Aug 14, 2019

Axios Markets

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(Today's word count is 889, or ~3 minutes.)

Situational awareness:

  • WeWork has filed its IPO prospectus and plans to raise $1 billion in an initial public offering, although the ultimate offering amount is expected to be at least three times larger. (Axios)
  • CBS and Viacom reached a deal to merge into ViacomCBS Inc., reuniting the 2 companies 13 years after they split apart. (Axios)
  • U.K. Speaker of the House of Commons John Bercow said he will not allow Prime Minister Boris Johnson to suspend Parliament to force through a no-deal Brexit. (Telegraph)
  • China reported a spate of unexpectedly weak data for July, including a surprise drop in industrial output growth to its lowest level in 17 years. (Reuters)
1 big thing: The bond market doesn't believe the hype

Illustration: Aïda Amer/Axios

Stocks roared higher on Tuesday after news that some Chinese imports would be spared from a 10% tariff increase the Trump administration plans to impose on Sept. 1, but the bond market was unimpressed and continued to push yields lower, tipping a strong recession indicator.

Why it matters: Bonds have been accurate in predicting Fed policy and U.S. economic indicators all year. Tuesday's market action shows investors believe the damage has already been done to the world economy — and that this temporary respite in the trade war is likely too little, too late.

The big picture: The bond market has consistently priced in the negative impacts of the trade war, triggering recession alarms this year that have been accurate since World War II.

The stock market, on the other hand, has rallied on any good news about the trade war and renewed communication between China and the U.S., which has generally proved fleeting and short-lived.

What they're saying: "Talking is good, but there has been a lot of talk since Trump and Xi met in Buenos Aires last November, and not much progress," Lou Brien, market strategist at DRW Trading, tells Axios in an email.

  • "The high level of uncertainty has been quite negative for business planning and spending on capital expenditures, which has in turn caused several important indicators to roll over, such as the ISM indexes, Industrial Production and orders for Durable Goods."

Catch-up quick: Global economic data has consistently worsened in 2019, with Japan and 3 of Europe's 4 largest economies — Germany, Italy and the U.K. — heading toward recession by year-end, and China growing at its slowest pace in 27 years.

  • Central banks around the world have started cutting interest rates en masse, and policy is the most dovish it has been at any time since the global financial crisis, according to data from Goldman Sachs.
  • Stock investors are viewing the policy shift as evidence that growth will pick up and underpin a rally, while the bond market sees it as a sign the economy is in peril.

What to watch: The inverted 3-month/10-year yield curve, which most recently touched -35 basis points, and the 2-year/10-year inversion have preceded every recession in the past 70 years.

2. No one is worried about inflation

Bond investors also were unfazed by Tuesday's consumer price index reading, which showed inflation picked up meaningfully in July.

  • U.S. CPI rose a seasonally adjusted 0.3% last month from June and 1.8% from a year earlier, with the core reading, which excludes volatile food and energy categories, up 2.2% year over year.

Why it matters: Normally a higher-than-expected inflation report would cause a selloff in Treasuries because inflation erodes the value of already held bonds, especially in longer-dated maturities. But not on Tuesday.

  • "For fixed income investors it’s a matter of competing with the rest of the world to find some sort of attractive yield while it’s still around. Maybe that’s actually outweighing the fear of slightly higher inflation," Gennadiy Goldberg, interest rates strategist at TD Securities, tells Axios.
  • "The thinking seems to be, 'We’d rather lock in higher yields right now, if we can, and worry about inflation later because it’s not really our concern.'"
3. Americans hold more mortgage debt than ever before
Expand chart
Data: New York Fed; Chart: Axios Visuals

Total U.S. household debt rose to $13.86 trillion in the second quarter, the 20th consecutive quarter with an increase. Total household debt — fueled by mortgages — is now $1.2 trillion higher, in nominal terms, than its previous peak, touched in 2008, the New York Fed reported Tuesday.

  • "Mortgage balances — the largest component of household debt — rose by $162 billion in the second quarter to $9.4 trillion, surpassing the high of $9.3 trillion in the third quarter of 2008," the central bank said in the report.
  • "Mortgage originations, which include mortgage refinances, also increased by $130 billion to $474 billion, the highest volume seen since the third quarter of 2017."
4. Scoop: How the U.S. decided which China tariffs will be delayed

Axios' Courtenay Brown reports: The Trump administration's list of goods from China that won't be subject to a 10% tariff until Dec. 15 is made up of "products where 75% or more of the 2018 U.S. imports of that product were from China," according to an email sent to trade groups from the U.S. Trade Representative Office.

  • The items subject to the Sept. 1 tariff are those that are less commonly imported from China.


  • For products where less than 75% of 2018 U.S. imports were from China, the 10% tariff will take effect Sept. 1.
  • Items like video games and certain clothing and toys won't be affected until mid-December, by which time companies will largely be finished with their orders for the holiday season.
  • A large swath of athletic apparel and sports equipment, meanwhile, will still see tariffs on Sept. 1.
  • A group of goods, including child safety seats, will be removed from the list altogether "based on health, safety, national security and other factors."

Between the lines: The Chinese Ministry of Commerce said that U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and China's Vice Premier Liu He spoke on Tuesday and that the parties would commence trade talks within the next 2 weeks.

Speaking to reporters, Trump said the tariff move was an attempt to provide some relief for retailers — and ultimately consumers, who could face higher prices if the additional costs from tariffs are passed on.

  • It was the first time Trump publicly acknowledged that consumers would be hurt by tariffs. He has previously claimed that China pays tariffs directly into the U.S. Treasury, which is not correct.