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THE DAILY EDGE: 18 MAY 2022: Retail Warnings!

RETAIL SALES: PICK YOUR NUMBERS

Inflation is tricking retail sales data. There is no official deflator for retail sales. The St-Louis Fed provides a Real Retail Sales Series but it simply uses total CPI as a deflator. Most of the time, this is a valid proxy. This year, however, it is misleading because services inflation, 60% of the CPI, is much lower than goods inflation. There are virtually no services in retail sales data. Deflating with total CPI therefore currently overstates real sales.

This chart plots CPI-services (red, +5.4% YoY in April) with CPI-durables (blue, +14%), CPI-nondurables (yellow, +12.8%) and my own CPI-retail (black, +12.5%), essentially using a CPI-ex-services calculation. This provides a much better reflection of retail price trends since mid-2020. By comparison, total CPI was up 8.3% in April.

fredgraph - 2022-05-17T180517.516

This next chart shows the YoY trends in nominal retail sales (red, +8.2% in April), real retail sales per the St-Louis Fed (blue,-0.03%) and my own version of real sales (black, -3.8%).

fredgraph - 2022-05-17T181754.569

This other chart plots the same series indexed at February 2020 = 100. Nominal sales remain in an uptrend, up a huge 28.8% from their pre-pandemic level. The St-Louis Fed version of real sales has flattened since March 2021 and is up 15.6% while my own version of real sales has been trending down and is up a lesser 10% from its pre-pandemic level. Importantly, it’s back on its long-term trend (dash), meaning that Americans’ splurge on goods is over.

fredgraph - 2022-05-17T183112.640

Americans generally spend their labor income (aggregate payrolls in black below). During the pandemic, particularly since March 2021 (remember the stimmies), they spent much more, significantly overspending on goods which propelled retail sales. The latest data suggest that payrolls are back as the main driver and that savings may not play as big a role as many expect in 2022.

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Now we can better understand the “surprising” poor results from some of the best retailers in the world.

Walmart Flashes a Warning Sign to the Entire Consumer Economy The world’s biggest retailer is known for being careful about costs. But that’s harder to do when prices for everything are going up.

The country’s largest retailer by revenue said sales increased in the most recent quarter, but higher product, supply-chain and employee costs ate into profits, sending the retailer’s stock sharply lower Tuesday. (…)

On Tuesday Walmart said its net income in the April-ended quarter fell 25% from a year ago, and that earnings per share came in below analysts’ forecasts. (…)

“We’re not happy with the profit performance for the quarter and we’ve taken action, especially in the latter part of the quarter on cost negotiations, staffing levels and pricing, while also managing our price gaps,” Mr. McMillon said on Tuesday.

Inventory levels increased over 33% in the quarter from the same period last year. That rise reflects the higher cost of goods due to inflation, the company said, along with Walmart’s choice to buy products aggressively amid supply-chain snarls and rising demand for some goods in past quarters. Product markdowns, when a retailer sells an item at a discount, were $100 million more than expected in the quarter.

Supply-chain costs also came in higher than expected as the war in Ukraine and uptick in Covid-19 globally created delays, said Chief Financial Officer Brett Biggs. “The supply chain didn’t move towards normal as quickly as we thought,” he said. (…)

U.S. comparable sales, those from stores or digital channels operating for at least 12 months, rose 3% in the quarter ended April 29 (…).

Walmart said it expects U.S. comparable sales for the full year to grow about 3.5%, up from a prior estimate of 3%. It expects operating income to decrease about 1%, excluding currency fluctuations, down from a previous estimate of an around 3% increase. (…)

If Walmart is struggling even with its thriftiness and superior scale, then smaller and less efficient retailers are in for a very difficult time — not least because there was another note of caution in Walmart’s first quarter announcement.

The squeeze of inflation on discretionary incomes is starting to affect what consumers buy. Because Americans were having to spend more on food, they cut back on clothing and home furnishings more than Walmart had expected. Unseasonably cool weather, affecting items such as apparel and patio furniture, didn’t help either.

Walmart isn’t the only retailer to feel the pinch of high prices. While Home Depot Inc. reported better-than-expected first-quarter sales and saw an 11% increase in the average amount that each consumer spent in the first quarter, the number of customer transactions fell by 8%. (…)

(…) Comparable sales, including sales from Target stores or digital channels operating for at least 12 months, rose 3.3% from the prior year, the company said. Digital sales climbed 3.2%—its slowest growth since the beginning of the pandemic.

While total revenue increased 4% to $25.2 billion, operating income was $1.3 billion, down from $2.4 billion for the same quarter in 2021. Target reported earnings per share of $2.16, down 48% from a year earlier, and below Wall Street forecasts. (…)

Target’s operating income margin rate was 5.3%, compared with 9.8% in 2021, with the retailer saying it expected a similar level of profitability in its second quarter. For the full year, the company said it continues to expect an operating margin rate in a range centered around 6%. (…)

Target management said fuel and freight costs will be $1 billion higher this year than it had expected, with little sign of their easing throughout 2022. The company said it would try not to pass those cost increases to consumers through higher prices for its goods, trading short-term profit for what it hopes will be longer-term market-share gains. (…)

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” Target Chief Executive Brian Cornell told reporters. (…)

“These (costs) continue to grow almost on a daily basis and there is no sign right now…that it is going to abate over time.”

Mr. Cornell said customers were buying fewer big items such as bicycles, TVs and kitchen items than in the past two years. Shoppers are “moving from buying small kitchen appliances and maybe replacing that with gift cards to restaurants and entertainment as they return to a more normalized lifestyle,” he said. (…)

“(Pricing) continues to be the last lever we pull,” finance chief Michael Fiddelke said. “While we don’t like the impact to our profitability in the short term, we know it is the right thing to do.” (…)

Contrast these comp sales growth rates in the 3% range (even drops like at Lowe’s) with total CPI up 8.3% in April, let alone of my own CPI-retail at +12.5% in April.

These are HUGE declines in volume, resulting in excess inventories (+33% at WMT!!!) that will lead to more markdowns, cancelled orders and weakening manufacturing activity worldwide.

Pricing power has disappeared!!!

Payrolls are currently rising faster than inflation thanks to rising employment and wages but the gap is narrowing. The Fed needs to slow employment growth to prevent a wage spiral. The hope is that inflation will slow in sync, protecting real income. This is the recipe for a soft landing: don’t squeeze the consumer.

fredgraph - 2022-05-18T055707.349

Mr. Powell is well aware of the challenging odds. We should all be:

(…) “Restoring price stability is an unconditional need. It is something we have to do,” Mr. Powell said in an interview Tuesday during The Wall Street Journal’s Future of Everything Festival. “There could be some pain involved.”

Mr. Powell said he hoped that the Fed could bring down inflation while preserving a strong labor market, which he said might lead the unemployment rate—near half-century lows of 3.6% in April—to rise slightly. “It may not be a perfect labor market,” he said. (…)

Mr. Powell said Tuesday that it was possible that disruptions from the pandemic had changed the labor market in ways that made current levels of unemployment inconsistent with the Fed’s 2% inflation goal.

He said that it seemed the unemployment rate consistent with stable inflation “is probably well above 3.6%.” (…)

The Fed chairman repeated his hope that the central bank can curtail high inflation without spurring a large rise in unemployment. However, Mr. Powell said, there is little from modern economic experience to suggest that outcome can be achieved. “If you look in the history book and find it—no, you can’t,” he said. “I think we are in a world of firsts.” (…)

“We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down,’” Mr. Powell said. “We will go to that point, and there will not be any hesitation about that.”

“This is not a time for tremendously nuanced readings of inflation,” Mr. Powell said. “We need to see inflation coming down in a convincing way. Until we do, we’ll keep going.”

Wells Fargo & Co. Chief Executive Charlie Scharf, speaking at the same event Tuesday morning, said it would be difficult to avoid a recession but noted that consumers and businesses remain financially solid.

“The fact that everyone is so strong going into this should hopefully provide a cushion such that whatever recession there is, if there is one, is short and not all that deep,” he said. (…)

Gasoline Tops $4 a Gallon in Every US State for the First Time
U.K. Inflation Hits 40-Year High The U.K.’s annual rate of inflation jumped to 9% in April, the highest level recorded by an industrialized nation since the start of the global price surge last year.

(…) GfK’s measure of consumer confidence slumped to -38, a level last seen in the early 1990s as well as in 2008. Of particular note is the GfK index that tracks how people feel about making a major purchase: The most recent data suggest Brits don’t think this is a good time to buy expensive items such as furniture or cars. (…)

Sales weakened in April, according to the British Retail Consortium and KPMG’s Retail Sales Monitor. Although this figure compares with the period a year ago, when consumers were unleashing pent-up demand after stores reopened, it’s clear that spending is sliding. With total sales falling by 0.3% in April, and inflation estimated at 9.1% that month, this implies a big fall in the volume of goods sold. (…)

Big-ticket items were hit hardest by the slowdown in April, according to the BRC and KPMG. Many Brits refreshed their homes when they were spending much of their time there. Now, furniture sales are suffering. In addition, the sector is seeing price rises, because items are generally bulky and expensive to ship in containers. Made.com Group Plc, the online home-furnishings retailer, warned on profits on Monday after volatile trading, and estimated that the digital furniture market as a whole was down by 30% to 40% so far this year. (…)

Data from Barclaycard showed that consumer credit and debit-card spending rose 18.1% in April, compared with the corresponding period in 2019, marking the highest uplift since October 2021. However, this was largely driven by holiday bookings. International travel had its best month since before the outbreak of Covid-19. In contrast, spending on some other categories, such as nights out, takeaways and subscriptions all had smaller boosts than in March. (…)

U.S. Home Builder Index Took a Steep Drop in May

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 10.4% m/m (-16.9% y/y) to 69 in May from 77 in April. This is the fifth straight month that builder sentiment has declined and the lowest since June 2020. The decline was significantly steeper than the INFORMA Global Markets survey expectations of 76.

The current sales reading fell 9.3% m/m (-11.4% y/y) in May to 78 from April’s reading of 86 and stood at its lowest level since July 2020. The index of expected sales in the next six months dropped 13.7% m/m (-22.2% y/y) to 63 in May from 73 in April. The index peaked at 89 in November 2020.

The index measuring traffic of prospective buyers fell 14.8% m/m (-28.8% y/y) to 52. The index stood at the lowest level since June 2020.

Regional activity was largely weak in May. The NAHB reported that “growing affordability challenges in the form of rapidly rising interest rates, double-digit price increases for material costs and ongoing home price appreciation are taking a toll on buyer demand”. The index for the Midwest fell 17.7% m/m (-28.2% y/y) to 51. The index for the West declined 13.1% m/m (-19.8% y/y)) to 73. The South posted a decline of 7.3% m/m (11.6% y/y) to 76 in May. The Northeast was the only region posting a monthly rise, up 2.7% m/m (-2.6% y/y). These regional series begin in December 2004.

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Demand has normalized. Traffic has dropped to levels that were on the high side pre-pandemic. The frenzy is gone. The froth will follow.

U.S. Industrial Production Much Stronger than Expected in April

Industrial production increased 1.1% (6.4% y/y) in April following an unrevised 0.9% gain in March. A 0.4% increase had been expected in the Action Economics Forecast Survey. Manufacturing output rose 0.8% m/m (5.8% y/y) in April, the same monthly increase as in March (revised down slightly from 0.9%). Utilities output increased 2.4% m/m (7.5% y/y) following a 0.3% decline in March. Mining output gained 1.6% m/m (8.6% y/y) in April after a 1.9% m/m increase in March.

The increase in manufacturing output in April was once again led by motor vehicle and parts production, which was up 3.9% m/m on top of an upwardly revised 8.4% monthly gain in March (initially 7.8% m/m). Durable goods manufacturing was up 1.1% m/m while nondurable good output rose a more modest 0.3% m/m.

In the special classifications, factory output of selected high technology industries fell 0.3% m/m in April, the first monthly decline since August 2021, after a 1.4% m/m gain in March. Factory production excluding the high technology sector increased a solid 0.8% m/m, the same monthly increase as in March. Manufacturing production excluding both high tech and motor vehicles rose 0.6% m/m in April after a 0.3% m/m increase in March.

Capacity utilization rose to 79.0% in April, the highest level since December 2018, from 78.2% in March (revised from 78.3%). A 78.6% rate had been expected. Utilization in the factory sector rose to 79.2% in April, the highest reading since April 2007, from 78.6% in March (revised from 78.7%).

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Canada Can Boost Oil Output by 900,000 Barrels a Day, Kenney Says

Premier Jason Kenney gave the estimate in testimony before a U.S. Senate committee on Tuesday. It’s about triple the estimate delivered weeks ago by Canadian Natural Resources Minister Jonathan Wilkinson.

About 300,000 barrels a day of unused capacity exists in the North American pipeline system, which should be filled this year through higher output, Kenney said. Another 200,000 barrels of crude oil could be shipped by rail and “if midstream companies get serious about it, and if regulators approve it,” a further 400,000 barrels could be added through pipeline reversals and technical improvements. (…)

By 2024, the completion of the Trans Mountain pipeline expansion project to British Columbia will give Canada even more capacity to ship oil to the US, Kenney said in an interview on Bloomberg Television. (…)

Energy producers can raise shipments of crude by 200,000 barrels a day and natural gas by the equivalent of 100,000 barrels by year-end by accelerating planned projects to expand output to help compensate for the loss of Russian supply, Wilkinson said at a March 24 press conference in Paris.

China’s New Home Prices Fall for the First Time in More Than Six Years A monthly measure of new home prices in China fell for the first time in more than six years, offering further evidence of the pain that Beijing’s regulatory campaign is inflicting on the sector.

Average new-home prices in 70 major cities edged 0.11% lower in April from a year earlier, according to Wall Street Journal calculations based on data released Wednesday by China’s National Bureau of Statistics.

The decline, though slight, marks the first such decrease since November 2015 when China was wrestling with a pronounced slowdown. It follows a 0.66% year-over-year increase in March.

When compared with the previous month, Chinese new-home prices declined for an eighth consecutive month, falling 0.3% in April—wider than March’s 0.07% month-to-month decrease.

New-home prices rose in just 30 of the 70 cities last month, compared with the 40 cities that saw increases in March. The declines were generally concentrated in China’s smaller and poorer cities, Sheng Guoqing, an analyst at the statistics bureau, said Wednesday. (…)

“Policies to stabilize home prices and buyers’ expectations need to be issued soon. Otherwise the prices will continue to cool.” (…)

As of Monday, full or partial lockdowns have been implemented in 38 Chinese cities, affecting 271 million people, according to analysts at Nomura, an investment bank. (…)

On Monday, China reported that new-home starts and home sales by value plunged 44% and 47%, respectively, in April from a year earlier.

Mortgage demand also plunged last month, contracting by the equivalent of $9 billion last month, China’s central bank said Friday. (…)

It’s not only new homes:

The share of cities that experienced sequentially higher property prices dropped in April from Marchimage_3 (2)

Hmmm…

image_2 (10)

Source: Goldman Sachs Global Investment Research

Tencent Disappoints After Lockdowns, Crackdown Wipe Out Growth

Sales barely rose to 135.5 billion yuan ($20.1 billion) for the three months ended March, missing the average forecast, after online ad revenue plummeted 18%. Overall growth decelerated for a seventh straight quarter, to the slowest pace since the Shenzhen company went public in 2004. (…)

Net income slid 51% to 23.4 billion yuan, lagging estimates despite a big gain from the sale of stock in Singapore’s Sea Ltd. (…)

Stock Selloff Crunches SPAC Creators An investor stampede out of risky trades is squeezing special-purpose acquisition companies that are running out of time to find businesses to take public.

(…) Because so many SPACs raised money during the frenzy early last year, roughly 280 face deadlines in the first quarter of 2023, figures from data provider SPAC Research show. If the current pace of SPAC deal making continues, analysts estimate that a large percentage of those blank-check firms won’t find mergers. The merger window for many SPACs is closing because it often takes months to find a deal and many companies that previously might have considered such mergers are now electing to stay private, bankers say.

Creators of those SPACs and other insiders together are now expected by early next year to lose $1 billion or more—money known as “at-risk capital” that they have already spent setting up the SPACs and can never get back. (Of course, if the creators do strike deals, they stand to make several times their money on paper because of how those deals are structured.) (…)

Some investors expect many SPACs to pursue low-quality companies to take public at improper valuations to stave off possible losses. They say that possibility shows the incentive problems inherent in such deals. Even with that expected push, analysts say many SPACs won’t find mergers because there simply aren’t enough companies that will want to complete SPAC deals in time. (…)

The recent market collapse is already triggering some SPAC liquidations and throwing a wrench in deal negotiations, bankers say. It also comes as federal regulators are tightening rules on how blank-check companies make disclosures and business projections when taking companies public.

About 90% of the companies that completed SPAC mergers during the boom that started in 2020 now trade below the SPAC’s initial listing price, according to SPAC Research. (…)

(…) The stock prices bear out the analysis. More than 300 companies that have gone public via SPAC mergers since the start of 2018 have averaged a loss of about 33 percent from the IPO price of the SPAC, versus an average loss of 2 percent for the 1,000 other companies that chose to go public through a traditional IPO as of mid-April, according to Renaissance Capital, which tracks IPOs. Compared with the S&P 500, which gained more than 50 percent during that time, the SPAC numbers are little short of a disaster. (…)

SPAC investors who can vote for the merger deals but sell out on the announcements and get their money back are doing just that. Redemptions in 2020 averaged 80 percent and are now at about 90 percent, according to market sources. (…)

The rising level of redemptions leaves the funding for the merger deals almost entirely up to PIPEs. “The PIPEs are a foundational cornerstone of a successful SPAC deal. If you find institutions to validate the transaction and its valuation, then any other investors may choose to leverage that due diligence to get comfortable with committing capital to it,” explains Ben Kwasnick, founder of SPAC Research, which tracks the market.

But there isn’t enough money coming in from PIPE deals to fill the hole. This year, PIPEs have raised only about $2.8 billion, compared with almost $14 billion in the peak month of February 2021, according to data provider SPACInsider. Fidelity, which has done $32.2 billion in PIPE investments in the past three years, made its last one in October, and BlackRock, which committed $24 billion to PIPEs during the same time period, did its last in July. Those two firms account for more than 60 percent of the $88.1 billion of PIPE money that has been raised in the past three years, according to SPACInsider.

PIPE investors have also been losing money. (…)

But though the SEC’s hard line may help stem the flood of shoddy SPACs, it seems unlikely to solve the structural problems that beset the entire sector — which are getting even worse. (…)

In March 2021, when Cembalest looked at SPAC returns, he found that the sponsors had raked in a median 468 percent return since January 2019, even after accounting for all their concessions, forfeitures, and vesting. By August, that number had gone down to 284 percent — still an almost unheard-of gain on a risk-free trade.

Then there are the IPO investors — the so-called SPAC Mafia, or SPAC arb players. They certainly appear to be rational players. From January 2019 to mid-2021, they made a median 16 percent return, according to Cembalest’s calculations. In fact, their gains were the same in August 2021 as in March of that year.

“It was almost like free money to buy the unit and sell the announcement,” says the family office investor. The SPAC yield, he notes, is still greater than the 10-year Treasury bond. “Why buy government bonds when you can just flip SPACs?”

What’s perhaps most astonishing is that to keep the SPAC machine humming, the terms for these investors — as well as for PIPE investors — have only become more lucrative, according to Ohlrogge and Klausner.

“SPACs have been evolving recently in ways that make them even more expensive vehicles to take companies public, and thus in ways that will likely lead to even worse returns for shareholders who hold their shares through SPAC mergers,” the academics wrote in a new paper published in March.

Ohlrogge and Klausner found, for example, that to lure PIPE investors, an increasing number of SPAC sponsors are letting these institutional investors buy in at steep discounts, typically $8 per share. More-complex and opaque terms for private investments make it even harder to know what they are paying — and how much it will end up costing other shareholders in the end. (…)

More-lucrative warrant terms are also being used to entice IPO investors, and the traditional 24-month time frame to find a deal is being shortened to as little as a year, according to the professors.

Another relatively new effort they point to includes overfunding SPAC trust accounts by placing additional funds in them. Instead of $10 per share, the trust accounts now have $10.20, making them still more lucrative for those who paid $10 per share and redeemed, getting $10.20 instead.

But it’s something of a vicious cycle, which could lead to the downward spiral Ohlrogge envisions. Because the sponsors are typically repaid for the overfunding, he explains, “they drain even more value out of the SPAC and they have the potential then to lead to even worse returns for the SPAC at the time of the merger, which then could require even more generous benefits [to be] paid to the IPO-stage investors.”

Says Ohlrogge: “They need to find more ways to entice the IPO-stage investors to buy in, and that’s what they’re doing.” At least they’re trying. (…)

The SPAC model has always been an ingenious, if complicated, way to convince investors and companies alike to hop aboard the gravy train, and now sponsors (and their bankers) are coming up with creative ways to keep it chugging along. But Ohlrogge says some of the new features are only making things worse.

“They have the potential to turn into a death spiral for SPACs.”

Note: the whole Institutional Investor piece is well worth a read. Good stuff for the non-initiated. Also makes you aware that Wall Street does not have your back! Never.

THE DAILY EDGE: 17 MAY 2021

U.S. Shoppers Continued Stimulus-Fueled Spending in April Retail sales were up for autos, dining out, while consumers pulled back on other goods purchases

Retail sales overall were unchanged last month from March, the Commerce Department reported Friday. That kept spending at the same pace set by March’s upwardly revised 10.7% advance [+1.0%], which was influenced by government-stimulus money for most households. (…)

Sales were up 2.9% at auto and parts dealers, where shortages in available cars have driven up prices, and 3% at restaurants and bars, a positive sign for the hard-hit industry as the U.S. economy more fully opens.

(…) sales at restaurants and bars in April were just 2% lower than their levels in February 2020, just before the pandemic took hold in the U.S.

Shoppers otherwise last month cut spending across a range of retail categories, such as clothing and accessories, furniture, and sporting goods. Sales at general merchandise stores, such as big-box retailers, and online retailers also fell. (…)

Sales in the retail control group, which excludes autos, gas stations, building materials and food services, declined 1.5% last month (+29.1% y/y) after rising 7.5% in March and 12.6% in Q1. April’s number is 20% above April 2019’s level. Total retail sales are up 21% over 2 years.

fredgraph - 2021-05-15T070212.767

The next chart, indexed at Feb. 2020 = 100, shows that the big surge in retail sales really started this March when the $1400 rescue checks were sent and signs of a fading pandemic emerged. Given that spending on services finally started to recover in April, the sustained sales at the March high level, well above the trend in aggregate payrolls, are the first tangible signs of true dissaving amid renewed confidence that the end is in sight. Note that April payrolls (employment x hours x wages) were 1.8% above their Feb. 2020 level in spite of 8.2 (-5.4%) million fewer people at work. Average weekly earnings of all private employees are 7.7% above their pre-pandemic level.

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As of May 10, the Chase consumer card spending tracker is up 14.2% over 2 years ago and is now flat vs pre-Covid trends in spite of weak spending on Travel and Entertainment.image

Chase’s data, which proved too optimistic in April after being spot on in February and March, suggest continued strong spending on goods in May. The Millennials/Gen Z (+51% from Jan. 2019) and the Gen X (+30%) generations are substantially outspending the Boomers (+14%) so far but even +14% over 2 years is pretty strong.

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Caveat: the $300/week enhanced unemployment benefits that are set to expire in September will be cut sooner in 18 states to incite people to seek a job. The states, all with Republican governors, include Alaska, Alabama, Arizona, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Utah, West Virginia and Wyoming.

Firms Ponder Speeding Up Plans for Return to Offices New CDC guidance on masking and social distancing for vaccinated people is throwing a wrinkle into plans for repopulating city centers.

(…) Parsing the new recommendations falls to communities and businesses, and could be especially difficult to implement for public settings such as workplaces, health researchers said, because there isn’t an easy way to determine who is fully vaccinated. Further complicating the issue is that the CDC guidance contained a raft of caveats, including statements that it is still unknown how effective the vaccines are against multiple variant strains of Covid-19 that are circulating, how long-lasting the vaccines’ efficacy will be in most people, and that people who are immunocompromised, and those who live with or care for them, should continue showing more cautious behavior. (…)

China’s Economic Recovery Slowed in April Growth in retail sales slowed sharply from the March pace; industrial output and fixed-asset investment beat expectations

(…) China’s industrial production in April was up 9.8% from a year earlier, slower than March’s 14.1% pace, the National Bureau of Statistics said Monday. Fixed-asset investment decelerated as well, to 19.9% in the January-April period from 25.6% in the first quarter.

Retail sales, a key gauge of China’s domestic consumption, underwhelmed: April’s figure was up 17.7% from the pandemic-hit level a year earlier, well short of March’s 34.2% pace. (…)

Monday’s figures on industrial output and fixed-asset investment actually exceeded the forecasts of economists polled by The Wall Street Journal, who had pegged 9.1% and 19.2%, respectively. Retail sales, however, missed their predicted 24.9%.

To strip out last year’s pandemic distortions, government statisticians and economists have benchmarked this year’s numbers against 2019’s. By that measure, official data showed industrial production up 14.1% in April, largely in line with March’s growth rate, while the pace of retail-sales slowed to 8.8% from March’s 12.9%. (…)

Chinese policy makers face a dilemma, Louis Kuijs, an economist with Oxford Economics, told clients in a note Monday: While Beijing wants to dial down leverage generally, the persistently weak consumption numbers may increase “pressure to pursue a more pro-growth macro policy that could increase financial risks and leverage.” (…)

Iris Pang, an economist with ING Group, said April’s consumption weakness may prove short-lived, with figures for the five-day Labor Day holiday at the start of May indicating robust spending.

Over the holiday, Chinese people made a total of 230 million trips, marking the first time that traveler numbers topped pre-virus levels. The nation’s box office also broke records for revenue and number of moviegoers.

Meanwhile, though fewer cities in China reported rising home prices in April, average new home prices nationwide in April were up 4.45% from a year earlier, official statisticians said Monday, following a 4.36% year-over-year rise in March—underscoring the challenge that policy makers face in reining in home prices.

Economists had forecast 25.2% growth for Chinese retail sales
U.S. Industrial Production Rises Modestly in April

Industrial production rose 0.7% m/m (16.5% y/y) in April, following an upwardly revised 2.4% m/m (1.0% y/y) rise in March (initially 1.4% m/m) and a downwardly revised contraction in February of 3.5% (reported last month as -2.6% m/m). April 2020 was the trough of the pandemic, hence the large year-on-year rise. That said, total industrial production was still 2.7% below its pre-pandemic (February 2020) level. The Action Economics Forecast Survey looked for a rise of 1.1% m/m in April. The unusually cold weather in February had affected industrial production both in February and March. The return to operation of plants that were damaged by February’s severe weather conditions in the south-central region contributed to the advance in factory output.

The index for manufacturing rose 0.4% m/m (23.0% y/y) in April, following a 3.1% rise in March despite a 4.3% m/m drop in motor vehicles and parts that continues to reflect shortages of semiconductors. Excluding the motor vehicle sector, factory output rose 0.7% m/m. Mining rose 0.7% m/m (-2.4% y/y), following the 8.9% m/m jump in March. Utilities output rose 2.6% m/m (1.9% y/y), following a 9% m/m plunge in March. The rise reflected a 2% m/m (4.1% y/y) gain in electric power generation, transmission and distribution, and a 6.1% m/m jump (-8.2% y/y) in natural gas.

Durable manufacturing output declined 0.4% m/m (36.6% y/y) in April, driven by the afore-mentioned decline in motor vehicles and parts. Durable goods output had posted a 3.2% m/m advance in March. Other categories of durables posted either small increases (computers and electronic products +0.3% m/m) or small declines (fabricated metal products -0.2% m/m).

Nondurable products rose 1.3% m/m (11.7% y/y), following a rise of 3.2% m/m in March. Chemicals posted a 3.2% m/m gain, the largest in the nondurable category. Output of petroleum and coal products followed with a monthly gain of 1.6%, and apparel and leather goods with a gain of 0.7%. Other categories, such as paper, printing and support, and plastics and rubber products recorded small declines.

Capacity utilization rose 0.5 percentage point in April to 74.9 percent, a rate that is 4.7 percentage point below its long-run (1972-2020) average.

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U.S. Import & Export Prices Moderate in April, but Still Strong

Import and export price increases were less dramatic in April, but were still quite large. Import prices advanced 0.7% (10.6% y/y), down from 1.4% in March, 1.2% in February and 1.5% in January; these earlier months are indeed month/month amounts and all are slightly revised from previous readings. The April amount is very close to the Action Economics Forecast of 0.6%. Export prices rose 0.8% (14.4% y/y), following 2.4% in March, 1.6% in February and 2.7% in January, with January and March amounts somewhat revised. The April result is equal to the Action Economics forecast of 0.8%.

Among import categories, fuel prices rose “just” 0.5% in April after five months of outsized advances; as a result, the y/y increase for April was 126.9%. Nonpetroleum import costs increased 0.7% m/m, with the y/y amount “just” 5.0%. Food, feed and beverage price increases were still quite large at 2.0% for April (7.5% y/y). (…) Capital goods rose 0.3% (1.3% y/y) in April, automotive vehicles, parts and engines 0.2% (0.9% y/y) and consumer goods ex automotive were flat in the month, up 0.8% y/y. (…)

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Nonfuels import prices last 3 months: +8.2% annualized.

TRANSITORY WATCH
  • Despite Lumber Boom, Few New Sawmills Coming Executives in the cyclical business of sawing logs into lumber say they are content to rake in cash while lumber prices are sky-high and aren’t racing out to build new sawmills.

(…) Demand has been unbowed by escalating prices. (…)

“We are going to be ultra cautious on what we do in those regards,” Canfor Corp. Chief Executive Don Kayne told investors last month when the company reported record quarterly profits. “We don’t mind at all having a little extra cash around for sure, considering what this industry goes through.”

U.S. lumber-making capacity has risen about 11% over the past five years, according to Forest Economic Advisors LLC. New mills in the pine belt between Georgia and east Texas have helped offset closures that have shrunk Canada’s capacity, but there isn’t much coming behind them. Idled facilities are restarting in Florida and Mississippi. A couple small mills are under construction out West. Four bigger mills have been announced but not begun in the South, the firm said. (…)

Besides the time and money it takes to build a modern mill, equipment, from microprocessors to heavy machinery, is in short supply. So are the sort of workers needed to operate a computerized mill, especially in the rural places where timber is abundant, Mr. Hesters said.

“Trying to build capacity and make investments that have a lot of lead time at the top of a cycle is historically a good way to lose money,” Mr. Hesters said. (…)

Added shifts and new equipment should increase output on the margins, but mill executives expect supplies to remain tight and for prices to remain high into next year. (…)

(…) Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.

Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said on a call this month. Clients are “trying to get everything they can because they see high demand,” Jennifer Rumsey, the Columbus, Indiana-based company’s president, said. “They think it’s going to extend into next year.”

The difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight. Big or small, few businesses are spared. (…)

For anyone who thinks it’s all going to end in a few months, consider the somewhat obscure U.S. economic indicator known as the Logistics Managers’ Index. The gauge is built on a monthly survey of corporate supply chiefs that asks where they see inventory, transportation and warehouse expenses — the three key components of managing supply chains — now and in 12 months. The current index is at its second-highest level in records dating back to 2016, and the future gauge shows little respite a year from now. The index has proven unnervingly accurate in the past, matching up with actual costs about 90% of the time. (…)

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Once viewed as liabilities before the pandemic, fatter inventories are in vogue. Transport costs, more volatile than the other two, won’t lighten up until demand does.

“Essentially what people are telling us to expect is that it’s going to be hard to get supply up to a place where it matches demand,” Rogers said, “and because of that, we’re going to continue to see some price increases over the next 12 months.” (…)

Though polyurethane foam is 50% more expensive than it was before the Covid-19 pandemic, Wolkin would buy twice the amount he needs and look for warehouse space rather than reject orders from new customers. “Every company like us is going to overbuy,” he said. (…)

Whirlpool Corp. CEO Marc Bitzer told Bloomberg Television this month its supply chain is “pretty much upside down” and the appliance maker is phasing in price increases. Usually Whirlpool and other large manufacturers produce goods based on incoming orders and forecasts for those sales. Now it’s producing based on what parts are available.

“It is anything but efficient or normal, but that is how you have to run it right now,” Bitzer said. “I know there’s talk of a temporary blip, but we do see this elevated for a sustained period.” (…)

Reynolds Consumer Products Inc., the maker of the namesake aluminum foil and Hefty trash bags, is planning another round of price increases — its third in 2021 alone. (…)

A United Nations gauge of world food costs climbed for an 11th month in April, extending its gain to the highest in seven years. Prices are in their longest advance in more than a decade amid weather worries and a crop-buying spree in China that’s tightening supplies, threatening faster inflation. (…)

Instead of proving to be a short-lived disruption, the semiconductor crunch is threatening the broader electronics sector and may start to squeeze Asia’s high-performing export economies, according to Vincent Tsui of Gavekal Research. It’s “not simply the result of a few temporary glitches,” Tsui wrote in a note. “They are more structural in nature, and they affect a whole range of industries, not just automobile production.” (…)

Executives at A.P. Moller-Maersk A/S, the world’s No. 1 container carrier, say they see only a gradual decline in seaborne freight rates for the rest of the year. And even then, they don’t expect a return to the ultra-cheap ocean cargo service of the past decade. More capacity is coming in the form of new ships on order, but they take two or three years to build.

HSBC trade economist Shanella Rajanayagam estimates that the surge in container rates over the past year could raise producer prices in the euro zone by as much as 2 percent. (…)

The Cass Freight Index measure of expenditures reached a record in April — its fourth in five months. Spot prices for truckload service are on track to rise 70% in the second quarter from a year earlier, and are set to be up about 30% this year compared with 2020, Todd Fowler, a KeyBanc Capital Markets analyst, said in a May 10 note. (…)

“This is kind of a long-term issue,” Wolkin said. “Inflation is coming — at some point, you’ve got to pass this along.”

Other interesting comments from the Logistics Managers report (note that the LMI is a diffusion index: a reading above 50 indicates that logistics is expanding):

  • consumers are continuing to rely heavily on methods of shopping they grew accustomed to during lockdown, such as at-home delivery or pick-up from store. These channels of consumption tend to require a greater number of trucks and more expansive warehouse networks than more traditional alternatives.
  • This container shortage is expected to last into at least 2022. Ironically, the economics of this shortage seem to be incentivizing many firms to act in ways that are counter-productive to ending it. The high cost of containers is enticing carriers to get back to China as quickly as possible so they can take another load. In addition to the blank sailings coming back from the U.S. to China discussed in last month’s report, a recent trend has emerged in which ships from China are returning on the backhaul route from the U.S. with 5-8% fewer containers, exacerbating the lack of containers available to come back across the Pacific.
  • Cost growth is not only limited to transportation, as for the second month in a row, Warehouse Prices have reached an all-time high in the history of the index.
  • In April they are up (+2.0) to a level of 83.5. This is a function of the continued decrease in Warehousing Capacity which is down (-1.5) to 41.8 – indicating significant levels of contraction. The rate of growth for Warehousing Utilization have more or less held steady (-0.5) reading in at 71.6.
  • Due to the tightness in capacity, even moderate levels of growth in Inventory Levels, are leading to rapid cost increases.
  • The logistics industry remains tight, and based on future predictions and industry experts, seems likely to stay that way through the rest of the year.
Natural Gas, America’s No. 1 Power Source, Already Has a New Challenger: Batteries A decade after the fracking boom took off, the fuel faces disruption by a new combination on the electric grid: renewable energy and electricity storage.

(…) A decade ago, natural gas displaced coal as America’s top electric-power source, as fracking unlocked cheap quantities of the fuel. Now, in quick succession, natural gas finds itself threatened with the same kind of disruption, only this time from cost-effective batteries charged with wind and solar energy.

Natural-gas-fired electricity represented 38% of U.S. generation in 2019, according to the U.S. Energy Information Administration, or EIA, and it supplies round-the-clock electricity as well as bursts during peak demand. Wind and solar generators have gained substantial market share, and as battery costs fall, batteries paired with that green power are beginning to step into those roles by storing inexpensive green energy and discharging it after the sun falls or the wind dies.

Battery storage remains less than 1% of America’s electricity market and so far draws power principally from solar generators, whose output is fairly predictable and easier to augment with storage. But the combination of batteries and renewable energy is threatening to upend billions of dollars in natural-gas investments, raising concerns about whether power plants built in the past 10 years—financed with the expectation that they would run for decades—will become “stranded assets,” facilities that retire before they pay for themselves. (…)

President Biden is proposing to extend renewable-energy tax credits to stand-alone battery projects—installations that aren’t part of a generating facility—as part of his $2.3 trillion infrastructure plan, which could add fuel to an already booming market for energy storage. (…)

“This is one risk that we’re looking at, but we need to look at that risk across every technology decision we make,” said Glen Snider, Duke’s director of integrated resource planning, noting that all power investments face potential disruption.

More than 60,000 megawatts of gas-fired capacity came online in the U.S. since 2014, according to the EIA. Like coal plants, many of which have been forced to close early, gas plants were financed with the expectation that they would operate for decades. (…)

Much of the nation’s gas fleet, on the other hand, is relatively young, increasing the potential for stranded costs if widespread closures occur within the next two decades.

Gas plants that supply power throughout the day face the biggest risk of displacement. Such “baseload” plants typically need to run at 60% to 80% capacity to be economically viable, making them vulnerable as batteries help fill gaps in power supplied by solar and wind farms.

Today, such plants average 60% capacity in the U.S., according to IHS Markit, a data and analytics firm. By the end of the decade, the firm expects that average to fall to 50%, raising the prospect of bankruptcy and restructuring for the lowest performers.

“They are under threat from tons of renewables,” said Sam Huntington, IHS Markit’s associate director for gas, power and energy futures. “It’s just coal repeating itself.” (…)

Most current storage batteries can discharge for four hours at most before needing to recharge. (…)

Quantum Energy Partners, a Houston-based private-equity firm, in the last several years sold a portfolio of six gas plants in Texas and three other states upon seeing just how competitive renewable energy was becoming. It is now working to develop more than 8,000 megawatts of wind, solar and battery projects in 10 states.

“We pivoted,” said Sean O’Donnell, a partner in the firm who helps oversee the firm’s power investments. “Everything that we had on the conventional power side, we decided to sell, given our outlook of increasing competition and diminishing returns.”

SENTIMENT WATCH

The Rise of Inflation Expectations Consumers are doubting that prices will remain ‘well-anchored.’

This is from the WSJ Editorial Board:

(…) the University of Michigan’s Survey of Consumers (…) shows expectations for rising prices have jumped this year and now anticipate an increase of more than 4%. This monthly consumer data can be volatile. But another signal is from the Philadelphia Fed’s survey of economic forecasters, which showed five-year average inflation expectations popping in May to 2.4%. That may not seem like much, but that survey rarely moves. The Fed’s inflation target is 2%.

The risk is that as inflation expectations rise, they become embedded in consumer behavior and business decisions. Workers demand higher wages to keep up with prices no matter the underlying productivity; businesses pay to keep those workers and then raise prices to compensate. Workers then demand high wages, as expectations are hard to break. (…)

[Americans] know what they are paying for groceries, a new or used car, or to call in the plumber. They’ll decide what’s “well-anchored” or not.

For now, investors, jittery over the short term, are buying the Fed’s “transitory” label, but are not so sure about it…

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BlackRock bond chief Rick Rieder, quoted in today’s WSJ:

We don’t think inflation is going to be that high for a persistent period of time,” says Mr. Rieder, 59 years old. “But if the markets believe in inflation, well that’s more important than whether six months from now people say, ‘Gosh, you were right.’

TECHNICALS WATCH

My favorite technical analysis firm remains confident that the bull market is intact, thanks largely to the rotation from growth to cyclicals and from small to large caps, both indicating a continued appetite for stocks in general. However, that selectivity is a concern, along with continued gradual deterioration in some key readings of demand and supply. Not the best conditions for broad-based buying.

  • Hot IPO Market Feels a Chill The U.S. IPO market, unstoppable for nearly a year, has hit a speed bump. With inflation fears weighing on stocks, investors have shifted away from technology shares, initial public offerings and SPACs.

Many newly listed firms, whose stocks rose after their initial public offerings, have dropped below their IPO prices. At least three companies, leery of jumping into a volatile stock market, postponed their IPOs after the S&P 500 started the week with its biggest three-day swoon in nearly seven months.

Some investors and bankers think next week could be a turning point. If the stock market calms and the public debuts of celebrity-backed Swedish oat-milk maker Oatly Group AB and software company Squarespace Inc. go well, that could shore up confidence in IPOs, they say. If volatility continues and those offerings sputter or get postponed, the IPO market could pump the brakes. (…)

On average, U.S.-listed IPOs this year—not including nontraditional methods like direct listings or special-purpose acquisition companies—were up 2.1% from their IPO prices through Thursday’s close, according to the latest data available from Dealogic. By comparison, the S&P 500 had risen 9.5% this year through Thursday’s close. The Nasdaq Composite, known for being stacked with growth companies similar to those looking to go public, was up just 1.8% this year through Thursday. (…)

So far in May, 13 SPACs have unveiled mergers, and of those, only one is trading above its IPO price. (…)

“The question everyone is trying to get their arms around is inflation, and what are we willing to pay for growth going forward,” Mr. Creedon said.

It would be nice to have profits to begin with…

The Renaissance IPO index is down 26% since its mid-February peak and is now below its 200-ay moving average, still rising mind you, but its 50 and 100 dmas are not terribly inspiring at this time.

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Note I started a joke Note (The Bee Gees)

Note I started a joke
Which started the whole world crying
But I didn’t see
That the joke was on me, oh no Note

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Source: Chartr