 concerns threaten growth. (Reuters)

3. What the bond market's saying
Data: FRED; Chart: Axios Visuals

The bond market just sent the strongest signals yet that investors believe inflation will ultimately be transitory, Axios' Kate Marino writes.

What’s new: Key bond market yields like the 10-year Treasury hit new lows this week.

Why it matters: Yields have come down because investors are cycling out of the inflation trade.

  • "The market had not necessarily agreed with Powell’s forecast that inflation would be transitory. But now it’s coming around to that view," Grant Moyer, head of leveraged finance at MUFG Securities, tells Axios.

Details: The 10-year Treasury went as low as 1.25% on Thursday.

  • That’s a decline of more than 30 basis points since the June 16 Federal Reserve meeting — a sizable move in the world of Treasuries.

Meanwhile, ICE BofA's high yield bond index just dipped below 4% — for the first time.

Be smart: In an inflation trade, investors position themselves to benefit from an environment of rising prices. That means buying assets that will appreciate, like commodities, gold, real estate or even stocks.

  • Low-yielding fixed income is unattractive if you're preparing for lengthy inflation. But that’s one area investors are buying into now — piling into bonds and pushing down the yields.

What to watch: Inflation is still expected to remain somewhat elevated this year — to the tune of 3.4%, according to the Fed's latest estimates.

  • But some of the key inflation metrics are leveling off, rather than continuing to move higher — which could support the Fed's view that next year's inflation will come back down to around 2.1%.
4. Leisure and hospitality workers quit at a record pace
Expand chart
Data: Bureau of Labor Statistics; Chart: Axios Visuals

Americans working in leisure and hospitality are quitting their jobs at a record pace.

Why it matters: Labor shortages have been affecting numerous industries. But it's been particularly acute in leisure and hospitality as increasingly vaccinated consumers take their delayed vacations and rush back to restaurants, bars and live events.

Our thought bubble: With workers in high demand, many quitters are trading up for different or better-paying jobs. This explains why unemployment figures aren't ballooning.

By the numbers: 5.3% of workers employed in leisure and hospitality quit their jobs in May, the Bureau of Labor Statistics said Wednesday.

  • This is a record level for the industry, and well above pre-pandemic levels (4.1% in February 2020).
  • It’s also much higher than the 2.5% average quit rate for all industries.

Context: About 764,000 leisure and hospitality workers quit their jobs during the month. Also in May, employers hired 1.343 million workers, and yet they still had 1.415 million job openings.

The bottom line: Leisure and hospitality "is the canary in the coal mine to a certain extent in the pandemic recession recovery," Indeed Hiring Lab’s Nick Bunker tells Axios’ Courtenay Brown.

Bonus chart: "Take this job and shove it"
Data: FRED and BLS; Chart: Axios Visuals

On the subject of quitting... DataTrek Research monitors quits as a percent of total job separations. They call it the "take this job and shove it" indicator.

  • For all industries combined, this figure came in at 67.8% in May — the second-highest level ever.
  • "At a 5.9% unemployment rate, this level of quits is unusually high and reflects how different this crisis is compared to previous recessions," DataTrek Research co-founder Jessica Rabe tells Axios.

For leisure and hospitality, this figure was even higher at a record 76.4%.

5. A Fed divided

Illustration: Shoshana Gordon/Axios

Talk about tapering just got interesting. New details about the Federal Open Market Committee's June meeting provide a glimpse into the debate over scaling back the central bank's quantitative easing program.

Why it matters: QE is an emergency monetary policy tool that involves large-scale purchases of Treasury and mortgage-backed securities (MBS) in an effort to keep the bond markets liquid and functional.

  • This helps keep borrowing costs low and stable for consumers and businesses.

State of play: Currently, the Fed is purchasing $80 billion worth of Treasuries and $40 billion worth of MBS per month.

  • As the economy improves and inflation rises, the Fed will eventually taper QE.

Context: In the past year, home buying activity accelerated and home prices surged to record levels.

  • This led some experts, including some regional Fed presidents, to argue that the Fed’s MBS purchases have fueled mania in the housing market.
  • In turn, these folks say the Fed should taper its MBS purchases sooner than it tapers its Treasury purchases.

What they’re saying: "Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets," according to June FOMC minutes.

But that wasn’t the consensus view.

  • "Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable," per the minutes.
  • Those members wanted to stay consistent with the Fed's prior communications on the matter.

Our thought bubble: Backtracking could send a message that the Fed has some concerns about the MBS purchases' effect on home prices.

What to watch: The Fed is months away from beginning this process of tapering QE, which means FOMC members have some time to hash this out.