Jun 11, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Apollo Global Management will buy Shutterfly and Snapfish, intending combine the 2 into a major player in online-photo services. (WSJ)
  • Huawei's chief strategy officer said the company no longer expects to become the world's largest smartphone maker this year. (Reuters)
  • The average cost of a gallon of gasoline has fallen for 5 straight weeks, putting many Americans on track to pay much less for fuel this summer. (WSJ)
1 big thing: The return of quantitative easing

Bank of Japan governor Haruhiko Kuroda at the G20 finance ministers and central bank governors meeting in Japan. Photo: Eugene Hoshiko/AFP/Getty Images

After pulling back from what was expected to be the year for global central bank policy tightening in January, policymakers are now giving markets a clear signal that they intend to start cutting interest rates, pouring stimulus on the economy. But analysts are skeptical the same song and dance will work this time.

The Fed has signaled it will likely cut this year, while central bankers in Australia, New Zealand and India already have cut rates to historic lows with markets expecting more.

The intrigue: In places like the eurozone and Japan, where interest rates are already below 0%, central bank heads may have to get creative in order to stimulate their slumping economies.

What they're saying:

ECB vice president Luis de Guindos, in remarks from Madrid: "We remain alert in the wake of mounting global uncertainties. The Governing Council is, therefore, determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments."

BOJ governor Haruhiko Kuroda told Bloomberg: "If the momentum to our 2% inflation target is lost, then of course, the Bank of Japan will swiftly respond by changing our policy."

What it means: During the financial crisis central bankers used the extraordinary policies of QE to offset a potential depression scenario.

  • As a result, today the central bank policy toolkit is looking quite barren and market watchers are skeptical they will be able to make much difference in the event of a downturn.

"Stimulus looks like chimera," Danielle DiMartino Booth, CEO of research firm Quill Intelligence, tells Axios in an email. "Stimulus has hit a wall of diminishing returns as a consequence of policymakers never having the courage to normalize [interest rates]."

  • In spite of the elevated stimulus already undertaken by China, the U.S. and Europe in the form of government spending and monetary easing and unprecedented share buybacks by American companies, global growth is still slowing significantly, Booth says. "It's no wonder policymakers are making a coordinated effort to ease."

"Kuroda and de Guindos are whistling past the graveyard," Joseph Trevisani, senior analyst at FXStreet, tells Axios. "When a recession comes they may buy bonds and push rates further into negative territory, largely because they are supposed to do something, but it will have very limited effect on their economies."

Bonus: A look at the Bank of England

In the midst of the still-unsettled Brexit decision the Bank of England hasn't made as many headlines as its global counterparts, but remains a major part of the quantitative easing story.

In March, The Guardian's economics correspondent Richard Partington looked at whether or not QE could be called a success in the country 10 years after it began.

The big picture: "The measures were designed for an emergency, yet still remain in place today, with the proceeds from any maturing bonds immediately used to fund more QE purchases. However, the fact that it has not been stopped – and that rates remain close to zero – indicate that the policy has not worked emphatically.

  • "Andrew Sentance, an economist who was on the MPC and also helped draw up the plan, said financial markets in March 2009 pointed to rates returning to 3% by 2011. 'I don't think anybody on the MPC deferred from the view that this was an emergency step. I certainly didn't,' he said."

The bottom line: "The real problem we have with the economy is that it hasn't turned out to be an emergency measure, it's turned out to be the status quo."

2. A record plateau
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The U.S. quits rate has remained unchanged for the longest period on record. For 10 straight months, from June 2018 to April, the quit rate has been 2.3%.

The big picture: The high quit rate — the measure of Americans who voluntarily leave their jobs as a percentage of total employment — is an indicator of a strong economy, and it's been holding at a 15-year high and the second highest rate since the government began tracking the data in 2000.

  • The plateauing rate is a strange and potentially worrisome development as U.S. jobs growth has stalled its torrid pace. However, the last time the quit rate plateaued, from April through November 2016, it picked up again setting the pace for the current highs.
3. Canada's deceptively low unemployment rate
Expand chart
Data: Statistics Canada; Chart: Axios Visuals

The Canadian economy added 27,700 jobs in May, bringing the year-over-year job gains to 453,100, and pushing the unemployment rate to 5.4%, the lowest level since 1976.

But, but, but: Canada's economy grew at an annualized pace of just 0.4% in the first quarter, following 0.3% growth in the fourth quarter of 2018, giving the country its weakest back-to-back quarters of growth since 2015.

  • Canada's household savings rate fell to 1.1% in the first quarter. That's 5.6% below the U.S. savings rate, the widest the disparity has been since the 1970s.
  • Canada's ratio of debt to income reached 176% in the fourth quarter, among the highest in the developed world, and 24 percentage points higher than the U.S. rate.

On the bright side: The Bank of Canada forecasts a rebound in the second half of the year with Canada’s GDP expected to grow by 1.2% this year, wages are rising and consumers are growing less pessimistic about the economy.

4. Salesforce's HQ2

Marc Benioff's San Francisco-based Salesforce on Monday announced a more than $15 billion all-stock purchase of data visualization software company Tableau.

What they're saying: "With Tableau, Seattle will become our second headquarters of Salesforce. That’s going to be our HQ2, if you will," Benioff said on a conference call announcing the deal.

TechCrunch reports: "Tableau has about 86,000 business customers, including Charles Schwab, Verizon ..., Schneider Electric, Southwest and Netflix. Salesforce said Tableau will operate independently and under its own brand post-acquisition. It will also remain headquartered in Seattle, Wash., headed by CEO Adam Selipsky along with others on the current leadership team."

Why it matters: Much like the actual rich, the geographically rich keep getting richer in America. Seattle, already home to Microsoft and a bevy of growing tech businesses, will now be a second home to Salesforce.

  • Following Amazon's notorious HQ2 search, companies are showing they have no intention to diversify their locations outside of cities already brimming with resources and talent.
5. Mnuchin pours water on GSE hopes

The Trump administration had stoked investor hopes this year that the government sponsored enterprises, mortgage giants Fannie Mae and Freddie Mac (not their real names), could be released from conservatorship soon in a listing potentially valued at $100 billion.

But Treasury Secretary Steven Mnuchin recently made it clear that won't happen without a major overhaul of the nation's housing finance system and action by Congress.

  • "What we're not going to do is business as usual with no changes, just recapitalize them and float them," Mnuchin said. "There needs to be housing reform as part of this."

The market reaction: Fannie Mae stock fell 9.5% Monday, while shares of Freddie Mac dropped 9.75%.

Dion Rabouin