Economic Trends
Trade disputes and yield curve inversion could lead to further rate cuts in 2019.
- Federal Reserve Chairman Jerome Powell signaled that the Fed would follow up their recent cut of the federal funds rate with an additional cut if trade tensions continue. He did follow up that the current tools available to the Fed were not sufficient to quell the rising anxieties of businesses and investors over the trade war currently underway between Washington and Beijing.
- Earlier in August, a Wall Street Journal survey of private-sectors economic forecasters found that on average the probability of another rate cut in August was 63.9%. This was a 14.1 percentage point increase over the prior month. Furthermore a Wall Street Journal survey of economists showed that economists projected a 33.6% chance of a recession within the next 12 months, which would very likely lead to more rate cuts.
- On August 11th, the Yield curve inverted, as short term treasury rates surged above long term rates. The Fed has often used this measure as a key indicator in their decision to lower interest rates. This would lower yields across the board, with the Fed hoping long term rates would again rise above short term yields.
Trade war heats up between China and U.S.
- Early in August, the U.S. labeled China a currency manipulator following a depreciation of the yuan. The yuan fell to a record low against the dollar, which was perceived as deliberate by the Trump administration. While the move is mostly symbolic, it is the first step before a consultation with the IMF that could further heat up economic tensions between Washington and Beijing.
- Following the Trump administration’s announcement of a new 10% tariff on Chinese imports estimated to be worth $300 billion that would come into effect on September 1st, China’s Finance Ministry retaliated with an announcement that they would place 5% to 10% tariffs on over 5,000 U.S. exports to go into effect the same day as the U.S. tariffs. While the U.S. did decide to postpone implementation of roughly half of the tariffs until December, China’s Finance Ministry announced its plan to resume a 25% tariff on vehicles and 5% on auto parts emanating from the U.S. on December 15th.
- President Trump responded to the Ministry’s retaliation via Twitter, by promising to increase the $250 billion worth of Chinese goods currently tariffed at 25% to 30% as well as ratchet up the new round of tariffs from 10% to 15%. Furthermore, Trump is now attempting to order American companies to search for suppliers other than China. The National Retail Federation rebuked the order, while the American Farm Bureau Federation noted that there could be further trouble for America’s agriculture due to the new round of tariffs on both sides.
U.S. mortgage debt eclipses 2008 peak.
- Homeowners in the U.S. has now reached $9.046 trillion, which surpassed the previous high set in the third quarter of 2008 by $112 billion. This comes on the heels of 20 straight quarters of increasing mortgage debt in the U.S. An increase in home equity loans are suspected to be a major source of the recent boost in household borrowing.
- Despite the large amount of nominal mortgage debt in the U.S., the debt situation is far from the precarious situation in 2008. Senior vice president at the New York branch of the Federal Reserve Wilbert van der Klaauw explained that, “mortgage delinquencies and the average credit profile of mortgage borrowers have continued to improve.”
Industry Trends
WeWork releases highly anticipated IPO prospectus.
- Co-working giant WeWork released their financial prospectus to the public on August 14th in their newest step leading up to their September IPO. The report revealed the soon to be public company to have roughly $27 billion in total assets, $1.8 billion in annual revenue, $1.9 billion in net losses, a shortfall of nearly $2 billion in free cashflow, and a $47 billion market capitalization.
- Four areas of primary concern are the lack of profits, incredibly rich valuation, the company’s vulnerability to a recession, and questionable corporate governance. Large investments needed to achieve economies of scale have been thus far able to explain the lack of profits, but the valuation may still be a bit too rich even given that explanation. Some landlords are wary of the possibility that WeWork may not be able to pay off their leases in the event of a downturn, and questionable practices by the controversial CEO, Adam Neumann, have only furthered that concern.
- Despite these issues WeWork has many built in features to guard against downturns such as controlling their own construction, offering landlords indirect benefits such as attracting higher value tenants, and relative affordability for co-working tenants. Furthermore, their meteoric rise has engendered a strong amount of confidence among potential investors that co-working is a model for the future and WeWork is at the forefront of that future.
Walgreens planning to shutter 200 stores nationwide in cost control measure.
- Due to tightened pharmacy reimbursement rates, pressures emanating from increasing tariffs, and an evolution of consumer tastes toward e-commerce, pharmacy giant Walgreens Boots Alliance plans to close 200 U.S. Walgreens retail locations by 2022. The multinational drug made the decision less than a year after announcing the closure of 200 Boots pharmacies in the U.K.
- Walgreens plans to adjust their business model by increasing their emphasis on merchandise like beauty products, packaged goods, and medical devices, as well as moving toward small-store concepts.
- Lower margins on prescription drugs due to pushback on increased drug costs and increased costs on goods like toothbrushes due to tariffs from China, as well as the overall trend of favoring shopping online instead of brick and mortar locations, are putting increased pressure on Walgreens to minimize costs and find new avenues for growth.