Axios Markets

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January 28, 2020

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🎙 "If the populace knew with what idiocy they were ruled, they would revolt." - See who said it and why it matters at the bottom.

1 big thing: Recession fears return to the market

Data: U.S. Treasury; Chart: Naema Ahmed/Axios

Data: U.S. Treasury; Chart: Naema Ahmed/Axios

Growing worry over the widespread outbreak of the Wuhan coronavirus is compounding an already jittery market and flipping the switch from risk-on to risk-off, as investors sell stocks and buy bonds.

  • The S&P 500 posted its biggest single day percentage loss since October and long-dated U.S. Treasury yields fell, putting yields on Treasury bills that mature in three months just 6 basis points below Treasury notes maturing in 10 years.

Why it matters: The yield curve already has inverted out to seven years and is within spitting distance of the 3-month/10-year inversion that economists at the Fed call the "best summary measure" of economic downturn for the second time in less than a year.

  • The spread between the yields on the 3-month bill and 10-year note is the smallest since October when the curve first returned to positive territory after about four months of inversion.

What's happening: The death toll from the coronavirus reached 107 in China and the number of confirmed diagnoses rose to over 4,000, with confirmed infections in almost 20 countries or regions.

  • The virus is spreading and concern is growing right as stock euphoria looks to have peaked and a swath of risks have again reared their heads.

Details: President Trump's impeachment trial took an unexpected turn when the New York Times reported former national security adviser John Bolton's claim that Trump told him aid to Ukraine was dependent on the country investigating Joe and Hunter Biden.

  • Middle East tensions have again risen as rockets reportedly hit the U.S. embassy in Baghdad Sunday.
  • A growing number of market analysts and major investment banks have issued warnings about the increasingly bloated prices of U.S. equities.

What we're hearing: "We're ... getting pretty nervous that we'll see another inversion," Ian Lyngen, head U.S. rates strategist at BMO Capital Markets, tells Axios. "'Recessionary fear' headlines will surely make the rounds again."

  • "If you were on the negative side, the interpretive view of the inversion would be that a recession is closer than not," Ellis Phifer, market strategist at Raymond James, adds.
  • "The last few days are all about safe haven buying of Treasuries just in case the Wuhan virus becomes a worst case scenario," Lou Brien, rates strategist at DRW Trading, says in an email. "It is not likely this situation is resolved quickly, so the inversion likely has further to go."

Bonus: The Fed's balance sheet could be an issue

Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

The Fed's balance sheet shrank last week with holdings touching their lowest level since mid-December, the strongest decline since the Fed restarted its bond-buying program in September.

Why it matters: The Fed will likely have to address its longer-term plans for liquidity injections to the repo market and the program that chair Jerome Powell has insisted on referring to as "not QE," (but many market participants have dubbed "QE4," or the fourth phase of quantitative easing).

  • Powell says the program is not a form of QE, a highly controversial stimulus program created to help dig the U.S. economy out of a hole after the financial crisis.
  • But even members of the Fed's rate-setting committee assert that the program is helping to boost the prices of risk assets like stocks.

Between the lines: That likely paints the Fed into a corner in addressing the program at its meeting tomorrow, Tom Essaye, director of Sevens Report Research, says in a note.

  • "[T]he dovish Fed has underwritten a lot of this four-plus-month rally, and they need to reassure markets they’re going to stay dovish this week."
  • "Conversely, if the Fed signals that it’s looking to determine an end to the repo operations, that will be hawkish and likely hit markets, potentially hard."

Go deeper: Fed's first hurdle in 2020: Dispensing with 'QE Lite' (Reuters)

2. Catch up quick

Sen. Mitt Romney said it is "increasingly likely" at least four GOP senators would join Democrats in calling for Bolton to testify in the Senate impeachment trial. (Politico)

Apple has asked suppliers to make up to 80 million iPhones in the first half of the year, 10% more than the previous year's output, but suppliers are concerned the coronavirus outbreak could dampen output. (Nikkei)

Automakers have banned travel to China, are withdrawing employees from the country and weighing whether to suspend manufacturing there entirely. (CNBC)

3. Americans pay the full cost for aluminum tariffs

President Trump's tariffs have notably increased the price of aluminum for U.S. businesses and consumers, a study provided first to Axios shows.

Why it matters: Trump has insisted the cost of the tariffs would be borne by China and other exporters, but the data shows that Americans are paying the costs.

  • "It’s pretty safe to say that it's 100%," Douglas Holtz-Eakin, president of think tank American Action Forum and a former director of the Congressional Budget Office, tells Axios.

Background: The price of aluminum worldwide spiked in April after the Treasury Department put sanctions on Russian producer Rusal, following Trump's announcement of 10% aluminum tariffs on every country (with exceptions eventually carved out for allies like Australia, Canada and Mexico).

  • Those price increases have since unwound in global markets, but U.S. customers continue to pay higher prices, as shown by the so-called Midwest Premium.
  • The price increase appears to line up very closely with the 10% tariffs imposed by Trump.

The intrigue: Trump on Friday doubled down on the aluminum tariffs, adding derivative aluminum products such as nails, tacks, staples, wire and parts for cars and tractors, meaning more price hikes are likely on the way.

The bottom line: "There have been assertions that China is paying the tariffs," study co-author Holtz-Eakin says. "And that’s not true."

4. Boeing gets a bailout, but economy still faces trouble

Data:; Chart: Axios Visuals
Data:; Chart: Axios Visuals

Boeing secured commitments of over $12 billion in financing from more than a dozen banks, CNBC reported Monday, citing unnamed sources.

Why it matters: The bailout will help Boeing maintain a healthier cash position as it deals with the fallout from a mandatory production stoppage of its 737 MAX jet after two crashes that killed hundreds of people.

  • However, Boeing's production halt will still be felt by a number of companies that rely on the aviation behemoth.
  • The stoppage also could threaten the overall U.S. economy, experts say.

The big picture: Pantheon Macroeconomics chief economist Ian Shepherdson predicts today's durable goods report will show a 2% year-over-year decline as a result of Boeing's troubles.

  • BofA Global Research revised their second quarter GDP forecast down by 0.4% as a result of Boeing's relaunch for the 737 MAX being pushed back.

Of note: As I wrote two weeks ago, Moody's has warned that Boeing's suspension could hit dozens of companies, identifying 24 with exposure to Boeing and its supply chain and placing four on review for downgrades.

  • One, Spirit Aerosystems, laid off 2,800 employees and had its credit rating downgraded.

5. Tug of war over how banks should give back

Illustration of two hands pulling a money rope in a tug-of-war.
Illustration: Eniola Odetunde/Axios

Axios' Courtenay Brown writes: A showdown over the Community Reinvestment Act (CRA) will take place Wednesday in a hearing hosted by the House Financial Services Committee.

  • It's led by Rep. Maxine Waters, who opposes the overhaul.

On the hot seat will be the banking regulator who proposed the changes — Joseph Otting, the Trump-appointed head of the Office of the Comptroller of the Currency.

  • Otting says that the changes he wants — which would be the most extensive overhaul of CRA since it became law in 1977 — will increase lending to poor communities by $500 million a year, but legislators and others are skeptical.
  • Some skepticism may stem from the fact that Otting is the former CEO of OneWest Bank, the institution founded by Treasury Secretary Steven Mnuchin.
  • Both men have cited their personal history with CRA as motivation for the changes, which is something community activists pointed out at a separate congressional hearing earlier this month.

Go deeper: Read the full story here.

On Jan. 28, 814, Charlemagne, or Charles the Great, died. During the early Middle Ages, he united the majority of central and Western Europe.