Feb 21, 2020

Axios Markets

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1 big thing: Companies are behaving like it's a recession

Illustration: Aïda Amer/Axios

Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash.

Why it matters: Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now.

  • In the short term, that means the country is less at risk for economic collapse, but it also shows that American businesses are investing less in the future.

What they're saying: "That is highly unusual, as being late cycle this is precisely when companies are supposed to lever up," credit strategists at Bank of America Global Research said in a recent note.

By the numbers: Net debt declined on a year-over-year basis in the fourth quarter of 2019 for the first time in nearly a decade, Bank of America's data shows.

  • 25% of companies reduced their debt levels in 2019 by at least 7.8%.
  • Those numbers are rarely seen during economic booms, BofA strategists note, and are much more akin to "what we see on a more forced basis during and in the aftermath of recessions."

What's happening: Despite increased profits from the Tax Cuts and Jobs Act, CEOs and company leaders have told Axios the uncertainty of the U.S.-China trade war and fears of an imminent recession discouraged big-ticket spending during 2019.

  • Rather than use their tax savings for investment or expansion, they largely socked it away.
  • Data from accounting firm PwC shows company cash holdings rose to $2.4 trillion, the highest amount in decades, a company spokesperson said.

Be smart: It's not just net debt. Companies have added very little gross debt, dating back to the second quarter of 2017, BofA's data shows, the continuation of a "remarkable development."

  • "As we have argued, it is indeed different this time."

Between the lines: Investment grade companies that would be in the best position to issue very cheap debt to finance investment projects or mergers are pulling back in part because they spent so much between 2014–2017 pursuing large-scale M&A.

  • The data shows that most companies are improving their fundamentals, but most are BBB-rated, the lowest end of the IG scale.
2. Catch up quick

Wells Fargo is near a deal to pay $3 billion to settle its myriad claims of consumer abuse over years. (Bloomberg)

Japan's manufacturing PMI fell to 47.6 in February, the 10th straight month in contraction territory and the weakest reading since December 2012. (Reuters)

A majority of surveyed economists now expect Japan to fall into recession this quarter. (Bloomberg)

Morgan Stanley's CEO said he began talks to acquire E*Trade in December, and the Charles Schwab-TD Ameritrade merger encouraged the $13 billion purchase. (WSJ)

The government of Hubei Province will extend its business shutdown for a third time, to March 10, more than a month and a half after the Lunar New Year holiday was slated to end. (Nikkei)

3. Philly Fed index boomed in January
Expand chart

Data: Federal Reserve Bank of Philadelphia, projection from Wall Street Journal; Chart: Axios Visuals

The Philadelphia Fed's manufacturing business outlook rose to near its highest level on record, and notched its biggest reading above economists' expectations in history.

  • Analysts at BMO Capital Markets note that the monthly reading is among the highest in history (in the 99th percentile) going back 30 years and marked the largest two-month jump since 1995.

Why it matters: The survey's results were taken in the immediate aftermath of the phase one U.S.-China trade deal, which bolstered expectations among many in the manufacturing industry.

  • The Fed's index is largely a gauge of sentiment, rather than hard numbers, and shows manufacturers are bullish on the deal.

Details: The future general activity diffusion index, which measures firms' expectations six months ahead, rose to 45.4 from 38.4 in the previous month. More than half of the firms surveyed expected activity to rise over the next half a year, and new orders almost doubled, rising to 33.6 from 18.2.

Yes, but: Following Wednesday's strong producer prices report, which showed the largest gain since October 2018, the Philly Fed survey provided more evidence of upward pressure on costs. Prices paid rose to 19.7 from 14.6.

  • If manufacturers continue to report higher prices paid, it's expected that consumer prices will also begin to rise.

One more thing: The index's employment component fell significantly to 9.8 from 19.3.

The intrigue: Despite the PPI report Wednesday and the Philly Fed reading Thursday showing serious potential for inflation to pick up, expectations for the Fed to cut rates by year end remain near 90%, according to CME Group's FedWatch tool.

4. California's "woman quota" law seems to be working

Illustration: Eniola Odetunde/Axios

Axios' Courtenay Brown writes: When California passed its boardroom law, requiring public companies based there to have at least one female director, there were concerns it would spark a gold rush for the same handful of well-known women — but that hasn’t happened.

Why it matters: Of the 138 women who joined all-male California boards last year, 62% are serving on their first company board, per a new study by accounting firm KPMG.


  • Only four women joined more than one all-male California board last year — with all four joining two boardrooms.
  • Two-thirds of the women only serve on the board they joined last year.
  • The data suggests “the law broadened the candidate pool for public company directors,” KPMG writes in its report.

Of note: The report doesn’t look at whether the women are also on the boards of private companies or nonprofits.

There’s no standard definition of how many boards is "too many" for one person to serve on.

  • Vanguard said last year it would vote against companies’ would-be board members who already serve on more than five boards.

The backstory: California's first-in-the-nation law was signed in September 2018, giving companies more than a year to comply. By 2021, companies with five-person boards will have to have at least two women, while boards of six or more will have to have three.

  • 27 publicly traded companies in California — or 4% — still had all-male boards by the end of last year, KPMG says.
5. Economic indicators suggest boost from phase one deal

The Conference's Board's index of 10 major economic indicators jumped in January, doubling Wall Street expectations.

Why it matters: Real estate is clearly booming in the U.S., as low interest rates have prompted increased buying and a response from builders.

  • A decline in applications for unemployment benefits, higher consumer confidence, record stock prices and cheaper credit also added to the index's climb.

What they're saying: “The LEI’s six-month growth rate has returned to positive territory, suggesting that the current economic expansion — at about 2 percent — will continue through early 2020," Ataman Ozyildirim, senior director of economic research at the Conference Board, said in a statement.

Yes, but: The numbers also come from a bullish period after the signing of the phase one trade deal and before the outbreak of novel coronavirus.

  • The reading shows that the economy was clearly picking up steam, but it remains to be seen whether it can return to that pace.

Charles Drew was a physician, surgeon and medical researcher who invented the refrigerated trucks that are used to this day to transport blood between locations, known as bloodmobiles or mobile blood donation centers.

  • Drew played a seminal role in creating and developing the first large-scale blood banks and blood plasma programs during World War II and worked with the Red Cross on new developments in blood transfusions, which saved thousands of lives during the war.
  • He eventually resigned from the American Red Cross because of the organization's racist insistence on segregating blood.