Jan 30, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here.

Situational awareness:

  • The U.S. has formally requested the extradition of Huawei CFO Meng Wanzhou from Canada, a day after the Justice Department unveiled new indictments against Huawei. (Axios)
  • The White House will propose big spending cuts in its 2020 budget, but will miss the Feb. 4 deadline to submit the plan to Congress. (Reuters)
  • In his first public comments to the media since being arrested, former Nissan chairman Carlos Ghosn said he is a victim of “plot and treason.” (Wall Street Journal)
  • Alibaba's third quarter revenue missed Wall Street's expectations, as the company saw its slowest pace of quarterly revenue growth in three years. (Reuters)
1 big thing: More Fed than ever before

Illustration: Sarah Grillo/Axios

A new era of more frequent press conferences begins today, and it will likely change the way investors look at Federal Reserve Chairman Jerome Powell's words, Axios' Courtenay Brown reports.

Powell talks about inflation, unemployment and growth more than anything else, an Axios analysis of the chairman's speeches and congressional testimonies in his first year shows.

The details: Powell dropped the word "inflation" much more often than Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker did during their first year at the helm.

  • Despite the overwhelming influence Powell has had on the stock market, he mentioned "markets" no more than Yellen during her first year, but far less than other predecessors.

The big picture: As the Wall Street Journal's Nick Timiraos points out, there have been a series of confusing comments from Powell that have spooked markets. Both investors and the chairman himself will now have to get used to a bigger and more regular dose of Powell.

  • "We do not envy Chair Powell, who is clearly not a verbal stunt pilot, on how he plans to address the questions he will face from aggressive financial journalists following the release of the Fed statement," says RSM chief economist Joe Brusuelas.
  • Powell's increased face time with reporters "could be a volatility factor," Liz Ann Sonders, chief investment strategist at Charles Schwab tells Axios. Though, she believes the net effect of more press conferences is more positive than negative.

What to watch: Virtually no one expects the Fed to announce an interest rate hike at today's meeting, so the focus will be on the press conference.

  • Without the release of new economic projections, there will be fewer questions surrounding things like the dot plot, so expect "harder/squishier [topics], for good or for bad," says Nicholas Colas, co-founder of research firm DataTrek.
1 bonus chart: First year Fed speak
Expand chart
Data: Federal Reserve System and Federal Reserve Bank of St. Louis; Note: Rates calculated using speeches and testimonies given by each chair during their first year in office; Chart: Naema Ahmed and Courtenay Brown/Axios

This chart sheds light on the words the past 5 Fed chairs used most in their first year of duty but there is no metric for tone, or differentiation between concern and optimism.

  • Jay Powell took over as chairman in an era of low inflation, low unemployment and strong economic growth, in contrast to Volcker who was appointed to fight stagflation and Bernanke who began his chairmanship at the height of the housing boom.
2. On Jay Powell's change of heart

Jay Powell reiterated earlier this month that the Fed would be "patient" with future interest rate hikes and ready to change course "significantly if necessary," — a reversal of his previous stay-the-course message after the Fed raised U.S. interest rates in December.

  • Two market analysts weigh in with their opinion of what happened and what to expect from Powell today.

Tom Essaye, financial analyst and founder and editor of the Sevens Report:

"I believe that Powell wants to return to a state of normalcy with the Fed and that he wants to raise rates to get there."
"What he’s realized is that for 25 years now the market has gotten used to the idea that there is a Fed put — when things go sideways, even a little bit, the Fed will ease off and get more dovish — and he’s pushing back on that. That’s a pretty big change for the markets, and the market reaction in December was hopefully a wake up call for him."
"You hope that he’s realized that there’s a finesse game here that he needs to play."

Mike DePalma, fund manager and CEO of PhaseCapital:.

"If the Fed is going to answer to the president, who doesn’t have even a basic understanding of economics 101, then that’s a huge problem. Central bank independence is very, very important and I’m concerned we’ve moved away from that."
"They’ll never admit that they’re capitulating, but I believe they have."
"I understand [Powell] is trying to calm financial markets, but what changed in those two months other than the stock market declining?"
3. "The U.S. labor market remains strong"
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Lazaro Gamio/Axios

The number of Americans filing jobless claims fell to the lowest in close to 50 years last week. Based on historical trends, LPL Financial analysts argue this could signal a recession is further off than many expect.

The big picture: Jobless claims are a leading indicator, LPL Research Chief Investment Strategist John Lynch says. Historically, a 75,000–100,000 increase in claims over a 26-week period has been associated with a recession.

  • “The U.S. labor market remains strong and will help buoy consumer health and output growth this year,” Lynch said.

Yes, but: The data excludes 380,000 workers who went without pay because of the political impasse over President Trump’s plan to build a wall along the Mexican border.

4. How the 2019 shutdown stacks up
Expand chart
Data: Department of Labor; Note: January 2019 numbers are subject to revision. Chart: Lazaro Gamio/Axios

Unemployment claims by federal workers are rare and tend to average around 1,000 or less per week. But 35,873 federal workers filed jobless claims in the first 2 weeks of 2019, more than 12 times the number who typically apply during that time frame.

Reading the chart: In 2010, local and state governments shed more than 200,000 full-time equivalent employees from the previous year and close to 28,000 part-time employees in the aftermath of the financial crisis.

  • "We are looking at the worst contraction of state and local government employment since 1981," Moody’s Capital Markets Research told Reuters that month.

The 2013 government shutdown affected more government agencies than its 2019 counterpart. That year about 850,000 federal employees did not work for at least part of the 16-day shutdown, and more than 1 million employees did not receive a paycheck, the Office of Management and Budget found.

5. Things are changing for Apple

During Apple’s earnings call for the first quarter of 2018, chief executive Tim Cook told investors, "everywhere I look, I feel really good about how we’re doing in China."

  • In fact, "we had an all-time record for revenue in Mainland China, and of course a key part of that was iPhone. And as I'd mentioned before, Kantar reported that the top five selling smartphones in urban China were all iPhones. And so we could not be more pleased with how we're doing.
  • Tuesday's earnings call went a bit differently: "Our revenue [in Greater China] was down by $4.8 billion from last year, with declines across iPhone, Mac and iPad. Most of the shortfall relative to our original guidance and over 100% of our worldwide year-over-year revenue decline was driven by performance in Greater China."

Axios' Ina Fried has 3 big takeaways from the call:

Apple's focus is shifting from unit sales to user base.

  • However, the company still has to keep selling a lot of iPhones — and it also wants to keep a disproportionate share of the high-end buyers who spend a lot on apps, accessories and services.

New Apple subscription services are imminent.

  • Apple said it expects to have 500 million people subscribed to its services by sometime next year, up from 360 million today.

iPhone prices took a hit from exchange rates.

  • Asked whether Apple priced its latest iPhones too high, Cook noted that because of currency fluctuations prices for some customers, especially emerging markets, were higher than last year.
  • Cook confirmed Apple aims to lower iPhone prices in some countries.
6. The Silicon Valley/Detroit divide on automated vehicles

Illustration:Rebecca Zisser/Axios

There's a growing realization on Wall Street that self-driving cars are still many years away. But there's a growing consensus that Silicon Valley has a better shot at making money from them than Detroit, Axios' Joann Muller reports.

The big picture: Investors are betting the real value of autonomous vehicle companies will come from the estimated 4 terabytes of data each car will generate per day.

The bet on data helps to explain why analysts at Morgan Stanley have very different views on the two leading AV companies.

  • Auto analyst Adam Jonas recently reduced the value of GM's self-driving car unit, Cruise Automation, to $9 billion, from $11.5 billion, citing delayed expectations for fully self-driving cars.
  • Tech analyst Brian Nowak figures Alphabet's self-driving car unit, Waymo, is worth $37 billion, and perhaps as much as $175 billion, citing future opportunities from robotaxis, logistics and licensing revenues.

The mood has changed about automated vehicles. Bold predictions by Tesla and others that cars would be able to drive themselves by now have evaporated in the face of technology challenges and market realities.

The business model for AVs assumes that by removing the driver, the cost per mile falls dramatically.

  • "If you are going to be more pessimistic on the timing, then it means not removing the safety driver and that means the economics of the whole thing don’t work," Jonas says.
  • "Instead of a $30,000 car with no human, you've got a $300,000 car with one or two humans."

What to watch: Morgan Stanley's Jonas says his more conservative $9 billion value for Cruise is warranted, and the massive gap between Cruise and Waymo is realistic because of the data analytics capability of Waymo's parent, Google.

  • "The value is in the data, and what you can do with it," he says.

Go deeper.

1 bonus thing: Here's why it's so cold today
Expand chart
Data: ThreadEx, WeatherBell; Chart: Harry Stevens/Axios

The coldest air in decades is hitting the Upper Midwest, and at least 88 million people will see temperatures dip below 0°F by the end of this week, Axios Science editor Andrew Freedman reports.

Driving the news: The stratospheric polar vortex — which is a whirl of low pressure at upper levels of the atmosphere over the pole — was knocked askew in early January, increasing the odds of cold outbreaks in the U.S. and Europe.

  • When the polar vortex is strong, it tends to keep the coldest air bottled up in the far north.
  • However, when it weakens or wobbles, it can send frigid air spilling south, as if Mother Nature left the freezer door open.

The big picture: The Earth as a whole, however, is still much warmer than normal, and scientists say the cold snap in parts of the U.S. in no way invalidates the overwhelming scientific evidence showing the planet is warming over the longer term due to the burning of fossil fuels for energy.

  • In fact, studies published in the past several years show that polar vortex disruptions may be more likely as the Earth warms and sea ice in the Arctic melts, and open water persists longer into the fall, says Judah Cohen, director of seasonal forecasting at AER, a Verisk company.

Go deeper: Andrew explains more of what's going on.

Dion Rabouin

Days without a factual error: 2

#SwaggerBack