Aurelia Butler

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These deficits, coupled with robust state and local spending, threaten to keep inflation high and interest rates elevated in the short term. However, the long-term implications are even more concerning.In the note, Piper economists highlight that persistent federal deficits are likely to slow potential GDP growth, which in turn depresses incomes and living standards while increasing the poverty rate.”Big government deficits often ostensibly generated to support the economy actually boost poverty and reduce real incomes,” notes the Piper Sandler team.The reason for this is that government borrowing crowds out private investment, which slows job creation and economic growth, leading to a vicious cycle of increased fiscal stimulus and larger deficits.Moreover, mandatory federal spending, including Social Security, Medicare, and interest payments, is identified as the primary driver of these deficits. The situation is further exacerbated by higher defense and Employment Retention Credit outlays, economists say.The Congressional Budget Office (CBO) forecasts that deficits will consistently surpass potential GDP growth, meaning fiscal shortfalls will exceed what the economy adds naturally each year. That scenario was previously seen only in the aftermath of the Global Financial Crisis and during the COVID-19 pandemic.“Additionally, federal interest outlays alone are expected to exceed nominal GDP growth within the next decade. Both highlight the threat of big deficit spending crowding out eco growth,” Piper’s team wrote. More

LONDON (Reuters) – From Brazil, Nigeria and Turkey to even some of the riskiest emerging markets such as Egypt and Zambia, evidence is growing that a decade-long deterioration in sovereign credit ratings has finally started to reverse. Economists watch ratings because they influence a country’s borrowing costs and many are now highlighting a turnaround that seems incongruous with the usual warnings about rising debt pressures.According to Bank of America, almost three-quarters of all sovereign rating moves by S&P, Moody’s (NYSE:MCO) and Fitch this year have been in a positive direction, compared with the almost 100% that went the other way in the first year of the COVID pandemic.With that and the spike in global interest rates now in the rear view mirror, more good news should be coming too. Moody’s now has 15 developing economies on a positive outlook – rating firm parlance for an upgrade watch – one of its highest numbers ever. S&P has 17, while Fitch has its best ratio of positive versus negative outlooks since a post-global financial crisis rebound in ratings in 2011.Fitch’s global head of sovereign research Ed Parker said the turnaround has been down to a combination of factors. For some countries it has been a general recovery from COVID and/or the energy price spikes caused by the Ukraine war. Others are seeing country-specific improvements in policymaking, while a core group of junk-rated “frontier” nations are now benefiting from suddenly being able to access debt markets again, he said. Aviva (LON:AV) Investors’ head of EM hard currency debt, Aaron Grehan, describes the current upgrade wave as a “definitive shift” that has also coincided with a sharp drop in the premiums that emerging markets almost everywhere have had to pay to borrow.”Since 2020, well over 60% of all rating actions have been negative. In 2024, 70% have been positive,” Grehan said, adding that Aviva’s internal scoring models were similar. DECADE OF DOWNGRADESThe awkward reality though is that the current run of upgrades will not make up for the last 10-15 years.Turkey, South Africa, Brazil and Russia all lost coveted investment grade scores during that time, while a deluge of debt almost everywhere apart from the Gulf has left the average EM credit rating more than a notch lower than it used to be.And though some countries argue that developed economies where debt is still surging are being treated more leniently by the rating firms, EM finances are hardly sparkling now.Eldar Vakhitov, a sovereign analyst and “bond vigilante” at M&G Investments points to the International Monetary Fund’s recent forecast that the average EM fiscal deficit will edge up to 5.5% of GDP this year. Just a year ago, the assumption was that the 2023 EM fiscal expansion was a one-off that would be fully reversed this year. Now the EM fiscal deficit is expected to remain above 5% of GDP until the end of the Fund’s forecast horizon in 2029.So why all the rating upgrades? “For some countries it is all about the starting point,” Vakhitov said, explaining that even though government deficits were still wide, they had at least dropped down from peak COVID levels. A few governments, such as Zambia, are getting a natural lift from coming out of debt restructurings while a number of places are making obvious policy improvements. Turkey, which has already had a couple of upgrades for attacking its inflation problem head on, and Egypt which seems to have shaken off default worries, are both expected to see multi-notch upgrades now, according to market pricing. “Rating agencies tend to be slow though,” Vakhitov said, “so it often takes them a lot of time to give upgrades.” COUPON PAYMENTSThe downgrades have not stopped completely. Moody’s and Fitch have both put China on a warning over the last six months, Israel’s war has led to its first ever downgrades and Panama has been stripped of one of its investment grades.Three years on from COVID spending splurges and the bills are having to be paid too. EM hard currency debt amortisations and coupon payments are expected to reach an all-time high of $134 billion this year, JP Morgan estimates. That is up by $32 billion from last year, so it is not surprising then that emerging market policymakers are eager to do all they can to get their ratings up and keep borrowing costs down.Indonesia’s Finance Minister Sri Mulyani Indrawati explained in London this month how the agencies had doubted her when she told them during COVID that Indonesia would get its deficit back below 3% of GDP within 3 years.”It ended up that we were able to consolidate the fiscal (position) in only two years,” she said. “So I always like to say to my rating agency staff, I won the bet, so you have to upgrade my rating!” More

LONDON (Reuters) – Britain’s regulators lack the mindset to boost growth and the financial sector’s global competitiveness, and need parliamentary backing to accept more risk when applying rules, the City of London said on Wednesday.Chris Hayward, policy leader at the City, which administers the capital’s financial district, said that a new public-private body is needed to attract foreign investment.The sector is worried about its competitiveness after being largely cut off from the European Union since Brexit, and as UK companies choose to list in New York.In response to this, the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority have been given a secondary objective of aiding growth and the financial sector’s international competitiveness when writing rules, but there is scepticism it will make a difference.”I don’t think the FCA in particular, the regulators generally, culturally have found it within their psyche to really promote risk taking, taking opportunities to promote growth, being flexible,” Hayward told the House of Lord’s financial services regulation committee.The new remit alone won’t boost inward investment and growth, and a new promotional body is needed for the UK to compete with Ireland and elsewhere, Hayward said.”There seems to be some reticence about having a public private partnership,” Hayward said.Parliament should also back regulators to accept more risk, given it implies “retribution” when things go wrong, as is inevitable at times, he added.”It’s not fair to make regulators entirely the whipping boy,” Hayward said.The FCA, which had no immediate comment, has faced a fierce backlash against its ‘naming and shaming’ plans to name companies it investigates early on, rather than after a probe has been concluded.Britain’s finance minister Jeremy Hunt has said the plans appear to contradict the growth objective, and should be rethought.Committee member Jonathan Hill suggested regulators need clarity between their statutory duties, and the “blue sky” and “social mission” discretion behind ‘naming and shaming’ and other proposals that “reduce” growth and competitiveness.The committee is scrutinising the new competitiveness objective ahead of the first annual report on it from regulators in coming weeks. More

(Reuters) -Target on Wednesday said it expects consumer caution to persist after it reported quarterly earnings that missed Wall Street estimates and issued a forecast for the current quarter that was also largely below expectations.Shares fell 8% premarket after it posted adjusted earnings per share of $2.03, 3 cents below analysts’ expectations, according to LSEG data. The stock has lost more than 40% of its value since touching an all-time high in Nov. 2021.Its disappointing earnings and outlook stood in contrast to larger peer Walmart (NYSE:WMT), which last week reported better-than-expected results and raised its annual outlook as shoppers prioritized food and essentials like toilet paper and detergent. “This performance is significantly worse than the overall market, which underlines that Target is losing share,” said Neil Saunders, Managing Director of GlobalData. “All in all, the picture painted by today’s figures is of a business that has run out of steam.”Companies ranging from McDonald’s (NYSE:MCD) to PepsiCo (NASDAQ:PEP) have flagged in recent weeks the strain that Americans are under due to sticky food inflation and the rising costs of eating out, rents and mortgages. “We remain cautious in our near-term growth outlook and we expect consumer discretionary trends to remain pressured in the short term,” Christina Hennington, Target’s chief growth officer, said on a media call. Higher interest rates, economic uncertainty and higher credit card balances have kept consumers concerned, she added, noting that consumer confidence took a meaningful dip in April. Shoppers are delaying their purchases to take advantage of deals, while also spending more time on out-of-home activities, Target’s CEO Brian Cornell said during a media call. Despite ongoing inflation in food and essentials, spending in these categories remained resilient, which Cornell attributed to a strong labor market. ‘LASER FOCUSED’ ON GROWTHTarget said it was “laser-focused” on getting back to sales growth in the current quarter, banking much of its hopes on sales events planned for Memorial Day and the July 4th weekend as well as price cuts on thousands of items this year.On Monday, the company cut prices on 1,500 products with plans eventually lower prices on 5,000 grocery items over this summer. This followed its move in January, where it introduced “dealworthy,” a new line of 400 products starting below $1 and most products under $10.”What is really disappointing if you look past this quarter, is that second-quarter guidance. A lot of people had a lot of higher expectations,” said Christian Greiner, senior portfolio manager at F/m Investments, which holds Target as part of its large-cap value dividend strategy. Target expects comparable sales in the second quarter will recover from its four straight quarterly declines, being flat to up 2%. It expects adjusted earnings of $1.95 to $2.35 per share. Analysts on average had anticipated a comparable sales increase of 1.39% and profit of $2.19 per share. In the first quarter ended May 4, comparable sales declined 3.7%, in line with expectations. Strong beauty sales partially offset a slowdown in discretionary items such as home entertainment, furniture and appliances. Apparel sales were a bright spot, it said.The company maintained its full-year target, with comparable sales seen flat to up 2%, and earnings of $8.60 to $9.60 per share. Telsey Advisory Group analyst Joseph Feldman said nearly all retailers, not just Target and Walmart, have painted a picture that the second half will improve.”But it’s been a little, you know, slower than we initially anticipated.” More

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