Feb 4, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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1 big thing: The market is expecting multiple rate cuts in 2020
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Data: CME Group; Note: Chart does not include expectations below 5% for a rate hike in 2020; Chart: Andrew Witherspoon/Axios

Just three days into February, traders have thrown out the Fed's guidance that it will remain on the sidelines in 2020 and lined up bets for multiple U.S. interest rate cuts.

What's happening: Fed fund futures prices show that as the coronavirus outbreak has worsened, expectations are rising that the Fed will take action, as policymakers did last year when the U.S.-China trade war began to ravage the manufacturing, trade and transportation industries.

Plus, the latest reports on the U.S. economy have not been particularly bullish, notes Jon Hill, an interest rate strategist at BMO Capital Markets.

  • He points to weaker-than-expected readings in December and January on consumer and producer inflation, jobs, manufacturing and a mixed Q4 GDP report.
  • The data "is not screaming ‘everything is awesome,'" Hill tells Axios.

Why it matters: The IMF credits loose monetary policy with stabilizing the global economy last year as central banks around the globe cut rates almost in unison. But it may not work again.

  • The European Central Bank, the Bank of Japan and a swath of central banks throughout Europe already hold negative interest rates and are pumping out tens of billions of dollars in stimulus each month.
  • The Fed has U.S. rates almost even with inflation and has added around $400 billion to its balance sheet since September.

What they're saying: Central bank stimulus may now be reaching a point where it's “ineffective if not counterproductive” in combating current issues, Mohamed El-Erian, chief economic adviser for Allianz, said during an interview on CNBC.

The big picture: Oxford Economics chief U.S. economist Gregory Daco came into the year with an out-of-consensus expectation that the Fed would cut rates once before year-end. He's now predicting "a couple of rate cuts and potentially earlier easing than even we expected" because of possible economic damage from the coronavirus.

  • "From a U.S. perspective, we anticipate a loss of 0.4% of GDP growth" in the first quarter, Daco tells Axios.
  • "This will be the result of reduced tourism activity, supply chain disruptions preventing the nascent rebound in business investment from solidifying, and tightening financial conditions constraining business and consumer outlays."

Watch this space: In addition to pricing in expectations for two rate cuts by year-end, CME Group's FedWatch tool shows traders see a greater than 50% chance of a cut by June.

  • Fed fund futures prices show a 36% chance of a rate cut as soon as the Fed's next meeting in March, according to FactSet data.
Bonus: Why the stock market keeps rising

Despite growing fears about the toll of the coronavirus on global economic growth, traders still seem happy to buy the dip — or purchase stocks on days following selloffs — frequently citing the adage TINA (There Is No Alternative) to U.S. stocks, as most other assets provide negligible return.

  • “The playbook has worked extremely well and it’s one that I’ve deployed, which is [to] rely on central bank injections because the marketplace believes that liquidity can decouple us from fundamentals for a very long time,” El-Erian said during his CNBC interview.
  • “Everyone seems conditioned to behave this way. But it assumes the shock is temporary, containable and reversible. Those are phrases that are very hard to associate with coronavirus.”
2. Catch up quick

Global PMI rose to a nine-month high in January, with 14 out of 30 countries signaling expansion, including the U.S. and China, while the eurozone, Japan and South Korea remained in contraction. (IHS Markit)

A new voting app and machinery melted down last night, leaving Iowa caucus voters without a single result. (Axios)

The Commerce Department finalized a new rule to impose tariffs on products from countries it determines have undervalued their currencies against the dollar. (Reuters)

China's central bank injected $57 billion into markets on Tuesday, the largest in a year, following Monday's net injection of $21.4 billion. It also fixed the daily yuan level stronger than 7 per dollar in an effort to support financial markets. More monetary easing is expected. (Bloomberg)

President Xi Jinping said fighting the coronavirus outbreak was China's most important task during a special meeting of the Politburo Standing Committee as the death toll in China rose to 425 with more than 20,000 cases now confirmed. (SCMP)

3. Tesla's stock continues to soar
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Data: Money.net; Chart: Axios Visuals

Tesla shares rose 20%, or more than $129 per share, increasing the automaker's market cap by a whopping $23.33 billion on Monday.

Driving the news: Panasonic announced yesterday that its joint battery-making venture with Tesla turned profitable in the fourth quarter of 2019, a full quarter ahead of schedule, although it did not provide specific numbers.

  • A bank analyst also upgraded Tesla on Monday, while one of the company's largest outside shareholders disclosed a slightly increased stake.

The big picture: "The signs of progress have spurred a rally that even global concerns over the coronavirus contagion couldn’t dent," Bloomberg notes. "The stock has rocketed 86% in the first month of the year, pushing its market value past Volkswagen AG. The rally this year has already eclipsed the 26% gain Tesla saw last year."

  • The stock's parabolic rise Monday pushed its price to 67% above the average analyst price target of $466.78.
4. Justice is elusive for Boeing's 346 plane crash victims

Axios' Courtenay Brown writes: Boeing is pulling out all stops to appease Wall Street over the grounding of its 737 MAX, but it is saying little about the issue of restitution for the families of the hundreds who died due to faulty technology onboard its flagship plane.

The backstory: Last year, Boeing made a big splash when it announced it would set aside $100 million for a victims' compensation fund. The move was among the first by the company to stymie the worst PR crisis in its 103-year history — two crashes in the span of six months that killed almost 350 people.

  • Those events prompted a global grounding of Boeing's 737 MAX, its biggest money-making jet — and a slew of lawsuits.

There were immediate calls for Boeing CEO Dennis Muilenburg to step down. But, before he did, he publicly pledged before a crowd of hundreds to contribute "substantial amounts" to the victims' fund.

  • At the time in November, Muilenburg said he planned to donate part of his own pay to the victims' compensation fund or a charity, wherever "the greatest need is at the time of vesting," a Boeing spokesperson clarified to Axios.
  • Muilenburg's exit package, which consists of stocks and pension awards worth $62.2 million, has Boeing shares that will vest soon.

What they're saying: "You've got $50 million for hundreds of families, as compared to the $63+ million compensation package that Dennis Muilenburg received," Mike Andrews, an attorney at Beasley Allen Law representing families of victims, tells Axios.

What they're not saying: In response to a request for comment, Boeing said it had no update on Muilenburg's promise and has had no contact with him since he left the company.

State of play: Of the $100 million Boeing allocated to victims, the company subsequently said only half of that sum would be paid directly to families.

  • In the same announcement, Boeing said it had hired victim compensation attorney Kenneth Feinberg to oversee those payouts, which is being evenly split among families who file claims. (Feinberg has worked on compensation for those impacted by 9/11 terrorist attacks, as well as the BP Deepwater Horizon oil spill.)
  • So far, 266 families have received $144,50o each, Camille Biros, a partner at Feinberg's firm, tells Axios. Lawyers representing the families say that's paltry.
  • The other $50 million probably won't be paid out directly to the victims' families, but rather toward a project that would honor the victims of the crashes and serve the impacted communities, which span more than 35 countries.
Dion Rabouin

Gerald Lawson created one of the first video games ever and pioneered the modern video game system when he and his team created swappable game cartridges. This allowed users to buy and play as many games as they wanted on a single system.

  • At the time, most systems had the games stored on ROM storage soldered onto the system's hardware.
  • Lawson's creation for Fairchild Semiconductor was soon picked up by console manufacturers, including Atari, which included it in their Atari 2600 in 1977.

Lawson was one of just two black members of the Homebrew Computer Club, a Menlo Park, California, group that played an influential role in the development and rise of Silicon Valley.

Editor's note: A quote in the top story was clarified to show Gregory Daco was referring to the loss of U.S. GDP growth in the first quarter.