Economy

Walmart’s top executives had to laugh as they prepared to discuss their latest earnings with analysts, chief executive Doug McMillon admitted last week. The conflicting anecdotes the US retailer was about to share about consumer demand — back to school backpacks flying off the shelves even as it had to slash prices to clear excess stock and its poorest customers traded down from beef to beans — seemed like a Rorschach test of economic interpretations.But if the company that sells more goods to more Americans than any other is struggling to interpret the consumer mood, spare a thought for those parsing such snippets for clues as to whether or not inflation is tipping the US into a recession.Consumer confidence surveys, usually a reliable source of advance warning on which way spending is heading, could not paint a much more dire picture of the outlook as the Federal Reserve scrambles to tame rising prices. The University of Michigan’s index of consumer sentiment hit a record low in June as inflation topped 9 per cent. Even after a slight rally, it still suggests that consumers are more gloomy now than they were during the worst of the Covid-19 pandemic, the global financial crisis or any other moment since the series began in 1952. Other surveys support this trend, with McKinsey finding twice the number of economic pessimists in July as in March. Yet this pessimism is not showing up in the sales story being told by Walmart and its rivals. For all the evidence that high petrol and grocery prices are squeezing those with the tightest budgets, or that pandemic-weary Americans now prize holidays over home goods, the retailers’ figures suggest that spending remains strikingly robust.Given all that has been thrown at them, including rising mortgage rates, Home Depot’s customers have been “incredibly resilient”, the DIY chain remarked as it reported record sales. “Rather than seeing [them] trade down, in many cases, we are seeing the opposite,” noted Lowe’s, its rival. Even Target, which has been plagued by inventory troubles, is still producing sales growth. The industry leaders are not alone: US retail sales rose more than expected in July, once fuel and car purchases were stripped out. Americans are getting less for their dollars, but they are still spending them.That shopping basket-half-full message has been echoed by executives from Visa and Mastercard to General Motors and Starbucks this earnings season. “Consumer sentiment is all over the map . . . But we have so much excess demand,” observed Tesla’s Elon Musk.Inflation, it seems, has severely affected consumers’ morale but has yet to affect their actual buying behaviour to anything like the same extent. “While consumer sentiment is now firmly in recession territory, consumers are not following through on their feelings,” Jefferies economists Aneta Markowska and Thomas Simons wrote last week.Greg Daco, chief economist at EY-Parthenon, says that had he seen such weak confidence in the past, he would expect a 10-15 per cent drop in spending. More than ever before, he concludes, we need to watch what consumers do, not what they say. But why should sentiment have become a less reliable guide to spending? The clearest explanation is what John Leer, chief economist of data group Morning Consult, calls an unprecedented divergence between inflation and unemployment. Even as small business optimism scrapes recession-like levels, unemployment remains near record lows. The stimulus payments which helped employers keep staff on also allowed consumers to shore up their savings. US households have twice as much cash to hand as they did at the end of 2019, McKinsey noted. Not all households, of course. Break down the headline figures and you find, unsurprisingly, that sentiment has fallen the furthest among the beef-to-beans income group. Older Americans, who have suffered the worst in the pandemic and know what inflation can do, are also disproportionately pessimistic.Polls show that Republicans, whose views of the economy were far rosier than Democrats’ through the Trump era, now see a dramatically darker outlook, and vice versa. And if the country’s partisan divides are souring the mood, so are geopolitical headlines. Consumers, Leer notes, respond faster to bad news than good. Even non-drivers quickly registered the sudden increase in petrol costs after Russia invaded Ukraine, for example, while the slow return to pre-invasion prices has not quelled their concerns.That suggests that even if policymakers can tame inflation it may not produce the swift boost to consumers’ mood that many companies — and the Biden administration — hope for. It is also a reminder that consumer confidence had not recovered from the shock of Covid-19 before it was tested again by the steepest inflation in decades. It is becoming clear that the back-to-back blows of the pandemic and inflation have left a lasting mark on Americans’ economic confidence. Yet low unemployment and high savings levels point to US consumers’ spending remaining more robust than the surveys capturing their anxious mood would imply. Even so, there are other reasons to worry about a less confident America. [email protected] More

WELLINGTON (Reuters) – Reserve Bank of New Zealand Deputy Governor Christian Hawkesby said on Monday that policymakers had “certainly considered 25 or 75″ basis point increases before ultimately deciding to raise the cash rate by 50 basis points (bps). Hawkesby told Reuters in a phone interview that if the committee thought that market pricing was wrong and they need to shift it they would consider a larger move than 50 bps.”At the meeting last week, we sort of reflected that actually market pricing for the OCR (official cash rate) over the period ahead was reasonably similar to what we were putting out in our OCR projections,” he said.New Zealand’s central bank on Wednesday delivered its seventh straight interest rate hike and signaled a more hawkish tightening path over coming months to rein in stubbornly high inflation. More

SYDNEY (Reuters) – Asian shares got off to a rocky start on Monday while the dollar remained in demand amid concerns most major central banks are committed to raising interest rates no matter the risks to growth.Federal Reserve Chair Jerome Powell headlines a host of policy makers at Jackson Hole later in the week and risks are he will not meet investor hopes for a dovish pivot on policy.”We expect a reminder that more tightening is needed and there is still a lot of progress to be done on inflation, but no explicit commitment to a specific rate hike action for September,” said Jan Nevruzi, an analyst at NatWest Markets.”For markets, a bland delivery like that could be underwhelming.”Futures are fully priced for another hike in September with the only question being whether it will be 50 or 75 basis points, while rates are seen up at 3.5%-3.75% by year end. A Reuters poll of economists forecast the Fed will raise rates by 50 basis points in September with the risks skewed towards a higher peak.One exception to the tightening trend is China where the central bank is expected to trim some key lending rates on Monday by between 10 and 15 basis points.Unease over China’s economy tipped the yuan to a three-month low last week while pressuring stocks across the region. Early Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.4%.South Korea’s KOSPI shed 1.1% while Japan’s Nikkei fell 1.0%, though it has drawn support from a recent sharp reversal in the yen.S&P 500 futures eased 0.5% and Nasdaq futures 0.6%. The S&P 500 has repeatedly failed to clear its 200-day moving average around 4,320 and ended last week down 1.2%.BofA’s latest survey of investors found most were still bearish though 88% did expect lower inflation over time, the highest percentage since the financial crisis.”That helps explain this month’s rotation into equities, tech and discretionary, and out of defensives,” said BofA strategist Michael Hartnett. “Relative to history investors are still long defensives and short cyclicals.” He remained a cautious bear given rising interest rates and recommended fading further S&P rallies above 4,328.YIELDS SPIKEEquity valuations were not helped by a steep rise in global bond yields last week. British 10-year yields climbed by the most in five years following a shock inflation report, while bund yields jumped on a sky-high rise in German producer prices.Ten-year Treasury yields rose 14 basis points over the week and last stood at 2.99%, while the curve remained deeply inverted to reflect the risk of recession. [US/]The general air of global uncertainty has tended to boost the U.S. dollar as the most liquid of safe havens, sending it 2.3% higher last week to 108.18 on a basket of currencies last week in its best performance since April 2020. [USD/]”The USD can track above 110.00 week if the August flash PMIs for the major economies show a further slowing in economic growth or contraction in activity,” said Joseph Capurso, head of international economics at CBA, referring to surveys of manufacturing due on Tuesday.”We also expect Powell to deliver a hawkish message about inflation in line with recent comments from other Fed officials, supporting the USD.”The dollar was up at 137.04 yen, having shot up 2.5% last week, while the euro was struggling at $1.0030 after losing 2.2% last week.Minutes of the European Central Bank’s last policy meeting are due this week and are likely to sound hawkish given they decided to hike by 50 basis points.The rise in the dollar has been a setback for gold, which was pinned at $1,744 an ounce. [GOL/]Oil prices were also under pressure amid worries about global demand and the high dollar. [O/R]Brent was down $1.02 at $95.70, while U.S. crude lost 99 cents to $89.78 per barrel. More

New Economy Minister Sergio Massa named Gabriel Rubinstein as his Secretary of Economic Programming, a position that acts as second in the ministry.Massa himself was tapped by President Alberto Fernandez tapped as economy minister in late July, making him the country’s third economic chief in barely a month, amid a severe economic slump fueled by sky-high inflation and growing street protests.Rubinstein’s appointment was expected considering the fact that Massa, a leader of the ruling center-left Peronist coalition, is a lawyer by profession, not an economist.”With professionalism and passion, I will do my best to address the challenges we have to face,” Rubinstein said on Twitter (NYSE:TWTR).”I would also like to highlight the government’s willingness to bring me into the team despite the offensive comments I made on social media, which were not appropriate,” he added.On Twitter, Rubinstein had previously harshly criticized President Fernandez’s economic management as Argentina faces projected inflation of 90% for 2022, rigid exchange rate restrictions, high poverty levels and repeated street protests.Massa last week stressed the need to boost hard currency reserves, pointing to new debt repurchase operations that could help, as well as advances in talks with the country’s key farm sector. More

BENGALURU (Reuters) – The U.S. Federal Reserve will raise rates by 50 basis points in September amid expectations inflation has peaked and growing recession worries, according to economists in a Reuters poll, who said the risks were skewed towards a higher peak.Still around a four-decade high, inflation eased last month, driving Fed funds futures to narrowly switch their pricing to a 50 basis point hike in September after 75 basis point moves in June and July.Most economists in an Aug. 16-19 Reuters poll predicted a half percentage point hike next month, the same as in the last poll, which would take the key interest rate to 2.75%-3.00%.Eighteen of the 94 surveyed expected the Fed to go for 75 basis points.Last month, Fed Chair Jerome Powell, due to speak at Jackson Hole next week, said “it likely will become appropriate to slow the pace of increases.”A cumulative 225 basis points of hikes since March and with more to come have brought a recession closer and the survey showed a 45% median probability of one over the coming year, up from July’s 40%, and a 50% chance of one within two years.”A recession is a necessary evil and the only way to get to where we want to be – where people don’t lose all their money to higher prices,” said Philip Marey, senior U.S. strategist at Rabobank.”It doesn’t have to be a heavy one because usually big recessions occur in conjunction with financial crisis and at the moment household balance sheets are strong.”(Graphics: Reuters Poll- U.S. recession probabilities: https://fingfx.thomsonreuters.com/gfx/polling/egpbkdwndvq/Reuters%20Poll-%20U.S.%20recession%20probabilities.PNG) Thirty-seven of 48 economists said if the U.S. enters a recession within the next two years, it would be short and shallow. Ten said it would be long and shallow and only one said long and deep.Consumer price inflation was expected to remain above the Fed’s 2% target until at least 2024 – averaging 8.0% and 3.7% this year and next – potentially pushing the central bank to take its key policy rate higher into restrictive territory.Nearly 90% of participants saw the key policy rate at 3.25%-3.50% or higher by the end of this year, largely unchanged from the last poll.Expectations of a slower pace of rate hikes have boosted both equity and bond markets over the past week and loosened financial conditions somewhat, adding more pressure on the Fed.While poll medians showed a terminal fed funds rate – a level at which they would peak in the current tightening cycle – of 3.50%-3.75%, expected in Q1 2023, nearly 80% of economists who replied to an additional question, 29 of 37, said the risks were skewed towards a higher rate than they expected.”Stubborn inflation continues to pose the single biggest threat to the economy. Inflation may not fall according to plan. In this event, policy rates would need to be much more restrictive, somewhere in the 4%-5% range,” said Sal Guatieri, senior economist at BMO Capital Markets.”If so, there won’t be much debate about whether the economy can avoid a deep downturn.”The world’s largest economy contracted in the first two quarters of the year, broadly the definition of a technical recession.However, the National Bureau of Economic Research – the official arbiter of U.S. recession – also looks at other factors to officially declare a recession including employment and real income.Non-farm payrolls have continued to remain strong and the unemployment rate fell to 3.5% last month, its pre-pandemic low, so the economy was expected to grow an average 1.7% this year and 1.0% next.The jobless rate was predicted to average 3.6%, 3.9% and 4.0% in 2022, 2023 and 2024, respectively, still very low compared to previous recessions. (For other stories from the Reuters global economic poll:) More

The loan prime rate (LPR), which banks normally charge their best clients, is set by 18 designated commercial banks who submit proposed rates to the People’s Bank of China (PBOC).Twenty-five out of 30 respondents in the Reuters snap poll predicted a 10-basis-point reduction to the one-year LPR. All 30 participants expected a cut to the five-year tenor, with 27, or 90% of them, forecasting a reduction larger than 10 bps. Among them, 15 traders and analysts predicted a 15 bps cut, 10 forecast a 20 bps cut, and the remaining two tipped a 25 bps reduction.Most new and outstanding loans in China are based on the one-year LPR, which now stands at 3.70%, after a reduction in January. The five-year rate, which was last lowered in May, influences the pricing of home mortgages and is now at 4.45%.The market consensus of LPR cuts this month comes as the PBOC earlier this week unexpectedly lowered two key interest rates for the second time this year, to try to revive credit demand in the COVID-hit economy.”We think this may translate to more transmission of easing into the real economy, via potential LPR cuts next week,” said Peiqian Liu, chief China economist at NatWest, as the LPR is now loosely pegged to the central bank’s medium-term lending facility rate.”We expect 5Y LPR to be lowered by 15 basis points (bps) while 1Y LPR to be lowered by 10 bps, as banks step up to support the demand for mortgage loans.”The notable dovish tilt in PBOC’s monetary policy stance came after a slew of key gauges including credit lending data and activity indicators showed the economy unexpectedly slowed in July. The loss of growth momentum has raised the challenge facing policymakers amid mounting headwinds including a resurgence of local COVID-19 cases, inflationary pressures and a slowing global economy.Policy insiders and analysts told Reuters that the PBOC is set to take more easing steps, though it faces limited room to manoeuvre due to worries over rising inflation and capital flight.”After this small rate cut and likely ensuing LPR cut, the space for the PBOC to cut rates will be quite limited due to a rising interest rate differential between China and the U.S. and squeezed profit margins for banks,” said Ting Lu, chief China economist at Nomura. More

China brought in 7.42 million tonnes of coal from Russia last month, data from the General Administration of Customs showed on Saturday. That was the highest monthly figure since comparable statistics began in 2017, up from 6.12 million tonnes in June and 6.49 million tonnes in July 2021.Western countries were avoiding cargoes from Russia ahead of a European Union ban on Russian coal that came into force on Aug. 11, aimed at reducing the Kremlin’s energy revenue over its February invasion.The ban has forced Russia to target buyers such as China and India and sell at a steep discount.Russian thermal coal with a heating value of 5,500 kilocalories (kcal) traded around $150 a tonne on a cost-and-freight basis in late July, while coal of the same quality at Australia’s Newcastle port was assessed at more than $210 a tonne on a free-on-board (FOB) basis.Some Chinese traders expect more Russian coal to flow into China in the fourth quarter when utilities in northern China build stocks for the winter heating season.July shipments of Indonesian coal, mostly cheap, low-quality thermal coal with a heating value below 3,800 kcal, were 11.7 million tonnes. That was up 22% from June but down 40% from a year earlier. China has reduced its overall coal imports in recent months amid surging domestic output.Power plants in southern China have increased tenders to buy Indonesian coal in August as it is cheaper than domestic coal, while demand for coal-fired power generation has been boosted by a record heat wave.Indonesian thermal coal with a heating value at 3,800 kcal changed hand at about $78 a tonne on a FOB basis last week, which would still below about 690 yuan ($101) for local coal when considering shipping costs.China’s customs data showed zero coal shipment from Australia in July.($1 = 6.8091 Chinese yuan renminbi) More

WELLINGTON (Reuters) – New Zealand’s government said on Monday it had transferred Kiwibank’s assets to a new state-owned company, since the lender no longer fit within the long-term plans for two state entities that currently own it.Kiwibank, which is New Zealand fifth-largest retail bank, was owned by state-owned entities New Zealand Post, Accident Compensation Corporation and sovereign wealth fund New Zealand Superannuation Fund. The government said in a statement that the transaction valued at NZ$2.1 billion will be done through a transfer of assets from the entities to a newly incorporated company that will also be owned by the state. It said the government will fund the purchase through a multi-year capital allowance. The purchase was already part of the borrowing programme published in 2022.”The Government is fully committed to supporting Kiwibank to be a genuine competitor in the banking industry – ensuring the bank has access to capital to continue to grow on a commercially sustainable basis and offer a viable and competitive alternative for New Zealanders,” said New Zealand Finance Minister Grant Robertson.($1 = 1.6194 New Zealand dollars) More