Feb 20, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Thank you for the Phoenix recommendations.

Situational Awareness: RIP Brooklyn's own Bashar Barakah Jackson, aka Pop Smoke, the latest hip-hop talent lost to senseless gun violence. (Los Angeles Times)

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1 big thing: The Fed may be setting the table for 2020 rate cuts

Illustration: Sarah Grillo/Axios

The Fed looks to be laying the groundwork to lower U.S. interest rates this year, just as they did in April 2019 before cutting rates in July, September and October.

Why it matters: A Fed rate cut makes taking on debt more attractive for U.S. consumers and businesses, helping to juice the economy, but also puts the central bank in a weaker position to fight off a potential recession.

What's happening: In the minutes of its latest policy meeting, the Fed highlighted its desire for higher inflation, Bob Miller, BlackRock’s head of Americas fundamental fixed income, points out in a note. "The FOMC changed its statement at the January meeting to make that fact clear, and we see that sentiment confirmed in [Wednesday’s] meeting minutes."

  • San Francisco Fed president Mary Daly asserted in a speech last week that “the new economic environment requires that monetary policymakers push inflation up to target.”

Further, "If you look at the uncertainty about concerns surrounding coronavirus and the fact that they added the phrase 'for a time' to describe how long current policy will remain appropriate, those read to me as a signal that a rate cut may be coming," Thomas Simons, money market economist at Jefferies, tells Axios.

What it means: The Fed is refocusing attention away from solid U.S. economic data to fears about coronavirus and underwhelming inflation, much as they did with the U.S.-China trade war and global growth concerns last year.

By the numbers: Following the release of the minutes Wednesday, Fed fund futures prices showed traders saw a 93% chance of at least one rate cut by year-end and a 65% likelihood of two, according to CME Group's FedWatch tool.

  • That's up from an 84% likelihood of a cut the previous day and 60% one month ago.

Yes, but: Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, argues the Fed is simply establishing its new view on inflation. He says assuming a rate cut is coming is a "misreading of the minutes."

Between the lines: Marvin Loh, senior global macro strategist at State Street, also points to the now-inverted U.S. Treasury yield curve, where 3-month Treasury bills hold higher yields (1.58%) than 10-year notes (1.56%).

  • "There are a number of things lining up to bring them back to the rate-cut table," Loh tells Axios.
  • He's expecting a rate cut by this summer.
Bonus: The greenback rises
Expand chart
Data: FactSet; Chart: Axios Visuals

The Fed has another reason to consider cutting interest rates — the strengthening U.S. dollar.

The big picture: The dollar rose to its highest level in almost three years against a basket of major global currencies on Wednesday.

  • In February, the dollar index has gained a little more than 2%, hitting its highest since April 2017.
  • It has strengthened against both currencies that typically appreciate when risk assets like stocks rise and against those that typically see buying when risk appetite falls.

Why it matters: When the dollar was last near this level, it was a major concern for U.S. multinational companies, highlighted as a primary factor hurting overseas returns.

  • It was also seized upon by President Trump as a reason to criticize the Fed's policy decisions.

What we're hearing: "With the coronavirus, a new tough situation presents itself that could lead to Fed intervention and thus affect the buck in a negative way," Juan Perez, senior FX trader and strategist at Tempus, tells Axios.

  • "But the ongoing contractions elsewhere along with the disease crisis are keeping the resilience of the dollar intact."

Interestingly, there has also been a 70% correlation between Trump's popularity and the U.S. dollar since his election, according to calculations from TD Securities.

2. Catch up quick

L Brands is near a deal to sell 55% of Victoria’s Secret to Sycamore Partners, valuing the lingerie brand at about $1.1 billion. (WSJ)

The Trump administration urged the Supreme Court to reject an appeal by Google against Oracle to collect more than $8 billion in royalties on the same day Trump attended a re-election fundraiser hosted by Oracle co-founder Larry Ellison. (Bloomberg)

UBS CEO Sergio Ermotti will step down and be succeeded by ING Group CEO Ralph Hamers. (WSJ)

China's central bank said control of the coronavirus is at the top of its agenda, with more stimulus support pledged to contain the epidemic. (Xinhua)

3. Gold rising with stocks, yen falling with bond yields
Expand chart
Data; FactSet; Chart: Axios Visuals

Markets are behaving strangely as investors attempt to make sense of the growing threat of the novel coronavirus. Assets that typically move in opposite directions are moving together, and assets that traditionally are very correlated are taking inverse tracks.

Case in point: The market's two most popular safe-haven assets, gold and the Japanese yen, have decoupled and are moving in opposite directions.

  • Gold has risen to its highest level since 2013, while the yen has fallen in value against the dollar to its weakest in nine months.

Going full circle: “The big wave of risk-off has sort of dissipated right now, but still the economic fallout is buttressing the demand for gold,” Stephen Innes, chief market strategist at AxiCorp, told Reuters.

  • “The stronger dollar is not really curbing the inflows to gold ... from an inflation perspective, a stronger U.S. dollar is working against the U.S. Federal Reserve’s inflation target and is pointing towards lower interest rates."

Of note: Lower interest rates reduce the opportunity cost of holding gold and typically also reduce the attractiveness of holding dollars.

4. The EU takes on Big Tech

Axios' Ina Fried writes: The European Commission released long-awaited position papers Wednesday on several key digital issues, including how to treat the continent's digital data and how best to regulate artificial intelligence.

Why it matters: Europe tends to trail the U.S. in creating the tech giants that gobble up consumer data, but leads in issuing the rules and policies that govern such practices.

What they're saying:

  • Guido Lobrano, ITI's VP for European policy: "For Europe to fully realise its tech leadership potential, it should take a collaborative approach to regulation and avoid prescriptive policies that could stifle innovation in emerging areas like artificial intelligence."
  • Thomas Boué, director general of BSA — The Software Alliance: "The upcoming broad consultations will be key to building trust and ensuring that new rules on data-driven technologies are transparent, fair, and fit for purpose.”

Meanwhile, Cornell business professor Thomas Jungbauer argues the proposals aren't what's needed to help Europe catch up.

  • "Network effects and technological factors are responsible for many of the markets in the tech and sharing economy to be ‘winner-takes-most’ scenarios, that is markets in which a big firm dominates with other smaller players serving niche needs."
5. "We are doing everything we can to stay open"

The coronavirus outbreak already is eating into companies' 2020 plans, with a number of firms announcing significant expected hits to their sales.

What's happening: After warning that it would need to write down its revenue expectations, a new report from Nikkei says Apple's iPhone inventories could remain low until April or longer and that suppliers are "currently operating at around 30% to 50% of capacity."

  • Adidas also said Wednesday that its business in and around China had dropped by about 85% year over year since Jan. 25.
  • Puma added that it expected the virus to hit sales and profits in the first quarter but still hoped to reach its 2020 targets.

What they're saying: “Retail in February is destroyed," Puma CEO Bjørn Gulden said in a statement. "We don’t know yet about March. We are doing everything we can to stay open."

Flashback: About 40% of companies that have reported earnings have cited the term “coronavirus,” and about a quarter of those have modified guidance due to the virus.

On the other side: “An aggressive response to the crisis [by the Chinese government] seems to be helping contain the epidemic,” Jefferies analyst James Grzinic told Reuters.

  • “[T]his would suggest that a tough first quarter should be followed by a strong recovery in the second quarter and beyond.”
Dion Rabouin

Otis Boykin's mother Sarah Boykin worked long hours as a maid and died of heart failure one year after giving birth to him. This inspired him to create what would become the pacemaker, using electrical impulses to maintain a regular heartbeat.

  • Boykin, an HBCU graduate who attended Fisk University, held as many as 27 patents, including electronic control devices for guided missiles and IBM computers.
  • He also invented a burglar-proof cash register.