17 hours ago

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 "Don't be afraid to give up the good to go for the great." - See who said it and why it matters at the bottom.

1 big thing: Jerome Powell, Trump's reelection MVP

Photo illustration: Annelise Capossela/Axios. Getty Images photos: Andrew Caballero-Reynolds/AFP and Lev Radin/Pacific Press/LightRocket

President Trump trails Joe Biden in most polls, has generally lower approval ratings and is behind in trust on most issues. Yet polls consistently give him an edge on the economy, which remains a top priority among voters.

Why it matters: If Trump wins reelection, it will largely be because Americans see him as the force rallying a still-strong U.S. economy, a narrative girded by skyrocketing stock prices and consistently climbing U.S. home values — but the man behind booming U.S. asset prices is really Fed chair Jerome Powell.

Reality check: It is Powell, not Trump, who Wall Street credits for the stock market's return to all-time highs, even in the face of the worst economic collapse in U.S. history last quarter.

  • Trump's 2017 tax cut certainly helped the market, but its effects were offset in no small part by his trade war with China and the uncertainty caused by his diplomacy-by-tweet style.

The intrigue: Powell has gone above and beyond the actions of previous Fed chairs to boost markets. His course correction in 2019 to lower U.S. interest rates and restart the Fed's massive bond-buying program in the midst of a strong U.S. economy was controversial but helped power the S&P 500 higher by 30%.

  • This year, Powell's decision to roll interest rates back to zero and provide markets with $3 trillion in liquidity has kept stock indexes hitting record highs even as close to 30 million Americans collect unemployment benefits.
  • And the promise of unlimited asset purchases, including buying bonds from trillion-dollar companies like Apple and even companies with "junk" credit ratings in March, has been described as "unprecedented."
  • Some even argue Powell violated the Fed's founding charter, the Federal Reserve Act.

What they're saying: The Fed and other central banks effectively "nationalized" the market for government and corporate bonds, strategists at Bank of America said in a note to clients in mid-July, helping lead to "irrationally" high stock prices.

  • And the central bank's recent pledges to keep interest rates at nearly 0% through at least 2023 has removed the threat of higher interest rates, bolstering sentiment for stocks, precious metals and home buying.

The big picture: The Fed's impact has helped keep eyes trained on record high equity indexes and away from spiking job losses, rising food insecurity, a growing trade deficit with China, a national debt nearing $27 trillion and a debt-to-GDP ratio on pace to be the worst in history.

  • The latest PBS NewsHour/NPR/Marist poll found that 20% of respondents rated the economy as their top issue — it was No. 1 among those who identified as Republicans — and half of Americans see Trump as a more effective leader on that issue, compared to 43% for Biden.
Bonus chart: The Fed remains untrusted

Data: Axios/Ipsos survey; Note: Margin of error for the total sample is ±3.2%; Chart: Andrew Witherspoon/Axios

The latest Axios-Ipsos poll shows that Americans' trust in the Fed has been unmoved since last month, with far more Americans saying they have not very much or no trust in the central bank, despite the Fed's latest shift in policy to average inflation targeting.

  • The new stance will keep interest rates lower for longer and is expected to provide a boost to job seekers and lower-income Americans who historically have not shared in the nation's prosperity.

Yes, but: A recent survey from the Cleveland Fed found few Americans are aware of the policy change and those who did know didn't seem to care.

Why it matters: Mistrust of the Fed could put the central bank in the sights of Congress after November's election as both Democrats and Republicans historically have gone after the institution following times of economic and political uncertainty.

2. Catch up quick

House Democrats unveiled a scaled-down $2.2 trillion coronavirus relief bill that includes restoration of $600 weekly unemployment benefits, another round of direct stimulus checks, and aid for restaurants, airlines and child care centers. (WSJ)

The global number of confirmed deaths from COVID-19 rose to more than 1 million on Monday, according to data from Johns Hopkins. (Axios)

The Trump administration is considering new sanctions that would cut Iran’s economy off from the outside world by forbidding dealing with its entire financial sector. (Bloomberg)

3. China is attracting global investors' attention, boosting the yuan
Data: FactSet; Chart: Axios Visuals

The dollar strengthened against most of the world's currencies last week, as traders bought the greenback expecting an end to the reflation trade, but China's currency bucked the overall trend (pun intended) and is on pace for its strongest month against the dollar since 2008.

Why it matters: "What we do see is a strong Chinese economy, which is part of what’s behind the strong renminbi," Jason Brady, president and CEO of Thornburg Investment Management, told WSJ.

What's happening: Investors have boosted Chinese stock and bond buying thanks to the equity market's strong rally and yields on 10-year government debt that recently topped 3% — around 230 basis points above comparable U.S. yields.

  • “More and more people are coming in, and it’s only the beginning,” Jan Dehn, head of research at Ashmore, told FT. “Asia markets are going to make their way into all the major global bond indices.”

The big picture: The Chinese government has acted to keep its currency weak in the past, but both the onshore and offshore renminbi, or yuan, have strengthened significantly in the third quarter. That suggests the government has been more willing to allow market forces to move the currency.

  • The strength of its exports over the past three months suggests that the currency's value has not hurt demand.

Watch this space: A recent article in the state-run China Daily newspaper noted that authorities plan to remove more barriers to using the renminbi internationally in an effort to "further promote the financial structural reform" and "create a level playing field for the renminbi and other major convertible currencies."

  • "We are improving our financial market regulations in order to integrate into the global financial market," Zhang Xuechun, a deputy director general at China's central bank, said in the article.

Why you'll hear about this again: China's strict currency controls are the major reason the yuan has not been used more in global trade and Chinese assets have not been more popular among global investors. Changing that could mean an avalanche of overseas investment funds flowing into China.

4. Why reparations could happen in the next 10 years

Thanks to growing momentum and changing attitudes among Americans, Brookings fellow Andre Perry predicts that within 10 years the U.S. will provide some form of reparations to Black people.

What we're hearing: "What's happening in the streets today is indicative of the attitude change that is occurring in America," Perry, a scholar-in-residence at American University and author, said during our interview for "Axios on HBO."

  • "When I look out there, it's a much more diverse coalition than I've ever seen before. And so I'm encouraged that reparations is going to happen."

Why it matters to the market: Recent economic analyses by McKinsey & Company and Citigroup have both estimated that the racial wealth gap has cost the U.S. economy trillions of dollars and will continue to hold back economic growth until it is closed.

  • Citi's global economists estimate that closing the gap would add $1 trillion a year to the U.S. economy over the next five years.

Yes, but: Perry cautioned that while he believes reparations are "a moral debt that is owed to Black people" and should be paid out in the form of direct cash or check payments, similar to the $1,200 direct payments that were a part of the CARES Act this year, he expects any reparations provided in the near term will likely be a means-tested fund that benefits some, but not all Black people.

  • He expects it would provide funding for education, housing or business formation.

The last word: "I do think you're going to see some type of demand and that demand will be heard ultimately," Perry said.

  • "So I think within 10 years you're going to see some form of reparations distributed to Black Americans."

Go deeper: 10 myths about the racial wealth gap

Dion Rabouin

Thanks for reading!

Quote: "Don't be afraid to give up the good to go for the great."

Why it matters: On Sept. 29, 1916, John D. Rockefeller became the world's first billionaire. Rockefeller amassed a fortune worth around $1.5 billion during his lifetime, according to his obituary, which equaled roughly 1.6% of the economy in 1937.

  • Were he to own the same percentage today, his net worth would be around $320 billion.