Axios Markets: Blame cars

Plus: Stocks-bonds dynamic breaks down 📉 | Wednesday, July 14, 2021

Open in app View in browser   Presented By ProEdge, a PwC Product   Axios Markets By Sam Ro ·Jul 14, 2021 Today's newsletter is 1,272 words, 5 minutes. Situational awareness: Fed chair Jerome Powell will testify before the House Financial Services Committee at 12 pm ET. 📉of the day: "This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors." - SEC chair Gary Gensler announcing charges against Stable Road Acquisition Company and its merger target Momentus.     1 big thing: Blame cars Illustration: Brendan Lynch/Axios   Inflation is at its highest level since 2008, thanks in very large part to a single item — cars — whose price has been going through the roof, Axios chief financial correspondent Felix Salmon writes. Why it matters: What goes up must generally come down, and there are strong indications — like data last week from prominent used car marketplace Manheim — that the unprecedented rise in auto prices is peaking. In the second half of this year, cars might well be a force making inflation numbers look artificially low. By the numbers: Used car and truck rental prices rose 12% in June, and 88% from a year previously. Used car prices were up 11% in June and 45% from a year ago, while new car prices were up 2% and 5% respectively. How it works: The cause has been a shortage of new cars, which in turn has been caused by a shortage of the computer chips needed to make any modern car run. Cars need as many as 1,400 different computer chips. Lead times for such chips can be as long as 180 days What they're saying: "These chips are not fungible assets," Tirias Research analyst Kevin Krewell tells Axios. "You can't just move them to another fabrication facility with spare capacity." Flashback: Fire and ice have both closed chip plants unexpectedly this year, making it harder for them to reconfigure their production lines to go back to making the auto chips that manufacturers desperately need. Automakers slashed chip orders when the pandemic hit in March 2020, causing chip makers to pivot to making components for uses that were booming, such as webcams. More recently, automakers around the world have been forced to cut production in the face of shortages. The big picture: While new-car prices haven't risen enormously (sticker prices are sticky, it turns out), the new-car shortage has meant that car-rental companies, faced with booming demand, have become buyers rather than sellers of second-hand vehicles, upending the market's normal delicate balance. What's next: Wholesale auto prices seem to have peaked, according to Manheim, which means that retail prices are likely to follow them down. Manheim chief economist Jonathan Smoke says that retail prices have been lagging wholesale prices by about 4 weeks this year — and that the decline in wholesale prices started 5 weeks ago. Data: Cox Automotive; Chart: Axios Visuals The bottom line: If you're in the market for a car, and you're able to wait a few months, you should probably do that. Go deeper     2. Catch up quick Senate Democrats have agreed on a $3.5 trillion budget reconciliation bill. (Axios) Fed chair Jerome Powell and Treasury Secretary Janet Yellen are expected to discuss the hot U.S. housing market with other regulators Friday. (Bloomberg) Apple has asked suppliers to increase iPhone production by up to 20%. (Bloomberg)     3. Your investment portfolio may be acting weird Reproduced from S&P Dow Jones Indices; Chart: Axios Visuals An important dynamic in financial markets has flipped, for now at least. Why it matters: Stock and bonds are usually inversely correlated — when stocks go up, bond prices move down. When invested in both, this diversification helps suppress volatility in the value of a portfolio. However, both have recently been moving together in the same direction, making investors' portfolios more susceptible to volatility. Driving the news: Since May, the six-month trailing correlation has been positive between stocks — as measured by the S&P 500 — and bonds as measured by the 10-Year Treasury note. This happens occasionally for brief periods of time. The last time correlations went positive was in late 2013 during the "taper tantrum," an episode where Treasury yields surged following the Federal Reserve's announcement that it would be tapering its then quantitative easing program. The big picture: Over the past 40 years, yields have generally trended lower in what can be characterized as a low-inflation environment. Charles Schwab chief investment strategist Liz Ann Sonders tells Axios this type of low-inflation environment fosters negative correlation because yields moving higher (i.e. when bond prices fall) signals things like improving growth, which is bullish for stocks. The latest: Today, inflation is the big risk everyone's talking about. "We don't know whether it's going to be long lasting or transitory," Sonders says. "But for now, we've seen that reversal." What to watch: Inflation data, like Tuesday's hotter-than-expected Consumer Price Index report, bear watching over the next few months to see if prices cool off and correlations go back to being inverted. "If indeed, it's a secular shift, that has huge implications for market behavior for how you diversify," Sonders says.     A message from ProEdge, a PwC Product Align skills and culture with the changing nature of work     Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product.     4. Report: Unemployment insurance's allure Data: Morning Consult; Chart: Will Chase/Axios About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday. Why it matters: U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons. One of the more politically controversial reasons has been the availability of unemployment insurance benefits, in particular emergency provisions that were introduced because of the COVID-19 pandemic. Indeed, 26 states opted to cut emergency benefits early with the intention of incentivizing people to take open jobs. By the numbers: Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021. Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits. Extrapolating from the 14.1 million adults collecting benefits as of June 19, Morning Consult concluded that 1.8 million people turned down job offers because of the benefits. To be clear, this is in regards to any and all unemployment insurance benefits including the standard 26 weeks worth of benefits as well as the emergency benefits that are set to end by September. Furthermore, all 1.8 million won't necessarily find employment quickly as jobs once offered to them may have been filled by others. What they're saying: Morning Consult chief economist John Leer cautions against concluding that this completely validates calls to cut unemployment benefits early. The bottom line: "Getting people to move from relying on unemployment insurance to wage income doesn't just automatically happen," Leer tells Axios. "There's going to be some searching and matching frictions at work."     5. JPMorgan: The consumer's "pump is primed" Photo: Robert Caplin/Bloomberg via Getty Images   JPMorgan Chase and its CEO Jamie Dimon have a lot of bullish things to say about U.S. consumers. Why it matters: As the biggest bank in the U.S., JPMorgan has an intimate understanding of consumers' financial activities, including how they are saving and borrowing. "The pump is primed," Dimon said of consumers' capacity to spend on an earnings call. "Their house value is up, their stock value is up, their incomes are up, their savings are up, their confidence is up." Driving the news: In its Q2 2021 earnings announcement, the bank said spending on its debit and credit cards was up 45% from the prior year, and up 22% from the pre-pandemic Q2 2019. Home loan originations jumped 64% year over year to $40 billion. Auto loan originations jumped 61% to $12 billion. And yet, despite this surge in spending and borrowing, consumers still seem to have a lot of dry powder. JPMorgan said outstanding credit card balances were lower and mortgage prepayments were up. Average deposits were up 25% to $1.0 trillion. Context: Some of this growth in deposits can be attributed to the excess savings consumers accumulated during the pandemic as they had limited options for spending. The bottom line: "They are raring to go," Dimon said on the call. "You see it in home prices. You see it in auto purchases. You see it. And it would be much higher, but for supply constraints right now."     A message from ProEdge, a PwC Product Align skills and culture with the changing nature of work     Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product.   Like this email style and format? Learn more about Axios HQ. It'll help you deliver employee communications more effectively.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Suite 1300, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: