Axios Markets

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January 13, 2022

💰 Good morning, Markets friends! Today's newsletter is 1,065 words, 4 minutes.

🚨 It’s Lael Brainard’s turn to head to the Senate today, where she’ll make her case to be confirmed as vice chair of the Federal Reserve. The hearing kicks off at 10am ET, and some Senate Republicans are open to voting yes, Axios’ Hans Nichols and Neil Irwin report.

1 big thing: How Fed policy can narrow racial divides

Data: U.S. Bureau of Labor Statistics via FRED; Chart: Axios Visuals
Data: U.S. Bureau of Labor Statistics via FRED; Chart: Axios Visuals

When the Federal Reserve moves to raise or lower interest rates, it affects nearly every corner of the economy at once, not just one group or another. Fed leaders refer to their tools as blunt instruments, Axios' Neil Irwin reports.

  • But it's becoming clearer that what the Fed does has surprisingly powerful effects on whether people historically more likely to be on the fringes of the job market, including Black Americans and those with less education, prosper.

Why it matters: Much as central bankers might like to make policy decisions at a technocratic remove, their policies ultimately affect different groups of real people differently — part of why this moment for the Fed is politically fraught.

A newly published paper shared exclusively with Axios makes clear just how dramatic the difference can be. It shows that when the Fed's monetary policy secures a tight labor market, the biggest benefits flow to those with historic disadvantages.

By the numbers: In tight local labor markets, a cut in the Fed's target interest rate was followed by Black employment growth over the ensuing two years — to the tune of 0.91 percentage points more than in loose labor markets. The number was 0.39 percentage points for workers without a high school degree.

  • The data is based on an analysis of 895 local labor markets in the U.S. from 1990 to 2019 by economists Nittai K. Bergman (Tel Aviv University), David Matsa (Northwestern), and Michael Weber (University of Chicago).

What they're saying: "Running the economy hotter does allow disenfranchised workers to find employment," said Weber.

That aligns with the experience of 2019 when the Fed cut interest rates amid an already-low jobless rate — and the gap between the Black unemployment rate and the white unemployment rate fell to its lowest level on record. It was 1.9 percentage points in August 2019.

  • "This was a very desirable feature," of the pre-pandemic economy, Fed chair Jerome Powell said at a hearing this week.
  • However, the gap has widened substantially since the pandemic, standing at 3.9 percentage points in December, even as the overall labor market has tightened up.

But, but, but: Neither the 2019 experience nor the new working paper says much about the flip side of tight labor markets, which is high inflation — not much of an issue in 2019. People with lower incomes frequently feel the bite of higher prices more intensely.

  • With average wages rising more slowly than consumer prices, it's not clear if the tight labor market of 2022 will, on net, leave lower-income and disadvantaged groups better off or worse.

2. Catch up quick

Private equity firm TPG priced its IPO yesterday at the midpoint of its projected range, and its trading performance today will be closely watched as a gauge of the 2022 IPO market amid the rocky start to the year for stocks. Meanwhile, business software company Justworks has delayed its IPO. (WSJ)

China’s ports face a new wave of congestion after a COVID-19 outbreak suspended some services at Ningbo, rerouting activity to other ports, including Shanghai. (Bloomberg)

Executives from leading tech giants will meet with the White House today to discuss software security, in the wake of several major cyberattacks last year. (Reuters)

3. Inflation’s poster child

Data: U.S. Bureau of Labor Statistics via FRED; Chart: Axios Visuals
Data: U.S. Bureau of Labor Statistics via FRED; Chart: Axios Visuals

Consumer Price Index data released yesterday showed used-vehicle prices continue to surge. As of December, they were up 37% compared to the previous year, Axios' Matt Phillips writes.

Why it matters: Analysts have been watching used-vehicle prices as a microcosm of the broader U.S. inflation story, encompassing both the disarray of global supply chains and the surge in demand for goods.

  • Prices of used cars and trucks were the second-biggest driver — after shelter — of the monthly increase in consumer prices in December, responsible for almost a quarter of the change.

The big picture: The global chip shortage has slowed vehicle assembly lines worldwide, driving a wave of buyers to the used-car market and prices sharply higher.

What's next: Not relief. A forward-looking gauge of wholesale used-car prices that tends to predict the direction of consumer prices surged yet again in December, suggesting upward pressure on cars — and inflation more broadly — shows no signs of abating.

Go deeper: Inflation hit 7% in December, highest since 1982

4. So much for global mega banks

Citi is selling Banamex

Photo: Susana Gonzalez/Getty Images

Citigroup plans to exit its Mexican retail banking business, known as Banamex, in yet another step back from its big global consumer ambitions, Axios’ Emily Peck writes.

Why it matters: This is one more sign of the end of an era for the international mega-bank model of consumer banking.

  • Citi has been winding down its global reach since the Great Financial Crisis, with efforts intensifying in the past year as it announced plans to sell off retail banks across Asia, Europe and the Middle East.
  • Before the crisis, the bank was in 40 global consumer markets. After shedding Banamex, it's down to just Singapore and Hong Kong.
  • In Mexico, the bank will still serve the wealthy and conduct institutional banking.

What's next: Fintech is the future. (Read more from Kate.)

  • Retail banking is a very specific local business, and operating a global network of local branches is costly and hard to scale.

Flashback: In 2001, Citi's then vice chair Robert Rubin announced the bank was buying Banamex for $12.5 billion. The present-day market value of the retail business is about $5 billion-$6 billion, according to an estimate from Wells Fargo Securities analyst Mike Mayo.

The acquisition, Rubin said at the time, signaled "the belief in the further integration of Mexico and the U.S. economy, and to the grander vision of the North American economy."

  • His quote hits different in the post-Trump COVID era when dreams of globalization seem far off indeed.

What to watch: More details could emerge when Citi reports earnings tomorrow along with JPMorgan and Wells Fargo.

5. Charted: Hedge funds still can’t match the S&P 500

Data: eVestment; Chart: Will Chase/Axios

2021 wasn’t the year for hedge funds to finally outperform passive investing.

The big picture: Some hedge funds are sure to beat the index in any given year. But average hedge fund returns continued to lag — in a big way, according to data provided by eVestment.

  • Event-driven-activist strategies came closest to the S&P's 28.7% gain last year, returning 27.3%. The runners-up were distressed investing at 14.6% and long/short equity at 13.4%.

The bottom line: Actively managed mutual funds don't usually beat the market either, as we've reported. And that's one reason assets invested in passive funds have ballooned over the last five years.