Economy

Good inventory management is the same as brushing your teeth. It is boring, but if you do not do it properly the consequences are dire. For US retailers such as Target, excess inventories have become a multibillion dollar headache. They scrambled to keep shelves stocked during the pandemic. Some even chartered their own cargo ships to bypass supply chain bottlenecks. They now find themselves stuck with a glut of goods they cannot sell. Target, until recently considered one of the best-run retailers in America, slashed its outlook on margin on Tuesday. Galloping energy and food price inflation is prompting consumers to divert spending to essentials such as groceries. They are buying less clothing and home furnishings. To clear the surplus stock, Target said it would need to ratchet up markdowns. Spending on additional storage will also drive up costs.Target now expects second-quarter operating margin to come in at about 2 per cent — compared with the 5.3 per cent it forecast just three weeks ago. The one-third drop in Target’s share price this year reflects justifiable disappointment at the reversal.Problems for some retailers create opportunities for others. Dollar stores should benefit as cash-strapped shoppers trade down. Off-price retailers that buy excess inventory from top brands and resell them are also well placed. The largest — TJX — owns TJ Maxx, Marshalls, and HomeGoods. It boasts a market value of $71bn, making it the sixth-biggest bricks-and-mortar retailer in the US by that metric. It has not been immune from higher labour and transport costs. But paying pennies on the dollar for goods cushions margins nicely. This is reflected in the 10 per cent rise in net profit in its most recent quarter. At 19 times forward earnings, TJX shares are no bargain. Target trades on a multiple of 13 times. This may make it a better longer-term bet. Inventory distortion will not last for ever. Clearing out excess stock now should put it on a better footing to grab market share during the all-important holiday shopping season later this year. More

New Jersey, Maine and Massachusetts joined the $5 club overnight to bring the US national average pump price to a fresh record of $4.919 a gallon, according to auto club AAA. At this rate, JPMorgan Chase (NYSE:JPM) & Co’s prediction of $6.2 gallon gasoline by August seems well within reach. The country’s gasoline stockpiles fell to 219 million barrels in the most recent report from the Energy Information Administration, the lowest seasonal level since 2015. In the Central Atlantic, where regional supplies can have an outsized impact on gasoline futures trading in New York, inventories have fallen to their lowest level ever for this time of the year in data going back to 1993. Which commodities will outperform into year-end? Raw materials is the theme of this week’s MLIV Pulse survey. Please add your voice.Low stockpiles have so far overshadowed slower gasoline demand growth, which lags the uptick typical for this time of year.“I do expect consumer resistance to the high gasoline retail price to begin to evidence itself,” said John Kilduff, co-founder of Again Capital LLC. ©2022 Bloomberg L.P. More

Turkey 5-year credit default swaps added 17 basis points (bps) from Monday’s close to 736 bps, levels last seen during the global financial crisis in 2008, data from S&P Global (NYSE:SPGI) showed.Bond prices were lower by more than 1 cent for most issues, with the September 2027 bond down 1.05 cents to 96.83 and yielding 9.1%.Speaking after a cabinet meeting, Erdogan said Turkey will not raise interest rates but rather continue cutting them in the face of high living costs. More

US Treasury secretary Janet Yellen has urged Congress to pass new measures to help ease ongoing price surges, as pressure mounts on the Biden administration to do more to contain the highest inflation in four decades.Lawmakers on the Senate Finance Committee grilled Yellen on Tuesday about the state of the economy, which has rebounded rapidly from the depths of the Covid-19-induced crash but is now beset by soaring costs for almost all goods and services.“Congress can do a lot to mitigate some of the most important and burdensome costs that households face,” Yellen said, noting specific proposals to reduce prescription drug prices, improve access to affordable housing and bolster investments in renewable energy.“In the course of doing that, we’ll expand the supply side of our economy,” she said. Investments in education and training, childcare as well as eldercare would lead to a larger labour force, she said, helping to bring down inflation and leading to “strong, sustainable [and] stable growth”.Yellen’s testimony comes just days after she conceded she was “wrong” last year about the threat posed by rising inflation, having previously ascribed price pressures to “transitory” forces such as supply chain bottlenecks and other Covid-related disruptions, as did many private forecasters and the Federal Reserve.She also became ensnared in controversy after excerpts from a new biography alleged that she had initially wanted to trim last year’s $1.9tn stimulus package by a third for fear that it would push up prices. Yellen has since rebutted those claims.

The Treasury secretary on Tuesday defended the actions taken by the Biden administration, but acknowledged that inflation is now running at an “unacceptable” level and that “an appropriate budgetary stance is needed to complement monetary policy actions by the Federal Reserve”.The US central bank has since March raised interest rates by 0.75 percentage points from the near-zero levels that had been in place for two years and is poised to deliver at least two more half-point rate rises at its upcoming policy meetings scheduled for next week and in late July. Market participants expect the Fed to eventually lift the federal funds rate to roughly 2.8 per cent by the end of this year.When asked by Steve Daines, the Republican senator from Montana, about the Biden administration’s role in stoking high inflation, Yellen pushed back. “We’re seeing high inflation in almost all developed countries around the world, and they have very different fiscal policies,” she said. “So it can’t be the case that the bulk of the inflation that we’re experiencing reflects the impact of the [stimulus package].” She added: “In designing a policy, there are various risks that need to be taken into account. Of course inflation was one of them, but the overwhelming risk was that Americans would be scarred by a deep and long recession.”Yellen said on Tuesday any new legislation must be paid for or structured in a way that leads to a smaller deficit.“Asking high-income taxpayers and corporations to pay their fair share is the right way to finance those investments,” she said, adding that tackling what is estimated to be a $600bn annual gap in taxes that are owed but not paid is “absolutely important in ensuring fiscal responsibility”.“It would generate substantial revenue in a manner that’s efficient and fair,” she said. “It would enable deficit reduction and help ease price pressures by providing part of the funding we need for the urgent fiscal priorities we discussed.” More

Online used car seller Cazoo has become one of the first British businesses to warn over the threat of recession as it announced plans to slash hundreds of jobs to protect its cash in preparation for a downturn. Cazoo warned that it faced a combination of high inflation, supply chain disruption and rising interest rates, which would force it to cut about 750 jobs and freeze cash-consuming investment projects. “This perfect storm has placed cash conservation top of mind for the company, ahead of growth” said Alex Chesterman, founder of Cazoo and former boss of property website Zoopla.Lossmaking Cazoo operates in the UK and across Europe but was floated in the US last year through a special purpose acquisition company at the peak of the tech listing boom. Shares in the group have since fallen more than four-fifths since listing in August in a deal that valued the then 2-year-old start-up at about £6bn. The company employs more than 3,500 people across the UK, Germany, France and Portugal. The company said on Tuesday that it expected to achieve cash flow break-even point in the UK by the end of 2023, and it would seek to manage costs and expenditure to become self-funding in the UK.Consumer-facing companies such as Cazoo are likely to be hard hit by any recession ushered in by the cost of living crisis. The Bank of England warned over the threat of recession last month owing to energy costs that have sent inflation to a 40-year high. To combat this, policymakers have started to raise interest rates, but this is set to squeeze household incomes further and hit demand for discretionary purchases such as new cars. On Tuesday, the S&P Global/CIPS Purchasing Managers’ Index — spanning services and manufacturing firms — showed that growth in British businesses had slowed in May to its weakest since February 2021.Cazoo said that it was “not immune to the rapid shift in the global economy and the possibility of a recession in the coming months”, which would force it to cut back costly parts of its business. “The combination of rising inflation and interest rates with supply chain issues caused by the pandemic and war has driven up the cost of living and hit consumer confidence,” said Chesterman.

Cazoo said that its restructuring efforts would cut costs by about £200mn, and extend its cash levels beyond 2023. The company expects sales and revenues to more than double in 2022, with the latter reaching up to £1.5bn.Cazoo will no longer offer its subscription service to new customers from the end of June, it added, given the “highly cash consumptive nature” of this model. The company had cash and cash equivalents of more than £400mn as of May 31, 2022 in addition to self-financed inventory of over £200mn More

Conflict begets conflict. Food is among the weapons. Russia’s invasion of Ukraine has spawned sanctions, export blockades and disruption to farming. That has already sparked civil unrest in Indonesia, Egypt and Iran. High prices and hungry bellies will foster further political instability.The war knocked out two links in the food chain: a hefty chunk of cereals supply and the fertiliser needed to bolster a wide range of crops. Ukraine is a big producer of wheat and corn. Russia and its client state Belarus husband vast quantities of nutrients.Potash is one. Used with other fertilisers for wheat, corn and soyabean crops, it can reputedly increase yields by a third or more. Production is concentrated in a handful of countries. Russia and Belarus together account for 40 per cent of output, slightly more than Canada. The west has not prohibited exports. But financial sanctions on Russia have made supplies harder to obtain. Potassium chloride — “muriate of potash” in the jargon — makes up the bulk of the commodity consumed globally. Deposits abound in Canada, particularly Saskatchewan. Around a quarter of Canadian production was idled after regular gluts. Share prices of the country’s two biggest producers, Nutrien and Mosaic, ratcheted up sharply after the outbreak of hostilities, having flatlined lengthily. Potash prices, measured by prices paid in Brazil for MOP, have soared to $1,200 a tonne after years below $500. Brazil, as a big agricultural producer, imports around 1mn tonnes a month. Higher fertiliser costs are hurting farmers worldwide. The income of Illinois grain farms could fall by a third, estimate academics in a farmdoc daily report. That will ensure food prices stay high unless two things change. First, Canadian potash producers, encouraged by elevated prices, would have to switch on more capacity. Second, Russia, would need to allow Ukraine to ship wheat and corn via ports such as Odesa. The first move would take a year to have much impact. The second, while mooted by Russia, depends on goodwill conspicuously absent in all its other actions. Persistently high food prices would mean poor, politically unstable countries become even more so. Risk is therefore proliferating for emerging market investors. Egypt, which subsidises bread to the tune of $3bn a year, is warning of global “food insecurity”. The United Nations says the number of people suffering severe food insecurity has doubled in the past two years to 276mn today. That total can only rise.The Lex team is interested in hearing more from readers. Please tell us what you think of the outlook for world food supplies in the comments section below. More

Russia’s war in Ukraine will lead to slower than expected growth across the developing world this year and next, pushing millions into extreme poverty and raising the risk of a debt crisis in low and middle-income countries, the World Bank has warned.The fallout from the war will exacerbate the effects of the pandemic, leaving 75mn more people in extreme poverty than expected in 2019, the bank warned in its latest economic outlook, published on Tuesday.“At the beginning of the year we expected things to be bad,” said Ayhan Kose, head of the bank’s economic forecasting unit. “Now they are going from bad to worse, and the policy response will be critical to avoid them going from worse to much worse.”He added: “The faster-than-expected tightening of financial conditions worldwide could push countries into the kind of debt crisis we saw in the 1980s. That is a real threat and something we are worried about.”The bank’s twice-yearly Global Economic Prospects report said global conditions today were similar to those of the 1970s, when steep rises in interest rates were needed to control inflation. Those interest rate rises sparked a global recession and a string of debt crises in developing economies.While the commodity price shock was less severe so far, further rises in the cost of goods and continued outbreaks of Covid-19 could lead to steeper interest rate rises, raising the risk of a broader debt crisis.Central banks are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades. Over the three months to the end of May, monetary authorities announced more than 60 rate rises. More are expected in the months ahead. “Even quite small increases in borrowing costs will be a problem,” said Franziska Ohnsorge, a lead author of the report. “Global interest rates were lower in 2019 and capital was chasing places to invest. That is going to turn — we are already seeing outflows [from emerging market assets].”World Bank data show that foreign debt in low-income countries rose by $15.5bn to about $166bn in 2020. Foreign debt in middle-income countries rose by $423bn to more than $8.5tn, leaving them especially exposed to sharper than expected interest rate rises.Under the World Bank’s base case scenario, global growth will fall from 5.7 per cent last year to 2.9 per cent this year and 3 per cent in 2023.But higher than expected rises in interest rates and energy prices and a continuation of Covid-19 would cut global growth to 2.1 per cent this year and just 1.5 per cent in 2023.In advanced economies, growth was 5.1 per cent last year, and was set to fall to 2.6 per cent this year and 2.2 per cent in 2023 under the bank’s base case. This could fall to 2 per cent this year and just 0.8 per cent next year if those risks materialise.

Growth in emerging and developing economies was 6.6 per cent last year and will fall to 3.4 per cent this year and 4.2 per cent next year. In the risky scenario, it would fall to 2.2 per cent this year before making a partial recovery to 2.6 per cent in 2023.The report found that the combined impact of the pandemic and the war would leave global economic output in the five years from 2020 to 2024 more than 20 per cent below the level implied by trend growth between 2010 and 2019. The impact on poor countries will be much greater, with output across emerging and developing economies a third less than expected and output in commodity-importing developing countries — especially badly hit by the sharp rise in food and fuel prices provoked by Russia’s invasion — more than 40 per cent less than expected. More

Politicians in Brussels have reached a deal on how EU countries will ensure adequate minimum wages in a move that will protect workers at a time of soaring inflation and a cost of living crisis.In the deal agreed between the European Council and parliament on Tuesday, member states will collect data on minimum wage coverage, assess prices for common household items and promote the principle of collective bargaining to help enforce companies to pay fair salaries. “This is a good day for social Europe. We have reached an agreement on the directive on adequate minimum wages in the EU. This is especially important at a time when many households are worried about making ends meet,” said Nicolas Schmit, European commissioner for jobs and social rights. MEPs, member states and the European Commission agreed to establish a framework for setting statutory minimum wages. They include obligations on member states to establish clear criteria for updating minimum wages every two to four years and the establishment of consultative bodies in which “social partners” such as unions are able to take part.EU countries would also have to collect data on minimum wage coverage and adequacy, and make sure workers had access to dispute resolution mechanisms, the EU’s executive said.“The new rules will protect the dignity of work and make sure that work pays,” said commission president Ursula von der Leyen in a Twitter message.The provisional agreement is expected to be signed off by parliament and member states this month, then published in the EU’s official journal. Countries will have two years to implement the rule after its publication.The new law will include provisions for the promotion and facilitation of collective bargaining on wages by trade unions and employers in all member states. “Countries with high collective bargaining coverage tend to have a lower share of low-wage workers, lower wage inequality and higher wages,” the commission said. Member states whose collective bargaining coverage was assessed at less than 80 per cent of workers would have to set up a plan to facilitate such talks between employers and workers, it added.Agnes Jongerius, one of the MEPs backing the proposed law in the parliament, said: “In the last decade wages have stayed behind the rise in productivity. Workers caught a smaller piece of the pie. This is especially true for those earning the lowest wages.” She said workers had been the victims of policymakers pushing for a reduction in the scope of welfare systems after the global financial crisis. While the directive needs only a qualified majority of votes from member states to be adopted, Denmark is likely to vote against it on the principle that the country does not think the EU should meddle in issues related to wages, said two people familiar with the Danish position. In recent years other Nordic countries had also expressed concerns that such a law would undermine their collective bargaining systems. Separately, the commission, parliament and member states are close to agreeing a deal on a law obliging companies to have a target of achieving 40 per cent female participation on their boards. The commission first proposed the directive in 2012 but it had encountered opposition from countries including Germany and some Nordic and Baltic states. More