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.
