Sep 6, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Trade policy uncertainty driven by the U.S.-China trade war could result in as much as $850 billion lost globally through early next year, according to new research from the Fed. (Federal Reserve)
  • The Treasury Department says it plans to privatize mortgage giants Fannie Mae and Freddie Mac in the coming years, releasing the companies guaranteeing about half the U.S. mortgage market to investors. (WSJ)
  • Hong Kong was downgraded this morning by ratings agency Fitch and is bracing for more protests this weekend, as leader Carrie Lam’s withdrawal of a controversial extradition bill has failed to appease some activists. (Reuters)
  • The U.S. jobs report will be released this morning at 8:30 a.m. Economists predict 160,000 jobs were added last month. (Bloomberg)
1 big thing: The flying blind economy

Illustration:Aïda Amer/Axios

CEOs, central bankers and money managers say they're operating in a world where they have no idea what's coming next, leaving them with few options but to prepare for the worst, Axios' Courtenay Brown writes.

Why it matters: Uncertainty about a handful of unprecedented phenomena — the grinding trade war with China, the ever-changing Brexit debate and President Trump's government-by-tweet — is inflicting pain on the global economy.

  • The uncertainty is showing up in hard data: The lack of corporate dollars being spent on factories, software or new equipment dragged down economic growth in the 2nd quarter. Business investment fell 0.6% — the first drop in 3 years.

Driving the news: Everyone is stymied over how to make financial or investment plans for the future because the rules keep changing by the day. Corporate America is still raking in eye-popping profits, but it is also in a decision-making tailspin.

  • Businesses don't know what to do about their operations in China, how to price their products or source their materials. And they don't know how consumers will react to higher prices during the all-important holiday season.
  • "There is no precedent for this, and there are a lot of moving pieces," Corie Barry, Best Buy's new CEO, said last week as the company lowered its sales forecast.

Powerful central bankers are also throwing up their hands, and there are doubts that the central banks' primary policy tool — adjusting interest rates — will be enough to stave off a slowdown caused by the tariff tit-for-tat with China and political disarray in the U.K.

Main Street is grappling with a lot of questions, too, mostly about how to absorb the impact of tariffs.

  • Small business owners told the WSJ that uncertainty about "if and when the duties, how large they will be and how long they will remain in effect ... is making it hard to plan and is hurting their businesses."
  • "It’s overwhelming. It’s exhausting. It’s demoralizing,” Susan White Morrissey, founder of a cashmere brand called White + Warren, told the WSJ.

Consumers, too, are in a bind.

  • Nobody knows what to do with their money in an environment where the stock market is a roller coaster — generally doing well, but subject to wild swings pegged partly to Trump's tweets — and savings accounts are paying lower interest rates due to the Federal Reserve rate cut.
  • While conventional advice to retail investors is to sit tight for now, some people are gravitating to perceived safe havens like gold.
2. U.S. service sector data is strong but not impressive
Expand chart
Data: Institute of Supply Management; Chart: Axios Visuals

The ISM non-manufacturing index beat expectations in August, bouncing back after 2 straight monthly declines and delivering the highest reading in 3 months.

Yes, but: The employment segment of the report continued to show declines, dropping to the lowest reading since March 2017.

  • This could portend a downside risk to tomorrow's U.S. jobs report, analysts said.
  • Further, the number should have been higher based on readings of U.S. retail sales over the past 2 months.

Wall Street was unfazed by those details, choosing instead to focus on solid production and new orders segments that surged during the month.

  • Combined with a stronger-than-expected ADP private payrolls report and a tentative agreement between the U.S. and China to restart trade talks next month, the S&P 500 jumped to its highest in 5 weeks.
3. The world's stock ownership is getting more concentrated
Expand chart

Reproduced from eVestment; Table: Axios Visuals

There was little change to the list of the world's most-held stocks, according to data from research firm eVestment.

  • The names on the list saw minimal change, and data shows ownership has gotten more concentrated over the past year, with more investors piling into the biggest companies.

Methodology: The quarterly stock ownership report analyzes long-only active equity portfolio holdings data reported to eVestment by active managers. The report includes a look at ownership of stocks from firms based in the U.S., U.K., Germany, Japan and emerging markets.

4. The biggest week for bond sales on record had perfect timing

U.S. companies issued $74 billion of investment-grade bonds this week, between just Tuesday and Thursday, the most for any comparable period since records began in 1972, Bloomberg reported Thursday. That was nearly double the previous record of $40 billion set in 2013.

What happened: Issuers were able to sell into a historically thirsty market, with 30-year bonds from companies like Disney, Deere and Apple carrying record low coupons, and investment-grade bond yields dropping to a 3-year low of 2.77%.

  • The leveraged loan market even got a boost with 17 deals totaling more than $16 billion issued this week, the busiest since last October.
  • “If someone has near-term financing needs, they should be looking to take advantage of this window,” Jenny Lee, co-head of leveraged loan and high-yield capital markets at JPMorgan, told Bloomberg. “Things potentially could shut down or get more difficult as we head toward the back half of this year.”

Investors didn't have to wait until the back half of the year. The bond market took a hard turn on Thursday after the strong economic data and positive trade war news, spiking bond yields higher.

  • Benchmark U.S. 10-year Treasury yields jumped by nearly 12 basis points, the most since November 2016, and yields on the 2-year note saw the biggest 1-day jump since 2015.
5. Globalization may be changing the fundamentals of economics

Globalization has played an increasingly large role in determining the rate of inflation over the last decade, asserts a new Brookings paper from MIT global economics professor Kristen J. Forbes.

Why it matters: With inflation more "determined abroad" than ever before and outside the control or purview of central banks, it may be time for a major overhaul in the way they operate.

  • That has major implications for everything from government policy to stock market returns.

Details: In her paper, Forbes highlights 4 areas of globalization that affect inflation: "increased trade flows, greater use of supply chains to optimize production costs, greater role of emerging markets and their impact on commodities, and a reduction in the bargaining power of workers."

What it means: Globalization has helped increase company profits by opening up new sales destinations and increasing trade, while also making trade more efficient.

  • It also has allowed companies to ship jobs and services overseas to populations that demand far lower wages, changing the way both workers and companies negotiate wages.
  • This has given employers a decided advantage and has been a major factor in depressing wages and holding back inflation in developed countries like the U.S.

The big picture: The study's findings also suggest that central banks may be losing their power to direct the economy. If raising and lowering interest rates does not produce a corresponding reduction and increase in inflation, then central banks' role as financial arbiters may need to be revamped.

Between the lines: With inflation having failed to exceed the targets of the Fed, ECB and other major central banks, pressure has grown for them to focus more on stimulating economies to provide maximum employment.

  • Focusing on economic stimulus is a central tenet of modern monetary theory (MMT), a previously fringe idea that is gaining acceptance among larger segments of the populace.

The bottom line: If central banks can't completely control inflation, efforts to stimulate or rein it in may be misplaced and/or generally ineffective.

  • Additionally, the findings could mean central banks can afford to focus more of their efforts on pursuing a “high-pressure” economy that pushes unemployment well below a supposed natural rate, rather than being obliged to pump the breaks on the economy when it starts to get hot.
Dion Rabouin