Aug 28, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

👋 Good morning. Dion is taking a previously scheduled break and will be back in your inbox on Monday. (Today's Smart Brevity count: 1,299 words, 5 minutes.)

🚨 Situational awareness: Shinzo Abe, Japan's longest-serving prime minister and the pioneer of "Abenomics," will step down, citing ongoing health issues with ulcerative colitis. (Reuters)

🎙️ “It would be fatal for the nation to overlook the urgency of the moment.” - See who said it and why it matters at the bottom of the newsletter.

1 big thing: The punch bowl is here to stay

Illustration: Aïda Amer/Axios

The Fed is ditching the "take away the punch bowl" mentality, which economists say choked employment opportunity for low-income, Black and Latino workers.

Why it matters: The central bank says the shift will help "foster economic conditions that benefit everyone," and be more inclusive for the communities that aren't lifted when the economy first begins to recover.

What they're saying: "When a central bank 'takes away the punch bowl,' what that means is they are tamping down on the recovery — just as marginalized communities are seeing benefits," Laura Veldkamp, economics professor at Columbia Business School, told Axios.

Catch up quick: The Fed no longer thinks there’s a trade-off between low levels of unemployment and inflation, a historic pivot for the central bank.

  • The Fed left "potential employment gains on the table" when they started to raise rates between 2015 and 2018 in an attempt to head off inflation that never manifested, the Peterson Institute's Adam Posen said during a media call on Thursday.

The backdrop: The announcement is the culmination of the Fed's nearly two-year long review of its policies and a series of events with community leaders who gave feedback about the Fed's policies.

  • Maurice Jones, CEO of Local Initiatives Support Corporation, told officials at a Fed Listens event last year that “focusing on prolonging the growth of the labor market and not being so wedded to 2% inflation” is most important.
  • "The longer we can get growth in the labor market, the more likely the folks that we serve and low-wealth communities will find a viable pathway to living wage jobs and careers," Jones told Axios, following Powell's speech.

The big picture: The renewed emphasis on more "inclusive" monetary policy goals come as the Fed faces pressure to tackle exacerbating racial inequality.

  • "This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities," Powell said.

What to watch: It will be a while before the Fed's shift plays out in practice. The August jobs report due out next week is expected to show the overall unemployment rate tick down a mere 0.2 percentage points, per FactSet. That still leaves the jobless rate at the worst level in over 10 years.

Between the lines: The most immediate impact is reassurance to market participants that the low interest rate environment will be here for longer than previously thought.

  • Rates on mortgages, credit cards and auto loans will remain low — though the cost to borrow is less meaningful for lower-income communities that often don't have access to these products in the first place, Jones points out.
  • Longer periods of low rates will also up the appetite for stocks and bonds, as one trader told WSJ, possibly exacerbating the divide between those who own stocks and benefit from the market's rebound and those who don't. (As CNBC's Jim Cramer said after Powell's speech: "Powell is on the side of the bulls.")
  • "We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes," Powell said.

The bottom line: Powell's Fed has said it's willing to let the economy run hot, a boon for communities that need low unemployment rates to feel the effects of an economic recovery.

2. Catch up quick
Data: U.S. Department of Labor; Chart: Axios Visuals

A combined 1.4 million Americans applied for regular state unemployment and Pandemic Unemployment Assistance last week. As of Aug. 8, over 27 million Americans relied on some form of unemployment. (Department of Labor)

Microsoft is working with Walmart on its efforts to buy TikTok's U.S. business from China's ByteDance. (Axios)

3. Buybacks stage a comeback
Source: S&P Dow Jones Indices; Chart: Naema Ahmed/Axios

A slew of companies put stock buyback plans on ice at the onset of the pandemic. Now some of them are beginning put share repurchases back on the table.

Why it matters: The ramping up of stock buybacks is a sign that swaths of corporate America feel confident enough to return to some sense of normalcy, even as millions of Americans are still dealing with the harsh fallout from the coronavirus-hit economy.

The latest: Intel said last week it would resume the previously announced $20 billion stock buyback plan that it put on ice when the pandemic hit. The company said "repurchases are prudent at this time, given the strength of the company's balance sheet," per its SEC filing.

  • Auto parts retailer O'Reilly Automotive restarted its share repurchase program in May after evaluating "business conditions and liquidity," executives said on an analyst call last month.
  • Agilent, which manufactures lab equipment, also said it would restart its regular pattern of buybacks. "We felt for some time that [fiscal] Q3 ... would be the toughest quarter for us for the year. We’re through that now," CEO Mike McMullen said to analysts.
  • A Barclays analyst predicts Honeywell is among manufacturers that will likely resume or ramp up stock buyback programs "as early as the current quarter," Bloomberg notes.

Yes, but: "The companies that are doing buybacks now have the money," Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, tells Axios.

  • Companies in industries completely battered by the coronavirus — like airlines — are still holding off on buying back stock, Silverblatt notes.
  • Others that are sitting on fatter cash piles may be holding off in case business takes another turn for the worse.

By the numbers: S&P 500 companies spent nearly $86 billion dollars on stock buybacks so far this quarter, by Silverblatt's count — a marked slowdown from the $165 billion companies spent on repurchases this time last year.

The bottom line: Companies halted stock buybacks when the pandemic presented unprecedented uncertainty. The return of buybacks mean some think that era of uncertainty is over, even though the pandemic still poses great challenges to the U.S. economy.

4. Best of times for auto dealers, worst of times for buyers
Data: Cox Automotive; Chart: Naema Ahmed/Axios

Anyone looking to buy a car right now is likely to find fewer choices and higher prices — with very little room to negotiate, Axios' Joann Muller writes.

The big picture: The pandemic has thrown off the natural balance between supply and demand for new and used cars, driving up vehicle prices and putting all the bargaining power into the hands of dealers, who are enjoying fatter-than-normal profits.

Between the lines: An extraordinary set of circumstances has created the perfect seller's market.

  • In mid-March, every major auto manufacturer stopped production — for the first time since World War II.
  • That led to a shortage of vehicles on dealer lots, in particular pickup trucks and SUVs.
  • Used cars grew scarce too, as fewer people traded in vehicles or returned leases during the pandemic's early lockdowns. And many banks aren't collecting on bad auto loans, either, meaning that fewer vehicles than usual were repossessed.

But consumer demand proved resilient in the months after the initial crisis, as dealers made it easier to shop online.

  • Federal stimulus checks, plus the extra $600 monthly unemployment benefits, helped grease the market (though both programs are over now).
  • Big incentives, including longer loans, helped put car payments within reach for many.
  • Shifts in attitudes toward public transportation during the pandemic also drove more people into the car market, many for the first time.

By the numbers: The average transaction price on a new car is $38,414, up about $400 since January and $1,200 since last July, per Cox Automotive data.

  • The spike is even more pronounced on used-car lots, where list prices are up $900 this year alone, to an average $20,445.
  • At wholesale used-car auctions, dealers are fighting over scarce inventory, bidding up prices — which get passed on to consumers.
  • On the flip side, you'll get more for your trade-in right now if you decide to upgrade.

What to watch: The rest of the year remains a big question mark, and the volume of auto sales will likely depend on the pandemic and the government's response, says Jonathan Smoke, chief economist at Cox.

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Dion Rabouin

Have a safe weekend.

Quote: "It would be fatal for the nation to overlook the urgency of the moment.”

Why it matters: Today is the 57th anniversary of Martin Luther King's "I Have a Dream" speech, delivered in front of thousands following the March on Washington for Jobs and Freedom.

  • King's vision of racial equality is still elusive for millions of Americans, as AP's Aaron Morrison writes.
  • Thousands are expected to protest on the steps of the Lincoln Memorial today — where King delivered the speech — to call for federal policing reforms and denounce racial injustice.