Global Supply Chain Pressure Index (GSCPI) The moves in the GSCPI over the past three months suggest, for now, a stabilization of global supply chain pressures at historically high levels.

• Following lockdowns in major cities, the supply chain recovery is taking longer than in 2020.

Source: Gavekal Research

U.S. Considering Reducing Tariffs on China to Ease Inflation, Yellen Says

U.S., Allies Try to Restrain Surging Global Oil Prices Treasury Secretary Janet Yellen said this week that the U.S. was involved in “extremely active” talks with European allies about efforts to form a buyers’ cartel and set a cap on the price of Russian oil.

(…) A goal in the talks is to keep Russian oil available on global markets to buyers such as India and China, which could help stabilize prices already trending at roughly double prepandemic levels, while constructing a mechanism Western countries could use to restrict Russian revenues from the sales. (…) “But absolutely the objective is to limit the revenue going to Russia.” (…)

An idea under discussion among the Group of Seven wealthy nations is to turn to insurers to try to set a price cap. Shipments of oil are often insured by companies in the EU or U.K., and officials are exploring the possibility of those insurers only covering shipments of Russian oil to non-European countries that fall under the price cap, according to people familiar with the discussions. Such a move would be constructed to be consistent with the EU insurance ban, according to the people. (…)

Not only would significant jumps in global oil prices inflame inflation around the world, but such high prices could allow Russia to maintain or even increase its net revenue from oil sales even as it loses buyers. (…)

But…Source: Princeton Energy Advisors

Mortgage-Application Index Falls to Lowest Level in 22 Years Applications fell 6.5% in the week ended June 3, the fourth consecutive week of declines. Refinance and purchase activity fell 6% and 7%, respectively.

(…) A median American household needed 38.6% of its income to cover payments on a median-priced home in March, according to the Federal Reserve Bank of Atlanta. That was up from 32.6% at the end of 2021 and the highest level since August 2007. (…)

  

(CalculatedRisk)

CalculatedRisk’s Bill McBride surveyed housing inventories in Denver, Vegas, San Diego, Santa Clara and the Northeast and found that

Inventory in these markets were down 28% YoY in February, down 4% YoY in March, up 10% YoY in April, and up 42% YoY in May! So, this is a significant change from earlier this year. This is another step towards a more balanced market, but inventory levels are still historically low.

For these areas, new listings were up 4.7% YoY. Last month, new listings in these markets were down 3.7% YoY.

Sales in these areas were down 6.9% YoY, Not Seasonally Adjusted (NSA).

Goldman Sachs finds that, so far, it’s the supply of new homes that’s rising:

Redfin’s latest survey of real estate agents suggest o change is underway:

More than one in five home sellers dropped their price while several measures of homebuyer demand posted largest declines since spring 2020

May marked a turning point in the pandemic housing frenzy, as buyers regained some control over the market. This limited sense of control comes at a great cost, as 5% mortgage rates and record-high prices have edged many buyers out of the market. Pending sales posted their largest annual decline since spring 2020, while the Redfin Homebuyer Demand Index declined 9% during the four weeks ending May 29.

The number of homes for sale climbed to a new high for this year, posting its smallest decline since April 2020. A growing share of sellers are recognizing the new limits to their power. More than one in five dropped their price, the highest rate since October 2019.

• Homebuilder Comments in May: “Builder metrics quickly deteriorating“

From the Calculated Risk Real Estate Newsletter:

These are clear signs of a market shift.
Some homebuilder comments courtesy of Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting (a must follow for housing on twitter!):
…
#Austin builder: “Some parts of town where finished homes are now taking a month to sell versus hours. Market is definitely correcting. Incentives are back and seeing some builders cutting prices on inventory.”
…
#Birmingham builder: “Steep decline in sales over past 2 weeks.”
…
#Greenville builder: “Lowest traffic in many months.”

#LosAngeles builder: “Seeing more cancellations due to payment shock for those in backlog that didn’t lock rates.”
…
#Portland builder: “Incentives are back in the market.”

In the real world:

• Manhattan Apartments Hit $4,000 Median — and It’s Going to Get Worse Competition, already fierce, will only intensify as the apartment market’s busiest season gets underway.

Manhattan apartment rents continued skyrocketing last month, with the median hitting $4,000 for the first time on record.

Rates on new leases jumped 25% from a year earlier to reach that benchmark dollar figure, an all-time high in three decades of data-keeping by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. (…)

“Historically, new lease signings always peak in August, which increases the chances that the additional demand will push prices up further,” said Jonathan Miller, president of Miller Samuel. “In other words, tenants could see more price pain through the summer.”

Manhattan’s vacancy rate, which averaged just over 2% before the pandemic, has held below that level since December. (…)

The fierce demand enabled landlords to keep cutting back on concessions. Just 15.3% of new leases in May had sweeteners such as a free month, the lowest share since September 2016, Miller Samuel and Douglas Elliman said.

With the value of incentives subtracted, tenants paid a median of $3,942, up 30% from a year earlier.

As top U.S. retailers drown in goods, rotation to services picks up inflation slack

(…) The pace of used car price increases has eased from the chart-topping levels that drove an initial surge of COVID-era inflation; but airline fares as of April were rising at a similarly stratospheric 33% annual rate.

The price of restaurant meals is accelerating with no break apparent yet in demand, according to data from reservation site OpenTable. (…) “Wage inflation there is stronger in a range of sectors from the low end…to the high end” – from restaurant workers to well-paid professionals. (…)

Excluding energy-related services, inflation for “core” services has accelerated for eight months straight, and its share of overall inflation has risen also. (…)

Reuters Graphics

• Global price pressures hold near record high amid unprecedented rise in service sector costs

(…) Energy prices are meanwhile also causing major cost concerns in the service sector, which reported upward pressures from material prices and staff costs. All three factors have driven service sector costs up by degrees rarely seen since data were first available in 2005

As a consequence, May saw service sector inflation measured globally exceed that of manufacturing for the first time in almost two years, with services costs rising at the steepest rate ever recorded by the PMI surveys

Services input price inflation

The survey data therefore indicated that global inflation is likely to accelerate in annual terms in May and June, though potentially cooling slightly thereafter, albeit remaining very elevated – above 6% – in the second half of 2022.

Global PMI input and output price inflation

Hot robot summer

We’re encountering lots more robots in our daily lives — delivering our food, pouring our drinks, mowing our lawns — but they’re just a small glimpse of what’s to come, Axios’ Jennifer A. Kingson reports.

The number of labor-saving robots on the market is exploding, thanks to AI improvements and lower development costs.

• Robot bartenders are cropping up everywhere, from sports arenas to hotels, while robot servers in restaurants bear bowls of Ramen noodles, plates of chicken curry and more.
• Delivery robots tote meals and groceries on city streets and sidewalks as well as college campuses.
• Professional kitchens are being transformed by robots that can flip burgers and brew coffee.
• In Japan, robots are “commonly employed in jobs like chopping vegetables and making sushi,” according to Robotics and Automation News. They also help farmers plant rice and other crops.
• Robot dogs are being employed in ways that would make a border collie proud — as pets, tennis ball caddies (good boy!), watchdogs and facilities inspectors.
  • But other uses have courted controversy. The New York Police Department stopped using its “Digidog” amid civil liberties complaints, and a proposal to deploy them on the U.S.-Mexico border has raised concerns.

“I would compare it to the computer industry in the early ’90s, when the software was just evolving,” Ajay Sunkara, CEO of Nala Robotics, tells Axios. “I believe this is the first stage and that robots are here to stay.”

• His company just introduced “Pizzaiola,” a pizza-making robot that can churn out 50 pies an hour.

The ongoing labor shortage is fueling demand for robot workers, while the pandemic heightened concerns over hygiene — making people sensitive to who is touching their food and groceries.

Robots are poised to make a particularly big difference in caring for the elderly, experts say.

• Robotic home monitoring systems will detect if an older person falls — and summon help.
• A robot health care worker “could take care of us, tell a story, cook and clean,” says Professor Lionel Robert Jr., a roboticist at the University of Michigan. “So they could do the messy work, but they could also be our friend — and take our pulse and blood pressure.”

Robots are interacting with people in increasingly human and personal ways, which deepens our connection to them — and scares us.

• Humanoid robots can sing and tell jokes and even paint artistic pictures.
• Voice assistants like Siri and Alexa are going to grow sophisticated enough to engage in meaningful dialogue, predicts Professor Christopher Atkeson, a roboticist at Carnegie Mellon University.
• “You’re going to have real immersive conversations with these personal agents, and they’re going to become your friends,” he tells Axios.

Robots under development will eventually be able to empty the dishwasher, fold the laundry and collect the toys your child has thrown on the floor.

One-Third of Americans Making $250,000 Live Paycheck-to-Paycheck, Survey Finds

Some 36% of households taking in nearly four times the median US salary devote nearly all of their income to household expenses, according to a survey by industry publication Pymnts.com and LendingClub Corp.

It’s particularly true among millennials, who are now in their mid-20s to early 40s: More than half of top earners in that generation report having little left at the end of the month. (…)

Living paycheck-to-paycheck doesn’t necessarily mean hardship, and LendingClub makes the distinction between those can pay their bills easily and those who can’t. Only a fraction of high earners — roughly one in ten — reported issues covering all their household expenses in April, according to the survey.

Housing expenses, which typically take up large chunks of the budgets of wealthier people, have skyrocketed during the pandemic. (…)

Among all consumers surveyed, 61.3% reported living paycheck-to-paycheck in April, a 9 percentage-point increase from a year earlier, LendingClub said in its report. (…)

Yen Hits 20-Year Low, Fueling Price Rises and Apology

The yen touched 134 yen to the dollar Wednesday, the lowest level since February 2002. The yen’s value in dollar terms has fallen 16% since the beginning of the year, accelerating inflationary pressures because it takes more yen to buy imported goods denominated in dollars. Energy is a particular concern because Japan imports almost all of its oil and gas and needs dollars to pay for it. (…)

The development is awkward for the Bank of Japan because it has long sought to achieve inflation of around 2%, but not in the way it is happening now. In the central bank’s preferred scenario, modest price rises would come in tandem with wage increases and help generate a virtuous cycle of corporate investment and economic growth. Japan’s ultralow interest rates would provide greater stimulus if wages and prices were rising steadily. (…)

• The yen’s current slide may spark turmoil on the scale of the 1997 Asian Financial Crisis if it declines as far as 150 per dollar, according to veteran economist Jim O’Neill. Speculators are gathering around the beleaguered currency and positioning is by no means extended, suggesting there’s still room for bears to pile in. Some 74% of Japanese business managers say a weak yen is having a negative impact on the nation’s economy. (Bloomberg)
• Chart of the Day spotlights an observation made by Bloomberg’s Cameron Crise, macro strategist and author of the Macro Man colum.

Take a look at the Chinese offshore yuan versus the Japanese yen. Both are major Asian exporters as well as net importers of oil, getting hit hard by higher commodity prices and competing to get their goods to the rest of the world.

So what happens with the yen, can have implications for the yuan (or even the Korean won). Crise observed that when the offshore yuan last hit the 20 level against the Japanese Yen in April, China devalued its currency further against the dollar. The logic there is if the yuan is cheaper, then their exports will be more attractive and therefore attract more business.

So keep an eye on the Japanese yen against other pairs, and not just the U.S. dollar. There are ripple effects, especially as consumers try to get their hands on commodities and exports.

@KritiGuptaNews

Half of NASDAQ halved Almost half of Nasdaq constituents are trading at least 50% down vs their 12M highs… (The Market Ear)

Refinitiv

Yellen, World Bank Expect Elevated Inflation to Persist Global growth is expected to slow as prices rise, increasing the risk of ‘stagflation,’ the bank’s president said, and the Treasury secretary sees a prolonged period of elevated prices.

Treasury Secretary Janet Yellen warned that the U.S. is likely facing a prolonged period of elevated inflation, while the World Bank sharply lowered global growth forecasts and flagged a risk of recession in many countries. (…)

“I do expect inflation to remain high, although I very much hope that it will be coming down now,” Ms. Yellen said (…).

Citing the damage from Russia’s invasion of Ukraine and the Covid-19 pandemic, the World Bank said global growth is expected to slump to 2.9% in 2022 from 5.7% in 2021, significantly lower than its January forecast for 4.1% growth. For the U.S., the bank forecast growth to slow to 2.5% in 2022, 1.2 percentage points below previous projections, and for inflation to remain above 2%—about where it stood before the Covid-19 pandemic—at least until 2024. (…)

Overall, the World Bank found in its latest Global Economic Prospects report that current economic conditions resemble the high inflation and weak growth—so-called stagflation—of the 1970s, when oil shocks, high federal spending and loose monetary policy caused inflation to soar.

“Several years of above-average inflation and below-average growth now seem likely,” David Malpass, president of World Bank Group, told reporters. “The risk from stagflation is considerable.”

Mr. Malpass, selected for his post under the Trump administration, also said recession will be hard to avoid for many countries as growth is hampered by the war in Ukraine, pandemic lockdowns in China and supply-chain disruptions. (…)

Still, the bank said the current situation differs from the stagflation of the 1970s because the dollar is strong, commodity price increases are smaller, and the balance sheets of major financial institutions are generally strong.

“Unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets,” the bank’s report said.

And Mr. Powell has been trying to keep inflation expectations low…

• Wholesale Used-Vehicle Prices Increase in May Wholesale used-vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 0.7% in May from April. The Manheim Used Vehicle Value Index rose to 222.7, which was up 9.7% from a year ago. The non-adjusted price change in May was an increase of 1.1% compared to April, leaving the unadjusted average price up 12.1% year over year.

But goods inflation is getting some help:

Target’s Oversupply Problem Should Scare All Retailers The retailer is known as one of America’s best-run stores. But lately it keeps missing the mark on what consumers want.

Just three weeks after a profit warning that saw its shares plunge the most since 1987, the big-box operator has cut its outlook again, as it seeks to address a glut of inventory amid a rapid shift away from pandemic purchasing patterns. (…)

Here’s TGT’s actual and consequential press release:

The Company is planning several actions in the second quarter, including additional markdowns, removing excess inventory and canceling orders. The action plan also includes the addition of incremental holding capacity near U.S. ports to add flexibility and speed in the portions of the supply chain most affected by external volatility; pricing actions to address the impact of unusually high transportation and fuel costs; and working with suppliers to shorten distances and lead times in the supply chain.

There is a lot in there:

• Mid-way during Q2, TGT has decided to bite the bullet in Q2 and try to protect margins in the important second half.
• May and early June sales must have been quite weak, following a very soft April.
• To clear excessive and unseasonal inventory, TGT will take “additional” markdowns, sell stuff to clearing centres and off-price retailers, and cancel existing unneeded orders.
• Still floating inventory will be warehoused until it becomes seasonal again.
• TGT will try to raise prices in some areas and squeeze suppliers to offset rising costs.

The press release continues:

In light of the decisions announced today, and based on the Company’s current expectations for the economy and consumer environment, Target now expects its second-quarter operating margin rate will be in a range around 2%. For the back half of the year, Target now expects an operating margin rate in a range around 6%, a rate that would exceed the Company’s average Fall season performance in the years leading up to the pandemic.

The company continues to expect full-year revenue growth in the low- to mid-single digit range, and expects to maintain or gain market share in 2022.

Recall that

• Q1 same-store rose 3.3% on a 3.9% rise in traffic. The average ticket was thus down 0.6% when inflation on TGT’s goods was double digit. Keep in mind that TGT’s Q1 ran from February to April.
• TGT’s inventory was up 43% YoY at the end of April.
• Three weeks ago, TGT said it expected its Q2 operating margin rate “in a wide range, centered around our first quarter rate to 5.3%”.

Well, 2% if quite a bit off center…and a lot of discounting in just a few weeks.

Target concludes:

(…) we don’t expect the external environment will be anything close to normal in the back half of the year. In particular, we don’t expect to see any meaningful reduction in global supply chain pressures until 2023 at the earliest. So the elevated costs we’ve been facing will continue to affect our profitability for the remainder of the year.

BTW, WMT’s inventory was up 33%, like many other retailers’.

In fact, Bloomberg inform us that “During the first quarter, companies in the S&P 500 had about $1.1 trillion in inventory on their balance sheets, up 16% from a year earlier and 25% when compared with the first quarter of 2020, according to S&P Global Market Intelligence, a data provider.”

So be ready for discounting and order cancelling:

S&P Global: “For consumer goods, the US stands out in recording strong and accelerating growth in demand during May”

This could get worse:

@spomboy:

Nerd that I am, I was just checking to see when the Citi Eco Surprise Index had last deteriorated as rapidly as it has in the last 7 weeks (-113pts). The precedents aren’t good. When it notched that steep a drop in Nov 2008 the S&P had already shed -40% ytd. It went on to lose another -24% before all was said and done. The next time it dropped that much was June 2011. In July the S&P was down -17%.

• Bridgewater bets against US and European corporate bonds on slowdown fears Sharp interest rate rises could ‘crack the economy’, hedge fund’s co-CIO Greg Jensen says

U.S. Consumer Credit Growth Slows in April

No slowdown yet…Stretched Americans are filling their cards up:

Revolving consumer credit balances rose $17.8 billion (13.1% y/y) following a record $25.6 billion March increase, revised from $31.4 billion. Revolving credit provided by depository institutions (90% of the total and mostly credit card debt) rose 15.2% y/y, the quickest growth since February 1997. (…)

The rise in nonrevolving credit slowed to $20.3 billion (5.8% y/y) in April following a record $21.7 billion March advance, revised from $21.1 billion. Federal government lending, which issued 42% of nonrevolving credit, rose 3.0% y/y. Nonrevolving loans provided by depository institutions (26% of credit) grew 10.7% y/y, the quickest growth since April 1995. (…)

Global CEO Confidence Plunged in May In the US, the Measure of CEO Confidence fell to 42 in H1 2022, while confidence levels in Europe dropped to 37. At 34, confidence levels were lowest among CEOs of multinational companies in China, where the measure was taken for the first time. A reading below 50 points reflects more negative than positive responses.

• Trader Joe’s workers want to unionize.

Chinese business sentiment rises, but remains downbeat

(…) the surveys were consistent with a contracting economy, all remaining below the key 50 level that separates expansion from contraction. Worryingly for policymakers, the employment components of the surveys remained consistent with a very weak labour market. All in all, some improvement in business sentiment was not a major surprise and suggests that the rate of decline in economic activity probably eased in May. That said, the surveys support the view that the economy is likely to contract in Q2 and that the recovery thus far is quite modest. President Xi will be hoping for a stronger bounce over the summer months as key political decisions are made in the lead up to the National Party Congress.

Soaring food prices raise risk of political instability

The negative impact of rising energy prices on inflation and the consequent hit to household incomes have attracted comparisons with the oil price shocks of the 1970s. Gasoline prices in the US have hit new highs, up by over 100% since the beginning of 2021. In the euro area and the UK, energy prices have helped to push inflation to its highest in decades; and the possibility of an energy blockade remains a major risk for Europe’s economy. And part of the inflation story has been a sharp rise in the price of food.

Since a trough in April 2020, global agricultural and livestock prices have increased by over 100%. Surging demand caused by the strong global economic recovery from the pandemic has been one of the key drivers of this increase. Higher energy prices have added relentlessly to the production and transportation costs of food. Extreme weather events in food producing areas have also played a role, while the hostilities in Eastern Europe have further pushed up food prices in 2022.

Both Russia and Ukraine are major producers not just of agricultural commodities, including wheat, corn, barley and sunflower oil, but also of the fertilizers used in global agricultural production. The two countries account for around 10% and 3% of global wheat production respectively, and together around a quarter of global wheat exports, according to the US Department of Agriculture. The price of wheat is currently up 34% since the middle of February and almost 70% since the start of the year, after having reached a new record around mid-May. Ukrainian wheat and corn production is estimated to be 23% and 42% below its five-year average, and the blockade of Ukraine’s Black Sea ports reduced grain exports to 300,000 tonnes and 1.09 million tonnes in March and April compared with up to 6 million tonnes per month before the outbreak of hostilities.

A sizeable share of household income is spent on food. Before prices began to rise, food already accounted for over 15% of the inflation basket in advanced economies, and this proportion will be higher for lower income individuals. That percentage jumps to around 20-25% of the inflation basket in the Latin America, emerging Asia and ‘Central & Eastern Europe, Middle East, North Africa’ regions, and a massive 40% in Sub-Saharan Africa.

  

Hence, higher food prices are having a disproportionate impact on inflation and incomes in the emerging world. Many of these commodities are priced in US dollars on global markets, and the strength of the dollar has further exacerbated the inflationary impact.

Rising food prices have historically been associated with political instability in developing countries. Surging prices of wheat in 2010 were said to have been a key driver behind the Arab Spring, while anger at record food prices contributed to recent protests against the government in Sri Lanka. Amid concerns about potential food shortages and rising prices, a number of countries have placed restrictions on the export of certain foods to other countries. According to the International Food Policy Research Institute, around 10% of global trade in food by calories is currently affected by active restrictions (actual bans and export licensing requirements). Export restrictions only add to global food price risks, and increase the likelihood of further beggar-thy-neighbour policies.

As inflation soars across the globe, the surge in food prices is exacerbating current economic and social problems in the developing world. Against this ominous backdrop, the risk of political instability is likely to be on the rise.  According to Fathom’s Financial Vulnerability indicator, Western Asia and the Middle East & North Africa look especially at risk of a sovereign crisis. This is, however, a global story with the risk over the coming year now at its highest since 2012.