May 1, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here.

Situational awareness:

  • GOP senators don't see pundit Stephen Moore getting enough support to be confirmed to the Federal Reserve. Sen. Lindsey Graham called Moore's possible nomination "problematic." (Politico)
  • Italy ended its recession, growing 0.2% in the Q1 and eurozone growth rose 0.4% while unemployment across Europe fell to its lowest level since at least 2000. Economists say the data suggests the eurozone will avoid a larger recession. (The Guardian)
  • Apple said slumping iPhone sales shrank its profit 16.4%, to $11.56 billion, in the latest quarter, and that it will buy $75 billion more of its own stock. (NYT)
1 big thing: Investors aren't convinced Maduro will fall soon
Venezuelan President Nicolás Maduro's supporters gather holding banners and portraits in Caracas. Photo: Miraflores Palace/Handout/Anadolu Agency/Getty Images

Investors are closely watching the clash in Venezuela with a clear and vested interest in President Nicolás Maduro's ouster. They also have become less convinced the opposition can succeed.

Why it matters: Despite calls of support from President Trump and politicians around the globe, investors tell Axios they are starting to lose faith in the opposition's ability to topple Maduro alone, given an apparent increase of support from Russia.

On the sidelines of the IMF-World Bank meetings in Washington, D.C., investors discussed a proposed power-sharing agreement between the opposition, led by opposition leader and U.S.-backed Venezuelan President Juan Guaido, and the military.

  • "At some point they are probably going to have to swallow the second-best outcome," Mike Conelius, an EM debt fund manager at T. Rowe Price, told Axios after the meetings.

Catch up quick: Guaido called on the country's military to turn against Maduro yesterday, sparking a stand-off between his supporters and the government.

  • Maduro has led the country into its worst ever recession with sky-rocketing poverty rates and inflation estimated to be 10,000,000%.
  • He also has stopped payment on Venezuela's bonds, with the exception of the state-oil company bond maturing next year.
  • Investors believe a new regime will be more than willing to pay up and likely right away.
  • JP Morgan earlier this year decided not to remove Venezuela from its EMBI Global index, meaning investors who track it own Venezuelan bonds and are unable to sell them because the Treasury has effectively banned trading

Where it stands: Because the Maduro regime has gotten continued support from Russia, China and Cuba, opposition efforts have come up short. Investors are stuck rooting for regime change, which they believe will lead to a removal of U.S. sanctions and possibly the chance to make further investments in the country.

  • "Once you're in an environment where sanctions come off investors can step in and lend new money to the country," Conelius said. "We can be faster than the IMF. Not bigger, but really quick in terms of getting further investments into the country in oil and other supplies. Because we're already invested. We want the country to recover as much as anybody."
2. Making sense of Trump's tweet about the Fed and China
Expand chart

Data: Federal Reserve Bank of St. Louis, FactSet; Chart: Andrew Witherspoon/Axios

President Trump tweeted an interesting combination of truth, non-sequiturs and lies on Tuesday:

"China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go...
"...up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!"

The facts: China added stimulus to its economy recently, but it's quaint compared to the military industrial and farm-aid spending added by the U.S. under Trump. China's stimulus has also come largely from the fiscal side — tax and fee cuts and looser lending standards — rather than the central bank.

  • China's central bank has reduced the reserve requirements ratio (RRR) for banks, but has not lowered its policy rate — the thing Trump is calling on the Fed to do — since October 2015. China's central bank policy rate is about 2% higher than the U.S. rate.
  • China's RRR — 14% for large institutions and 12% for small ones — even after recent cuts is significantly higher than that of the U.S. (10% and 3%).
  • The Fed raised rates in 2015 for the first time in nearly a decade and has backed off of the expected quantitative tightening it was set to engage in this year.
3. Bets are increasing that the Fed will cut interest rates

Investors are raising their expectations that the Federal Reserve will cut rates at least once this year, ahead of today's Fed policy meeting.

Driving the news: Fed funds futures prices show traders see a 65% chance the Fed cuts rates at least once this year and a greater than 20% chance of 2 rate cuts, according to CME Group's FedWatch tool. Bets on more than 1 rate hike have picked up notably over the past month.

  • "Markets have frequently underestimated Federal Reserve actions over the last few years, but lately the skepticism has been striking," LPL Financial chief investment strategist John Lynch said in a note to clients.

Flashback: The Fed forecast raising rates 3 times coming into 2019 and had predicted 2 rate increases as recently as January.

  • Axios reported in March that White House economic adviser Larry Kudlow wanted the Fed to cut U.S. interest rates by 50 basis points. Trump has ratcheted up those calls ever since.

The bottom line: Most investors say they don't believe Trump's pressure is going to influence the Fed, but bets have risen that the Fed will cut rates as Trump has increased calls for them.

4. Teacher "wage penalty" seen fueling 2018 strikes
Expand chart
Reproduced from the Economic Policy Institute; Chart: Axios Visuals

Americans are currently seeing the highest minimum wage ever, the New York Times' Ernie Tedeschi reported last week. Despite the federal minimum wage stagnating at $7.25 for 10 years, a string of moves by states and cities recently has raised the effective minimum wage to almost $12 an hour.

Yes, but: One group on the other side of that a wage increase is America's teachers. "Teachers were paid 21.4% less in weekly wages than similar college graduates in 2018—after accounting for education, experience, and other factors known to affect earnings," according to a new analysis by the Economic Policy Institute.

  • Despite generous benefits packages teachers earn, in terms of total compensation (wages plus benefits) teachers earned 13.1% less than similar college graduates last year, EPI's analysis found.

The big picture: 4 of the 7 states with the largest wage gaps between teachers and similar college graduates — Arizona, Colorado, North Carolina, and Oklahoma — were the site of teacher protests in 2018. Teachers in these states earned at least 26%, according to EPI's data.

"It's no surprise that the states that have seen teachers strike and walk out over the past year are the states that have some of the highest teacher wage penalties," said EPI Distinguished Fellow Lawrence Mishel in a statement. "If we are going to have excellent schools, we must make sure that teachers are paid for their work."

5. Blue Apron has fallen to one-tenth of its IPO value

Meal prep company Blue Apron noted a profit in its first quarter earnings report yesterday, but it wasn't enough for investors who sold the stock after the report.

It looks to be too little, too late, the Wall Street Journal's Elizabeth Winkler reports.

"As the company has struggled, many employees—including all three of its founders—have left. The company’s market value of around $220 million is just one-tenth of what it was worth when it went public in June 2017."

Details: Blue Apron reported a profit and has made progress cutting costs, but it also has reduced its customer base.

  • In the first quarter, customer count fell to 550,000 from a peak of more than 1 million in March 2017. Total sales also are moving in the wrong direction: $141.9 million for the quarter, down from $196.7 million in the same period last year.

The verdict: "Perhaps Blue Apron can eke out a few more dollars per customer, but the market for this product has proved to be a niche one."

Dion Rabouin