Jan 29, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"What's great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest."

"You can be watching TV and see Coca-Cola, and you know that the president drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking." - See who said it and why it matters at the bottom.

1 big thing: Confronting a new risk

Illustration: Aïda Amer/Axios

What was going to be a very simple and straightforward policy meeting for the Fed this afternoon has been significantly complicated by the outbreak of the Wuhan coronavirus, fresh geopolitical tensions and an inverted yield curve.

  • While no policy change is expected, all eyes will be on chair Jerome Powell's assessment of the economic environment and whether the U.S. central bank is leaning toward adding more stimulus or taking away the punch bowl.

Why it matters: The Fed has flooded the market with cash since September with its ongoing repo market injections and bond-buying program, helping boost market confidence and asset prices. A shift in tone away from ample accommodation could send the market on a downward spiral.

  • "How does Jay Powell walk the line between acknowledging there’s a new risk to the global economy but not overstating how worried they are?" Vincent Reinhart, chief economist at Mellon who spent 24 years at the Fed, tells Axios.
  • "To the extent that he’s on one side or the other tells you how willing they would be to ease policy," by adding more stimulus or cutting interest rates, he adds.

What's happening: Investors bought the dip on Tuesday following Monday's market selloff, as many asset managers remain bullish, betting that the coronavirus outbreak turns out to be a blip on the radar for U.S. and global growth.

  • To wit, Clifton Hill, global macro portfolio manager at Acadian Asset Management, says the backing of the Fed and other central banks has pushed many asset managers into risk assets like stocks, "because it’s just too punitive" to miss out on the rally.
  • "The market is definitely leaning long, no one wants to miss out, they feel like the central banks are being accommodative, [but] what happens if we get a sustained risk-off environment, and how much will markets really suffer with everyone leaning in a similar direction?"

Watch this space: The Fed is unlikely to create a permanent or longstanding cash facility for the repo market, Reinhart says, despite the expectation and repeated calls for one from repo market traders and primary dealers who do business directly with the central bank.

  • That could lead to a repeat of September's rate spikes as the Fed draws down its cash injections.
2. Catch up quick

Apple reported record quarterly revenue and profits well-above estimates and its own forecasts thanks to better-than-expected iPhone and services sales. (Axios)

  • CEO Tim Cook, however, told CNBC that the company has shut one store in China and restricted employee travel, and Apple's expected Q1 revenue has a $4 billion range due to uncertainty around the coronavirus outbreak.

Starbucks is temporarily closing more than half of its 4,300 stores in China as a result of the coronavirus outbreak. (NPR)

The White House told airline executives it is considering suspending all U.S. flights to and from China as the number of confirmed cases rose to near 6,000, already surpassing the SARS pandemic. (CNBC)

Match Group CEO Mandy Ginsberg announced she will be leaving her role at the company, the owner of online dating sites including Match and Tinder. (Axios)

3. First trillion-dollar deficit not caused by the Great Recession
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Data: Congressional Budget Office; Chart: Axios Visuals

The Congressional Budget Office expects the U.S. budget deficit will top $1 trillion in fiscal year 2020, the first trillion-dollar deficit in history not caused by the Great Recession.

  • Deficits are expected to remain above $1 trillion indefinitely, rising to $1.7 trillion in 2030, with the total debt held by the public rising to 98% of GDP that time.

Why it matters: The deficit is rising at a time of exceptionally low unemployment and solid economic growth, rather than during a crisis, which is typically when spending elevates.

Details: CBO projects real economic growth of 2.2% this year and an average of 1.7% through 2030.

  • Unemployment is expected to rise to 4.4% during that time.
  • Interest rates are projected to rise above 3%.
  • Inflation is projected to remain at 2%, meaning the estimates are priced for an almost ideal backdrop.

Don't sleep: The deficits in the latest projections are $160 billion higher through 2029 than in CBO’s prior baseline, the Committee for a Responsible Federal Budget (CRFB) points out.

  • "This is the net effect of roughly $500 billion in new debt from tax cuts in December’s appropriations package, partially offset by economic and technical changes."
  • The 2020 deficit is also dramatically higher than just five years ago when the deficit totaled $442 billion.

What they're saying: "Every year we set a new post-war record for debt as a share of the economy, every year the Congressional Budget Office warns that debt is rising unsustainably, and every year our largest trust funds get closer to depleting their reserves," CRFB president Maya MacGuineas says in a statement.

  • "Ignoring what is staring us right in the face is fiscal malfeasance."
4. The better-than-expected but also terrible durable goods report

Orders for U.S. durable goods — long-lasting items like sheet metal or motors — rose 2.4% in December, but 90% of that increase was from government defense purchases. Excluding that category, orders fell 2.5%.

  • New orders for nondefense capital goods excluding aircraft fell 0.9%, the biggest drop in eight months.

Why it matters: Business investment was the missing leg in the table for much of last year as the U.S.-China trade war and other geopolitical uncertainties like Brexit kept many companies from investment spending, forcing consumers to hold up the economy alone.

  • Tuesday's durable goods report shows that theme likely lasted through the year, and may be a negative drag on U.S. economic growth in 2020.
5. Fed manufacturing indexes jump in January
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Data: FactSet; Chart: Naema Ahmed/Axios

The Richmond Fed's January manufacturing survey recorded its highest reading in almost a year and a half on Tuesday.

  • The survey is considered a potential leading indicator of overall manufacturing because it is released close to month-end and may offer clues on national manufacturing readings like those from ISM and IHS Markit.

The big picture: Each of the Fed's regional manufacturing indexes has beaten expectations this month, suggesting a rebound in the sector may be coming after a very difficult 2019, as experts have predicted.

6. Hyperdynamic pricing

Hotels and airlines are now using artificial intelligence software to re-price tickets and stays, sometimes dozens of times a day, the New York Times reports.

Why it matters: More often than not this is resulting in higher prices for consumers as great deals are removed from travel websites and replaced by higher prices when the AI software notices increasing demand.

How it works: "Traditionally, hotels and airlines priced their offerings depending on peak demand periods, past sales data and the number of current reservations." Per NYT...

"Now, changes in travel pricing are being made much more frequently. The practice, called 'hyperdynamic pricing,' is poised for significant growth, said Angela Zutavern, a managing director at the technology consulting firm AlixPartners."

Go deeper: In the Race for Cheap Airfare, It’s You vs. the Machine (NYT)

7. The yield curve inverted again
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Data: Investing.com; Chart: Chris Canipe/Axios

The U.S. Treasury yield curve between 3 months and 10 years inverted on Monday, as it has before every recession in the past 50 years. Inversion has been a false signal just once in that time.

What it means: When yields on short-dated Treasury notes (typically 3-month bills to 2-year notes) climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs.

  • As Reuters' Dhara Ranasinghe and Sujata Rao note, "Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments. Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows."
  • "The economy eventually contracts and unemployment rises."

Timing: The yield curve has inverted six to 24 months before every U.S. recession and it typically reverts to normal before the recession comes.

  • It first inverted in March.
Dion Rabouin

Artist Andy Warhol wrote about Coke in his 1975 book, "The Philosophy of Andy Warhol." Coca-Cola was incorporated as a business in Atlanta on Jan. 29, 1892.