Sep 17, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning. (Today's Smart Brevity: 1,105 words, ~ 4 minutes.)

Situational awareness:

  • WeWork’s parent company has called off a roadshow this week and is expected to postpone its IPO after investors questioned the company's valuation and raised concerns about corporate governance. (WSJ)
  • Netflix signed a 5-year deal with Sony to become the exclusive worldwide streaming home of “Seinfeld,” starting in 2021. (LA Times)
  • The FDIC will propose eliminating the margin requirement at a public meeting Tuesday, in a move that would save Wall Street traders tens of billions of dollars they've been forced to set aside for swap trades. (Bloomberg)
1 big thing: Fallout from Saudi Arabia strikes is everywhere
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Data: FactSet; Chart: Axios Visuals

The attack on a Saudi Arabian oil field Saturday is still sending reverberations through markets, and it could have long-term implications for much more than the price of crude.

What's happening: Just about every market was moved by the attack and fears or hopes of how it could reprice assets.

Details:

  • Oil prices saw the biggest move, with U.S. WTI crude futures rising by 15%, the largest uptick since 2008.
  • Stock prices fell, with the Dow, S&P and Nasdaq all ending the day lower. Airlines were hit hard as JetBlue and United Airlines both fell nearly 3% while American Airlines dropped 7.3%.
  • Energy stocks, on the other hand, had their best day of the year, with the S&P Oil & Gas Production ETF jumping almost 11%, and the S&P energy sector rising out of a bear market with its best session of 2019.
  • Yields on the benchmark 10-year Treasury note fell by the most in 3 weeks, as traders sought safe haven U.S. government debt. Gold prices also jumped 1%.
  • Saudi officials also said they may delay an IPO for state oil company Saudi Aramco as a result of the attacks.

Looking ahead: Gas prices could rise meaningfully if tensions persist in the Gulf between longtime rivals Saudi Arabia and Iran, which the White House blamed for the bombing.

  • Oil analyst Andy Lipow predicted on CNBC that U.S. gas prices will rise by 20 cents per gallon “over the next week to 10 days.” The average price of a regular gallon of unleaded has been around $2.56, according to AAA.
  • That could also lead to a material increase in inflation, which is already seeing a pickup thanks to the tariffs in the U.S.-China trade war and rising U.S. wages.
  • An inflation surprise could force the Fed to re-evaluate its easing path in the coming months, potentially exacerbating the damage from the trade war.

Yes, but: Oil prices are still a far cry from their levels even a year ago and are not even threatening $100 a barrel, where they held for much of 2011 to 2014.

  • "Higher prices will hurt consumer spending but there will be some offset by an increase in energy-related investment. The good news is that the U.S. consumer is in good shape and can absorb higher gasoline prices in the near term," Ryan Sweet of Moody’s Analytics tells WSJ.

The big picture: Much of what happens next will depend on President Trump and his response to the attack. On Monday, he tweeted that the U.S. was "locked and loaded" and prepared for any conflict, but later asserted that he was "somebody that would like not to have war."

2. The real world impact of the trade war
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Reproduced from NPR; Table: Axios Visuals

The impact of tariffs has been difficult to quantify because U.S. retailers that pay them can choose whether or not to pass the costs on to customers.

  • In an effort to show how one quintessentially American business is handling the issue, NPR tracked prices at a Georgia Walmart over the course of a year.

The big picture: "When it comes to the prices inside NPR's tariff-inspired shopping cart, the average price change since August 2018 was a 3% increase," write NPR's Alina Selyukh and Charlotte Norsworthy. "That's almost double the current rate of inflation."

Yes, but: Prices haven't moved uniformly in one direction.

  • Over the past year the price tags on some items included in the "NPR basket" — a mix of items from across the store drawn up after consulting the 2018 lists of tariffs the White House imposed on imports from China, Mexico and Canada — actually got smaller.
  • "The two most expensive Chinese-made items in NPR's basket got cheaper: a TV by 12% and a microwave by 17%. That's because TVs and other electronics have been getting cheaper for years," per NPR.

Why it matters: "Many makers and sellers have so far chosen to absorb most of the tariffs, spread them across dozens of items, or pressure suppliers to bear more of the burden. Big U.S. retailers — such as Walmart, Target and others — get the final say on the price tags, and for them, jolting shoppers with price hikes is the last resort," they write.

My thought bubble: The fact that average prices of the NPR basket have risen by about double the rate of inflation suggests the tariffs are playing a role in increased prices even at a retail behemoth like Walmart.

Go deeper: NPR shopping cart economics: How prices changed at a Walmart in 1 year

3. The gig economy mismatch
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Reproduced from AppJobs; Chart: Axios Visuals

A new survey of more than 275,000 gig applications in the U.S. over the last 12 months shows there's a bit of a mismatch between the side hustles gig workers are seeking and the ones that pay the most.

Details:

  • Florida is the state with the highest number of temporary job applications at 55,762, which translates to 4,500 applications a month.
  • California had the second highest number of gig applications, followed by New York, Texas and Pennsylvania, respectively.
  • The number of applications for delivery driving equaled just under half of the total applications for gig work across the country.
4. The worrisome trend in unwanted new orders

Monday's Empire State manufacturing index was little noticed, but BMO Capital Markets U.S. rates strategist Ian Lyngen says in a note that the continuing trend of rising inventories and falling new orders, as also seen in last month's ISM manufacturing data, is "troubling."

"The rise of unwanted inventories has historically been a precursor to a recession and warrants a nod in the current environment."
"[Capital expenditures] predictions are back in the single digits for the first time since Aug '16; completing the round-trip since the Presidential election. We're reminded that a spike in energy prices has also been a harbinger of economic slowdowns."
5. BlackRock: Look out for stagflation

While not yet sounding an alarm, top strategists at BlackRock are starting to worry about the possibility of U.S. stagflation — high inflation combined with high unemployment and stagnant demand.

What they're saying: Mike Pyle, chief investment strategist for the BlackRock Investment Institute, sees inflation as set to pick up "thanks to more tariffs and faster wage growth in the face of a tight labor market," he says in a note to clients.

  • "A mix of lower growth and higher inflation complicates the Fed’s effort to achieve maximum employment and stable prices."

Be smart: Despite a recent armistice between the U.S. and China on the trade war, BII strategists believe the tensions are underpinned by "structural" issues, reducing the likelihood of a meaningful deal and keeping the trade war brewing for some time.

  • "U.S. growth could fall materially below trend in coming quarters," Pyle says. And with China slowing and Europe struggling, the U.S. is "unlikely to get much help from the rest of the world."

The bottom line: "Trade tensions pose the risk of slowing growth and rising inflation — a potential threat to stock and bond markets alike."

Dion Rabouin

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