Strong Economy Prompts Companies to Raise Prices From paint to air tickets to Steve Madden handbags, the prices of consumer items are going up as industries pass along higher costs. A long period of low inflation appears to be over.
U.S. companies are raising prices on everything from plane tickets to paint, passing on higher costs for fuel, metal and food to their customers after years of low inflation.
Coca-Cola Co. and Arconic Inc. on Tuesday said they raised prices in the third quarter. Top airlines, manufacturers and food makers have also announced price hikes over the past week. (…)
Oreo cookie and Ritz cracker maker Mondelez International Inc. plans to raise prices in North America next year. Chief Executive Dirk Van de Put said in an interview on Monday that consumers and retailers in the region have become more amenable to paying more.
The rising costs companies face are disparate. Mondelez said price hikes on some of its cookies and crackers will help cover rising ingredient and transportation costs. Airlines are paying about 40% more for fuel than a year ago. Trucking costs are up 7% annually in September.
And U.S. manufacturers are paying roughly 8% more for aluminum and 38% more for steel than a year ago as the industry has adjusted to tariffs the Trump administration levied on imports of those metals. A 10% tariff the administration imposed in September on $200 billion worth of goods from China is also weighing on businesses that buy those imports. (…)
Shoe maker Steven Madden Ltd. on Tuesday said that it was raising prices on handbags and other products it imports from China and that it would shift production to other countries to avoid the tariff. The company said prices on goods made in China could rise up to 10% at company-owned stores.
Sensing that consumers are getting used to higher prices, some companies are also charging more to improve profits. Arconic on Tuesday said it had widened operating margins on its rolled-aluminum products by charging more as the tariff has pushed up prices overall. (…)
McDonald’s Corp.’s 2.4% same-store sales growth in the U.S. in the third quarter was fueled by higher-priced burgers. Brinker International Inc. on Tuesday said it had raised the price of the two-entrees-and-an-appetizer deal at its Chili’s Grill & Bar chain from $22 to $25. (…)
Kellogg released a chocolate variety of its Thick & Fluffy Eggo waffles and priced it 12% higher than similar products.
Hershey Co. on Thursday said it will sell candy in new packaging next year at higher prices per ounce.
Chief Executive Michele Buck said in an interview that retailers are more willing to raise prices now because consumer spending and economic growth have risen. (…)
Which is exactly why the Fed is raising interest rates.
However, all these price increases have yet to transpire in official data. Yesterday’s PCE data showed both PCE and core PCE inflation slowing to 1.2% annualized in Q3 (here). The UIG is also softer. Durable goods prices are still deflating while non-durables inflation has slowed markedly lately. Inflation on services has stabilized in the 2.5-3.0% range with noticeable softness in medical care and decelerating inflation in housing related costs. Core goods import prices are still deflating while PPI Finished Goods has slowed from +4.0% to +3.0% and PPI Final Demand is +2.6%
Importantly, oil and U.S. gas prices have stopped climbing:
October 2018: The New York Fed Staff UIG Measures
- The UIG “full data set” measure decreased from a currently estimated 3.16% in August to 3.12% in September.
- The “prices-only” measure decreased from 2.09% in August to 1.95% in September.
- The twelve-month change in the September CPI was +2.3%, a 0.4 percentage point decrease from August.
The UIG measures currently estimate trend CPI inflation to be approximately in the 1.9% to 3.1% range. Both measures have declined in recent months reflecting the softening of the CPI.
It will be interesting if all these announced up-pricing intentions actually materialize in coming months. So far, the data does not support accelerating inflation. Nor do expectations: the 10-year TIPS yield has been very stable at the 2.0% level.
Home Prices Continue to Lose Steam as Slowdown Spreads Home-price gains fell below 6% for the first time in a year in August, another sign the housing slowdown is becoming widespread.
(…) Most sectors of the housing market are slowing, including new home sales and housing starts. Sales of previously owned U.S. homes fell 3.4% in September from the previous month to a seasonally adjusted annual rate of 5.15 million, the National Association of Realtors said Friday.
Fewer people are attending open houses and inventory levels are rising, prompting Lawrence Yun, the group’s chief economist, to acknowledge there has been a “clear shift” in the market.
First-time home buyers remain absent:
They simply cannot afford buying a house. We’ve been there before:
China’s Factory Weakness Adds to Mounting Worries About Economy Concerns about the escalating trade dispute with the U.S. are sapping activity in China’s factories, adding to the troubles of an economy already slowing faster than Beijing expected.
The official purchasing managers index, a gauge of activity in the critical manufacturing sector, dropped in October to its lowest in more than two years, government data released Wednesday showed. Subindexes measuring new orders, including for exports, and factory output fell precipitously as well, signs that economists said point to more weakness ahead. (…)
In a sign that slowing growth is causing concern among Chinese leaders, the Communist Party’s ruling Politburo said the domestic economy is facing increased downward pressure and policy measures aimed at stabilizing it need time to take effect, according to minutes released by the official Xinhua News Agency late Wednesday. (…)
Zhao Qinghe, an analyst with the government’s statistics bureau, said that uncertainties about conditions outside China, as well as a weeklong national holiday, depressed factory activity in October.
The official manufacturing PMI dropped to 50.2 in October from 50.8 in September, according to the statistics bureau.
The new export subindex—an indicator of overseas demand for Chinese goods—slipped to 46.9 from 48.0. The index of total new orders, which measures both exports and imports, also fell, to 50.8 from 52.0. Softening demand is curbing production, with an output subindex decreasing to 52.0 from 53.0. (…)
Subindexes measuring operations of small- and medium-size manufacturing companies showed a contraction in activity in October from September. (…)
An official gauge of nonfactory business activity, also released Wednesday, pointed to fresh weakness in the services sector, which has been more buoyant. China’s official nonmanufacturing PMI dropped to a 14-month low of 53.9 in October from 54.9 in September. (…)
Weaker China Adds to Risks of a Synchronized Global Slowdown
Bank of Japan Warns of Pressures From Global ‘Protectionist Moves’
This Chinese Bond Deal Should Give Investors the Shivers
One of the world’s most indebted companies has been tapping the markets for more funding. China Evergrande, the country’s leading property developer, on Wednesday raised $1.8 billion in three separate bond tranches, adding even more to its $100 billion debt pile.
This is one deal that looks more trick than treat.
First, there are the eye-watering coupons Evergrande is paying, ranging from 11% for the two-year bonds to 13.75% for the five-year. That will likely catch the eye of yield-hungry investors, but it smacks of desperation on Evergrande’s part. Some of the company’s existing dollar bonds, which mature in 2020, were yielding just 7.5% as recently as Monday.
The second spooky aspect is the outsize role of Evergrande’s chairman and 78%-owner, Hui Ka Yan, who bought $1 billion of this latest bond offer, officially to signify his “support and confidence in the company.” Mr. Hui, though, is essentially recycling some of the $1.6 billion he received when Evergrande paid out $2.1 billion of dividends in August.
Evergrande? Hmmm…
EARNINGS WATCH
We are up to 279 reports in. The beat rate has slipped to 77% but the beat rate hangs on at +6.0%. Q3 earnings now seen up 25.3% (22.4% ex-Energy). Q4 estimates now at +19.2% from +20.1% on Oct. 1. Q1’19: +7.8% vs +8.1%.
The Refinitiv Same Store Sales Index is now looking at a 3.6% Q3 2018 growth, up from the 1.7% SSS result posted in Q3 2017. All sectors are expected to post stronger comps this time around. The discount group is one of the strongest with a 4.0% SSS estimate, on top of a robust 3.1% comparison from last year.
Let’s dig in and find out where consumers went shopping and dining:
- The Refinitiv consumer confidence index reached a high point last month, and is relatively steady in October.
- The upward trend in consumer confidence is also reflected in the latest earnings guidance numbers, as retailers have been providing less negative earnings pre-announcements compared to a year ago.
- As a result, the Refinitiv Retail and Restaurant Q3 earnings index is expected to rise 12.1%.
- The Internet sales sector continues to have the highest earnings growth rate (49.1%) of any sector.
- On the other hand, the Hotels, Restaurant & Leisure sector has the lowest growth rate (0.8%) of any sector.
- The Refinitiv Restaurant Same Store Sales Index is looking at a 2.0% Q3 2018 growth, below the 2.8% SSS result posted last year.
- Casual and fine dining are doing better than last year. On the other hand, the quick service sector is struggling, with a 2.1% SSS estimate that is below last year’s 3.7% SSS result.
- For Q3 2018, there have been 42 retail negative EPS preannouncements, compared to 23 positive.
Retailers are less pessimistic than last year. There are fewer negative EPS and revenue guidance reports for Q3 2018 vs. Q3 2017 — and more positive EPS and revenue guidance. In addition to the 42 Q3 negative pre-announcements and 23 positive for EPS, retailers posted 26 negative and 39 positive revenue forecasts (Exhibit 3). The bulk of the negative guidance (45%) comes from the apparel sector. (…)
Exhibit 3: Q3 Earnings and Revenue Guidance
Key Midterm Indicators Don’t Bode Well for GOP
China Telecom diverted internet traffic in U.S. and Canada, report finds Cybersecurity researchers say state-owned firm has shunted data through legal access points in North America in an effort to steal intellectual property
China Telecom, a state-owned telecommunications firm, has systematically diverted internet traffic in Canada and the United States by shunting it through its own network in an effort to commit espionage and steal intellectual property, two cybersecurity researchers say.
Yuval Shavitt of Tel Aviv University and Chris Demchak of the U.S. Naval War College in Newport, R.I., published a paper recently in Military Cyber Affairs, the journal of the Military Cyber Professionals Association, outlining how China has been rerouting Canadian and U.S. internet traffic via access points it has set up legally in North America, ostensibly to improve service for its customers. (…)