Aurelia Butler

NEW YORK (Reuters) – Companies reporting earnings in coming weeks are likely to mention one common factor gouging their results: the strong dollar. The U.S. currency stands near a 20-year high against a basket of its peers and is up 15.1% in the past year, lifted by a hawkish Federal Reserve and investors seeking shelter from turbulent markets.A strong dollar can be a headwind for U.S. companies as it makes exporters’ products less competitive abroad and hurts multinationals that need to convert their foreign profits back into the U.S. currency. Each percentage point of year-on-year increase in the U.S. Dollar Index, which measures the dollar against six other currencies, translates to a 0.5 percentage point hit to S&P 500 earnings growth, analysts at MorganStanley estimated. “You seemingly can’t get a break right now. We’re starting to get some relief from oil prices, but you’ve still got the dollar banging on you,” said Bill Stone, chief investment officer at the Glenview Trust Company. International Business Machines (NYSE:IBM) Corp, Netflix Inc (NASDAQ:NFLX) and Johnson & Johnson (NYSE:JNJ) were among the companies that in the past week cited the dollar’s strength as a headwind, with Johnson & Johnson joining Microsoft Corp (NASDAQ:MSFT) by cutting its guidance due to the impact of the greenback’s rise.Next week’s results from Apple Inc (NASDAQ:AAPL), Microsoft Corp, Coca-Cola (NYSE:KO) Co and a slew of other companies will give investors a better picture of how businesses are holding up in the face of the strong dollar and soaring inflation.Investors are also awaiting what the Fed will have to say on those topics at its monetary policy meeting next week, at which it is widely expected to deliver another jumbo-sized 75 basis-point rate increase.DOLLAR DOLDRUMS Overall, some 40% of S&P 500 revenues come from overseas, data from FactSet showed. Information technology leads all sectors with 58% of revenues derived internationally, followed by materials with 56%, while utilities companies source just 2% of their revenues out of the United States, according to FactSet.The dollar’s strength threatens to combine with high inflation, supply chain issues and other factors to weigh on earnings, analysts said.“The rate of change on the dollar exhibits a strong negative correlation over time vs. S&P 500 earnings revisions. USD strength comes at an inopportune time for corporates already facing margin pressure and increasingly weaker demand,” Morgan Stanley’s analysts wrote.So far, 5.1% of the S&P 500 companies that have reported their second quarter results have posted earnings above expectations, nearly half the average of 9.5% over the prior four quarters, according to Refintiv data. Few can say when the dollar will turn, as the inflation-fighting Fed is expected to raise interest rates more aggressively than other central banks, boosting the U.S. currency’s appeal to yield-seeking investors. Still, some are betting that signs of a peak in the dollar’s rally could balance out some of the damage caused by the burgeoning greenback. Dollar peaks over the past 40 years have been followed by rallies in the S&P 500, with the benchmark index climbing by an average of 10% in the next 12 months on increased risk appetite and expectations of improving earnings, wrote John Lynch, chief investment officer for Comerica (NYSE:CMA) Wealth Management. Jim Paulsen, chief investment strategist at The Leuthold Group, said the dollar is trading at a nearly 120% “safe-haven premium” based on its historical relationship to the consumer sentiment index.The dollar has declined by an average 4.5% over 12 months each time its premium rose over 20% since 1988, he added. Others are looking at the bright side of dollar strength, which some see reflects the belief that the United States can weather a looming global slowdown better than other countries.Sameer Samana, senior global market strategist at Wells Fargo (NYSE:WFC) Investment Institute, has been increasing his overweight in U.S. equities, betting that any the effects of a strong dollar will be outweighed by better economic growth over the long run.”We think investors get too focused on the dollar’s impact on earnings,” he said. More

In Eric Farmelant’s nearly decade-long career as a real estate broker in Miami, he had never witnessed renters engage in bidding wars over rental properties until the coronavirus pandemic fuelled scorching demand for beachfront housing in Florida. He can no longer show four or five listings to clients because many of the properties are being rented sight unseen. “You’re seeing renters putting down a year’s worth of rent up front to get their offer accepted,” said Farmelant, who works for Ibis Realty Group.Rents, in turn, are up nearly 40 per cent since January 2021, according to Apartment List, indicative of a broader trend that has gripped the country.For realtors, double-digit rent increases have been a boon for business. For the Federal Reserve, they serve as yet another hurdle in the central bank’s quest to get the worst inflation problem in decades under control.With little relief expected in the near term, economists warn elevated rents will act as an accelerant, maintaining upward pressure on inflation even as consumer price growth stalls for other categories. It makes the US central bank’s job of tackling soaring prices all the more difficult.“It’s going to be hard to say ‘we’ve got inflation under control’ if you still have shelter costs continuing to march higher,” said Sarah House, senior economist at Wells Fargo. She expects lofty rental inflation to persist until at least the end of the year, and despite some offsetting moderation in other goods and services, “that will complicate the task ahead for the Fed”.

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Top officials pay close attention to housing-related inflation, given that it is such a significant component of overall inflation. By some estimates, shelter costs make up about a third of the consumer price index, which in June rose at an annual pace of 9.1 per cent, according to the Bureau of Labor Statistics, in what was the fastest such increase since November 1981. For the “core” measure, which strips out volatile items such as food and energy, it makes up over 40 per cent.Compared to the same time last year, rents rose 5.8 per cent after the biggest monthly jump since 1986 of 0.8 per cent. Owners’ equivalent rent, a measure of what homeowners believe their properties would rent for, rose 0.7 per cent. In all, shelter costs are up 5.6 per cent over the past 12 months, the most since 1991.The larger-than-forecast acceleration has reset expectations about how quickly headline inflation can moderate this year and how much more monetary policy tightening may be forthcoming. The Fed has said it needs to see a clear deceleration in monthly inflation data before significantly slowing the pace at which it is raising interest rates.Forecasts for rent inflation hinge in large part on the trajectory of home prices, which surged during the pandemic as people reshuffled their lives in a new era of working from home, sought out less dense locales and took advantage of ultra-low mortgage rates. As more prospective buyers were priced out of the market, they turned to rental options. Now buyers are being priced out for a different reason. Home prices are beginning to moderate after hitting another record in June, according to data released by the National Association of Realtors on Wednesday. But the cost to finance that purchase through borrowing has skyrocketed as the Fed has jacked up interest rates. According to Realtor.com, the gap between monthly starter home ownership costs and rents has widened by roughly 25 percentage points, or nearly $500. In June alone, the NAR reported sales of previously owned homes were down 5.4 per cent, or 14 per cent from a year earlier.“People who have been priced out of the for-sale housing market are increasingly turning to the rental market and that also pushes up demand,” said Daryl Fairweather, chief economist at Redfin.Coupled with the fact that rental prices trail home price changes by about 18 months, Kathy Bostjancic, chief US economist at Oxford Economics, said rental inflation may not moderate until the second quarter of 2023.

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Economists such as Ryan Wang at HSBC have revised higher their forecasts, pencilling in rental inflation on a year-over-year basis to top 7 per cent by early next year.“New leases are being contracted at much higher rent levels than before, and this is leading to increases in the overall universe of rents as measured in the CPI,” he said.Given the way BLS calculates the rent data, the broader inflation effects can also take time to show up in the official figures. Michael Pond, head of global inflation-linked research at Barclays, reckons the lag can be anywhere between six and nine months.In February, researchers at the Fed’s San Francisco branch estimated that current rental market trends would increase overall CPI inflation by an additional 1.1 percentage points in both 2022 and 2023, or 0.5 percentage points to the central bank’s preferred inflation gauge, the personal consumption expenditures index. So far, those predictions have held up.

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What could help ease some of these pressures is increased housing supply, which the Biden administration is prioritising. But economists and housing experts say those efforts do little to alleviate the immediate problem.“We don’t have enough housing. Even if you’re building over half a million units,” said Danushka Nanayakkara-Skillington at the National Association of Home Builders. Soaring material costs for builders are also being passed down to tenants, she said.

Realtors and real estate investors are most wary of a recession, which economists predict next year, as the Fed follows through on its “unconditional” commitment to restoring price stability. For Tom Porcelli, an economist at RBC Capital Markets, housing is already likely “just at the beginning of a recession”. “We are in store for a period of stagnating economic growth because of the interest rate increases the Fed is doing,” added Redfin’s Fairweather. “That will drive down price growth for basically everything, including rent. But it will just take a while for that to trickle down.” More

The Economy Ministry forecast a 59.354 billion reais ($10.80 billion) primary budget deficit for the central government this year, from the 65.5 billion reais deficit seen in May and against an official deficit target of 170.5 billion reais.The outlook for net revenues jumped by 51.955 billion reais, while the increase in expenses reached 45.819 billion reais, said the ministry in its latest bi-monthly revenue and expenditure report.Tax revenues soared to a record high in June, repeating a feat achieved every other month this year, among increases in corporate income taxes and oil royalties.The government also announced the need to freeze 6.739 billion reais in expenditures to comply with the spending cap rule, which limits spending growth to the previous year’s inflation. According to the Economy Ministry, the block will be necessary to compensate for extra expenditures after Congress overturning President Jair Bolsonaro’s vetoes to bills linked to the cultural sector and a wage floor for community health workers.($1 = 5.4977 reais) More

Retail sales volumes fell by a smaller-than-expected 0.1% from May, the Office for National Statistics said on Friday. Economists polled by Reuters had expected a 0.3% monthly fall.”After taking account of rising prices, retail sales fell slightly in June and although they remain above their pre-pandemic level, the broader trend is one of decline,” Heather Bovill, an ONS statistician, said.In the April-June period sales volumes were down by 1.2%.Excluding automotive fuel, volumes in June rose by 0.4% on the month, compared with a poll forecast for a fall of 0.4%.Automotive fuel sales volumes fell by 4.3%, the biggest drop since October last year when a shortage of truck drivers triggered a wave of panic buying of petrol and diesel.A monthly fall in May was estimated to have been more severe than originally thought, showing a drop of 0.8% from April compared with an initially reported decline of 0.5%.Britain’s economy is feeling the strain of inflation which is on course to hit double digits, driven in large part by the sky-rocketing fuel prices. The Bank of England is expected to raise interest rates for the sixth time since December on Aug. 4, potentially adding to the drag on economic growth.Paul Dales, an economist with Capital Economics, said Friday’s data was affected by an extra public holiday last month.”But even so, it is becoming clearer that the cost of living crisis is behind the steady decline in sales volumes in recent months,” Dales said. “We think a recession is just around the corner.”Earlier on Friday, a survey showed consumer confidence, remained at its lowest since records began in 1974. More

LONDON/TOKYO/NEW YORK (Reuters) -The global economy looks increasingly likely to be heading into a serious slowdown, just as the highest inflation in a generation prompts central banks to aggressively reverse the ultra-loose monetary policy adopted during the pandemic to support growth, data showed on Friday.Business activity in the United States, the world’s largest economy, contracted for the first time in nearly two years this month, activity in the euro zone retreated for the first time in over a year, and growth in Britain was at a 17-month low, purchasing managers’ surveys said on Friday. [EUR/PMIS]In another ominous sign for the global economy, Japan’s government is expected to sharply cut its forecast for domestic growth.Meanwhile, China’s strict COVID-19 lockdowns and Russia’s invasion of Ukraine have further damaged global supply chains that had not yet recovered from the pandemic.S&P Global (NYSE:SPGI) on Friday said its preliminary – or “flash” – U.S. Composite PMI Output Index had tumbled far more than expected to 47.5 this month from a final reading of 52.3 in June. That was the fourth straight monthly drop and was driven by weakness in the services sector, which contracted enough to offset moderate growth in manufacturing. With a reading below 50 indicating business activity had contracted, the report will feed the vocal debate over whether the U.S. economy is back in – or near – a recession after rebounding sharply from the downturn in early 2020 at the start of the COVID-19 pandemic.”The preliminary PMI data for July point to a worrying deterioration in the economy,” S&P Global Chief Business Economist Chris Williamson said in a statement. “Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis.”In the euro zone, business activity unexpectedly contracted this month due to an accelerating downturn in manufacturing and a near-stalling of service sector growth as burgeoning costs pushed consumers to cut back on expenditure, a survey showed. [EUR/PMIS]S&P Global’s flash Composite Purchasing Managers’ Index (PMI) for the euro zone, seen as a good gauge of overall economic health, fell to 49.4 in July – the lowest since February 2021 – from 52.0 in June, well below all forecasts in a Reuters poll that had predicted a more modest dip to 51.0.Businesses across the euro zone continued to report mounting inflation pressures and an acceleration in wage growth, even as the overall growth outlook becomes increasingly murky, the European Central Bank said on Friday, based on a survey of 71 major firms.Inflation in the currency union was 8.6% last month, official data showed, and on Thursday the ECB raised interest rates by more than expected, confirming that concerns about runaway inflation now trump growth considerations.The U.S. Federal Reserve, battling 40-year high inflation, is forecast to deliver another hefty 75 basis point interest rate hike at its meeting next week. [ECILT/US]The Reuters poll gave median predictions of a 40% probability of a U.S. recession over the coming year and a 50% chance of one happening within two years, a significant upgrade from a June survey. China and Japan remain exceptions by keeping monetary policy loose, a sign their economies – the second- and third-largest in the world – lack strength to offset the weaknesses in other parts of the globe.CHINA SLOWDOWNWorries over a global slowdown are casting a shadow over Asia’s recovery prospects with factory activity growth slowing in Japan and Australia, keeping pressure on policymakers to support their economies.Japan’s manufacturing activity grew at the slowest pace in 10 months in July, its PMI survey showed on Friday, boding ill for an economy struggling to shake the wounds from the pandemic.”July’s PMIs suggest that the manufacturing sector is slowing as demand weakens, while the latest COVID-19 is starting to hit the services sector,” Marcel Thieliant, senior Japan economist at Capital Economics, said on Japan’s PMI.Factory activity also slowed in Australia with the index falling to 55.7 in July from 56.2 in June, a separate survey showed on Friday.China’s economic growth slowed sharply in the second quarter, weighed by widespread COVID lockdowns and pointing to persistent pressure over coming months from a darkening global outlook.The slowdown in the world’s second-largest economy, as well as the fallout from aggressive central bank tightening, forced the Asian Development Bank to slash its growth forecast for the region on Thursday. More