Economy

The UK is hoping to conclude talks on joining a major Pacific trade bloc by the end of this year, as London pursues new commercial opportunities around the world post-Brexit.Anne-Marie Trevelyan, international trade secretary, told the Financial Times that the UK had already completed the first part of the accession to the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a process she likened to “sitting exams”.Trevelyan added that she was working through the rest of the negotiation. “It’s not unrealistic that we might get there by the end of the year,” she said.“They’re very enthusiastic about our application and everyone’s working really hard to try and . . . plough through the complexity that is trade language and detail to get there. So I’m hopeful that by the end of the year we should see that crystallise.”The CPTPP includes fast-growing Asian economies such as Malaysia and Vietnam along with established Pacific players such as Japan, Australia, Mexico and Canada. The UK opened talks last June and would be the first nation to accede since the bloc was launched in 2018. Trevelyan was speaking as the UK started negotiations with Mexico on an enhanced trade agreement to replace the one carried over from its EU membership days, which is more than 20 years old.“Mexico has a really strong and growing market . . . young population and with a high growth curve overall so we want to be making sure we can . . . harness those relationships and grow them.” Total bilateral trade is currently tiny at about £4.2bn and Mexico is the UK’s 44th largest trading partner. Commerce between the nations is less than 1 per cent of Mexico’s $661bn annual goods trade with the neighbouring US.London hopes a new agreement focused on services and the digital economy will grow trade with Mexico by 30 to 40 per cent in the next few years, Trevelyan added. It is the third set of trade talks launched by the UK this year, after those with India and Canada.Latin American nations complain that Britain has paid them little attention in recent years, despite the region’s wealth of natural resources and human talent. Total trade between the UK and Latin America was £18.1bn in 2021, down 4.5 per cent from a decade earlier, according to official data.Trevelyan said the UK viewed Latin America, which together with the Caribbean has a gross domestic product of $4.7tn, as “integral and important” for trade. She is pursuing talks with Brazil on extending an existing trade partnership and her team is also speaking to Colombia.Mexico was chosen as a priority along with Canada for a new agreement because both nations are CPTPP members. “We want to . . . get those extra layers of potential trade opportunities beyond the CPTPP,” Trevelyan explained. Clean energy and fintech were among the exports that the UK could offer.As foreign secretary, William Hague tried in 2010 to boost trade and investment with Latin America by opening new embassies, appointing a regional trade commissioner and boosting trade visits. A report from the Canning House think-tank concluded 10 years later that “in terms of UK exports to the region, the results have been poor”. The UK accounted for less than 1 per cent of Latin America’s trade by 2018, well behind its main European competitors. More

Inflation across the G7 has climbed to multi-decade highs, but whereas in the US or UK that means alarming levels of 8 or 9 per cent, one country stands out as different: in Japan, high inflation means just 2.5 per cent.Furthermore, while the US Federal Reserve and the Bank of England are rushing to raise interest rates, the Bank of Japan says it will keep policy on hold, buying as many bonds as it needs to keep 10-year yields pinned at zero per cent.The divergence illustrates a fundamental difference in Japan’s inflationary psychology after three decades of price stagnation. Even though Japan is heavily exposed to some of the same shocks as other countries — notably the increasing cost of imported commodities — there is almost no pass-through from rising prices to higher wages.On the contrary, said Masamichi Adachi, chief economist at UBS in Tokyo, the deflationary mindset means the pressure tends to go the other way. “In Japan, increases in import prices can lead to deflation. That is why it’s hard to imagine inflation can be sustained in Japan.”In the US and Europe, companies usually respond to a rise in raw material and commodity prices by transferring those costs to consumers. In Japan, however, businesses fear a public backlash if they raise prices, while workers — beaten down by decades of stagnant pay — do not demand the higher wages that would let them afford higher prices in the shops.If companies must pay more for imports but cannot increase their retail prices, they will suffer a squeeze on profits. They often react by seeking to cut wage costs, ultimately creating deflationary and not inflationary pressure.According to government data released on Friday, Japan’s consumer price index was up 2.5 per cent in April compared with a year earlier while core consumer prices, which exclude volatile food prices, rose at the fastest pace in seven years, hitting the Bank of Japan’s target with growth of 2.1 per cent. But stripping out the impact from both food and energy, prices were up just 0.8 per cent from a year earlier.The Bank of Japan, along with most economists, is convinced that underlying demand in the Japanese economy is weak. It, therefore, expects with greater confidence than its counterparts in Europe and North America that the current bout of inflation will be transitory and will fade out once the impact of higher import prices has passed through the system.Several other factors help to explain why Japan’s inflation is lower than in other advanced economies and why analysts think it is less likely to endure.First, a big chunk of the April inflation number reflected the disappearance from annual comparisons of cuts in mobile phone tariffs engineered by the then prime minister Yoshihide Suga last year. That means underlying inflation is less than the numbers suggest.

Second, Japan’s economy has yet to recover to pre-pandemic levels, even though the country has never imposed the strict lockdowns carried out in other parts of the world. While there were fewer restrictions on economic activity, people have continued to take precautionary measures, even after most of the elderly were vaccinated against Covid-19. Japan is still closed to tourists. That has hit consumer spending hard.Third, while weakness in the yen used to provide a big stimulus to the Japanese economy, that effect is more muted than in the past. Big Japanese companies have relocated much of their supply chain to China. Demand for the capital goods Japan does still export has been heavily hit by the weakness of the Chinese economy.“In addition to the rise in commodity prices, the impact of the [Covid] lockdowns in China is serious, so manufacturers may find it difficult to expand revenue this year,” said Kiichi Murashima, Japan economist at Citigroup. “Companies also see the impact of the weaker yen as a temporary windfall and do not want to increase fixed costs [by raising wages].”The BoJ is confident that such inflation as Japan has will subside and it needs to support rather than restrain the economy. “The rise in prices expected in the short run will be driven by energy prices and lack sustainability,” said the bank’s governor Haruhiko Kuroda in a recent speech. “There has been no sharp increase in medium- to long-term inflation expectations.“I would like to re-emphasise that the current situation of Japan’s economy is completely different from the United States and Europe,” he said. More

Global stocks rallied at the end of a turbulent week after China unveiled fresh stimulus measures to fight a growth slowdown in the world’s biggest emerging market. Europe’s regional Stoxx 600 share index rose 1.5 per cent and London’s FTSE 100 gained 1.8 per cent. In Asia, Hong Kong’s Hang Seng index added 3 per cent and Japan’s Nikkei 225 rose 1.3 per cent. The moves came after China cut its benchmark mortgage lending rate by a record amount. Chinese economic activity plunged last month, during stringent coronavirus lockdowns. Goldman Sachs this week cut its China growth forecast for 2022 to 4 per cent, from a previous projection of 4.5 per cent.“Beijing wants to rescue the property markets, which have experienced the worst contraction in many years,” said economists at Nomura. The Japanese bank cautioned that the impact of cutting the five-year loan prime rate from 4.6 per cent to 4.45 per cent would be “limited”, as “the Omicron wave and draconian lockdowns in around 40 cities have significantly limited mobility, employment, income and the confidence of Chinese households”.S&P 500 futures gained 1.3 per cent in European trading on Friday. However, Wall Street equities were still headed towards their longest stretch of weekly losses since the dotcom bubble burst more than 20 years ago and some analysts predicted further falls to come. “Markets are in a slow grind downward,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. “It’s a combination of fear of a Fed mistake, if they raise rates too quickly, and fear that this inflationary trend is going to eat into spending, which then leads to a reduction in companies’ earnings.”The S&P 500 would have to rally more than 3 per cent on Friday to avoid adding a seventh week to its losing streak. The blue-chip equity barometer has not fallen for such a sustained period since 2001, according to Refinitiv data. Concerns about the global economy have intensified after the US Federal Reserve, the Bank of England and other major central banks raised borrowing costs and signalled more increases to come.Inflation has soared to multi-decade highs in the US and Europe after economies reopened following coronavirus lockdowns and Russia’s invasion of Ukraine disrupted food and fuel supplies. US retailers Walmart and Target this week issued downbeat earnings reports, highlighting how companies and consumers are struggling with rising costs.In bond markets, the yield on the benchmark 10-year US Treasury note was steady at 2.87 per cent, down from a high last week of 3.2 per cent. Treasury yields, which move inversely to prices, have fallen this week as growth jitters drove traders to seek low-risk assets.Major currencies drifted on Friday, with sterling up 0.2 per cent against the dollar to just under $1.25 and the euro 0.1 per cent lower at just below $1.06. More

The administration says federal spending trends are helping rein in price increases, but the economic calculus may be more complicated.As Americans deal with the highest inflation in decades, President Biden has declared that combating rising costs is a priority for his administration. Lately, he has cited one policy in particular as an inflation-fighting tool: shrinking the nation’s budget deficit.“Bringing down the deficit is one way to ease inflationary pressures in an economy,” Mr. Biden said this month. “We reduce federal borrowing and we help combat inflation.”The federal budget deficit — the gap between what the government spends and the tax revenue it takes in — remains large. But Mr. Biden has pointed out that it shrank by $350 billion during his first year in office and is expected to fall more than $1 trillion by October, the end of this federal budget year.Rather than stemming from any recent budget measures by his administration or Congress, the deficit reduction largely reflects the rise in tax receipts from strong economic growth and the winding down of pandemic-era emergency programs, like expanded unemployment insurance. And for many experts, that — plus the reality that deficits have a complicated relationship with inflation — makes the budget gap a surprising talking point.“It’s probably not something they should be taking credit for,” Dan White, director of government consulting and fiscal policy research at Moody’s Analytics, said of the Biden team’s emphasis on deficit reduction. The expiration of the programs is mostly “not making things worse,” he said.The Biden administration’s March 2021 spending package helped the economic rebound, but it also meant the deficit shrank less than it otherwise would have last year. In fact, the $1.9 trillion relief plan probably added to inflation, because it pumped money into the economy when the labor market was starting to heal and businesses were reopening.But the White House has explained its new emphasis on deficit reduction and fiscal moderation in terms of timing. Administration officials argue that back in March 2021, the world was uncertain, vaccines were only beginning to roll out and spending heavily on support programs was an insurance policy. Now, as the labor market is booming and consumer demand remains high, the administration says it wants to avoid ramping up spending in ways that could feed further inflation.“Supply chains have created challenges in ramping up production as quickly as we were able to support demand,” said Heather Boushey, a member of the White House Council of Economic Advisers. “The point he’s trying to make is that the plan, moving forward, is responsible and is not aimed at adding to demand.”Moody’s Analytics estimates that inflation will be about a percentage point lower this year than it would be had the government continued spending at last year’s levels.But few people, if anyone, expected those programs to continue. And while it is possible to make a rough estimate about how much fading fiscal support is helping with the inflation situation, as Moody’s did, a range of economists have said that it is hard to know how much it matters for inflation with precision.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.The tie between budget deficits and inflation is also more complex than Mr. Biden’s statements suggest.Deficits, which are financed by government borrowing, are not inherently inflationary: Whether they push up prices hinges on the economic environment as well as the nature of the spending or cutback in revenue that created the budget shortfall.Policies that reduce the deficit could be inflationary, for instance. A big, broadly distributed stimulus that gives direct cash aid to low- and middle-income households could be more than offset in a budget by revenue from large tax increases on the wealthy. But shuffling much of that money to people who are likely to spend it quickly could cause demand to outstrip supply, leading to inflation. Alternatively, spending that would enlarge deficits — like debt-financed investments in energy infrastructure — could reduce inflation over time if the program improves efficiency, expands capacity or makes production cheaper.“I’ll fall back on the typical economist answer and say: It depends,” said Andrew Patterson, a senior international economist at Vanguard.The last time the federal government had a budget surplus was 2001. Since 1970, there have only been four years in which the U.S. government taxed more than it spent. Over that period, there have been times of both high and low inflation.“There’s no simple-minded deficit-to-inflation link — you have to look at both the demand and the supply side of the economy,” said Glenn Hubbard, a professor of finance and economics at Columbia University who headed the Council of Economic Advisers under President George W. Bush. The existence or absence of high inflation has more to do with imbalances in the real economy than with complex budget math. “If aggregate demand grows much faster than aggregate supply, you will see inflation,” he said.Complicating matters in the current situation, the stimulus from the last couple of years is still trickling out into the economy because consumers have amassed savings stockpiles that they are spending down, and because state and local governments continue to use untapped relief funds.And stimulus-stoked demand is far from the only reason prices are rising. Over the past year, because of factory shutdowns and overburdened transit routes, companies have struggled to expand supply to meet booming demand. Shortages of cars, couches and construction materials and raw components have helped to push costs higher.Grocery shoppers in Los Angeles. The White House has argued that a shrinking federal budget deficit will help rein in consumer prices.Alisha Jucevic for The New York TimesRecent global developments are worsening the situation. The Chinese government’s latest lockdowns to contain the coronavirus threaten to shake up factory production and shipping, while the war in Ukraine has caused fuel and food prices to increase.Employers are also raising wages as they scramble to hire in a hot job market, and that increase in labor costs is prompting some companies to raise prices to protect their profit levels. Some companies are even increasing their profits, having discovered that they can charge more in an era of hot demand.The demand drag from fading pandemic relief doesn’t appear to have been large enough to substantially offset those other forces. To date, price gains for a range of goods and services have mostly accelerated.Inflation F.A.Q.Card 1 of 5What is inflation? More

Nationwide Building Society has warned that rising inflation and shrinking household budgets will hit the economy and house prices in coming months.The warning came as the UK’s largest building society reported on Friday that its annual profits had doubled — for the year to April 4, mortgage growth and higher interest margins pushed pre-tax profits to £1.6bn, up from £790mn the year before.UK chancellor Rishi Sunak said this week that “the next few months will be tough” after UK inflation hit 9 per cent in April, its highest level in over 40 years and more than any other G7 economy.Nationwide chief executive Joe Garner said that while the lender had not yet “seen significantly more people fall into financial difficulty” those “already struggling are finding it even more tough”.“The great injustice of this: the lower your income, the larger proportion is spent on food and fuel. By definition this hits the poorest hardest,” he added. Garner, who will be replaced at the head of the lender by TSB head Debbie Crosbie in June, added that the “cost of living crisis affects every person in a different way”.Gross mortgage lending at Nationwide, which is the second largest home-loan provider in the UK, rose from £29.6bn to £36.5bn. The company’s net interest margin, the difference between the interest it gets on its loans and securities investments and the rate it pays for deposits, rose by five basis points to 1.26 per cent.Rate hikes from the Bank of England have led UK lenders to increase interest rates on mortgages. That, in turn, has led to a surge of mortgage applications as borrowers rush to lock in rates before they get any higher.“The housing market has been remarkably resilient so far this year — it has continued to run above pre-pandemic levels for the first three months,” said Robert Gardner, Nationwide’s chief economist. “But with the pressure expected in coming quarters, it seems logical it will slow.”The building society’s common equity tier 1 ratio, a key benchmark of balance sheet strength, fell to 24.1 per cent, a significant reduction compared with the 36.4 per cent in the previous year but well above regulatory minimums. Nationwide said that this was the result of regulatory changes brought in at the start of the year. More

Joe Biden has decided to water down his Indo-Pacific Economic Framework in an eleventh-hour move to attract more countries to join the deal that he will unveil in Tokyo on Monday.Biden is using his first trip to Asia as US president to launch the IPEF, which is intended to respond to criticism from allies and partners that his strategy in the region has been too focused on security and lacked an economic component. Six people familiar with the situation said the US and other countries had agreed to change the language in the two-page statement that will accompany the unveiling of the IPEF.An early draft obtained by the Financial Times said the countries would “launch negotiations”. But the Biden administration has since agreed to dilute the language to convey that the countries were starting consultations aimed at later negotiations.Several people familiar with the talks said Tokyo had urged Washington to be more flexible to maximise the chances of having a deal that would include more south-east Asian nations.US officials were still negotiating the content of the statement on Thursday as Biden flew on Air Force One to South Korea, the first stop on his five-day, two-country visit to Asia. The National Security Council said the US would launch IPEF with an “initial range of diverse partners” that would show its “far reaching ambition”.“We’re pleased to see the strong interest in IPEF from the region,” said Saloni Sharma, NSC spokesperson, who disputed any characterisation that the vision and substance of the framework had changed after the article was first published. “Countries have different domestic and legal requirements and anyone who has ever negotiated a joint statement would tell you not to focus on a single word but focus on the strong outcomes that it will lead to,” she added. Countries across the Indo-Pacific have spent the past year urging Biden to develop an economic strategy to help counter China, which is rapidly increasing its power and trade presence in the region. Critics have accused Washington of having an “all guns and no butter” strategy, which they said had given China an opportunity to use its economic clout to pressure other countries.The US started talks with Indo-Pacific countries late last year. But Biden’s team struggled early on to convince many south-east Asian nations and India to join. Several of the people familiar with the discussions said some countries were reluctant because they did not see much value for them, particularly since the IPEF will not include access to the US market.The IPEF will contain four pillars that will tackle issues such as infrastructure, supply chain resilience and clean energy. It will also include discussions about creating a digital trade agreement, which Tokyo has urged the US to prioritise. American officials have argued that the IPEF is more suited to the 21st century than traditional trade deals that cut tariffs. They have also made clear that conventional agreements have become politically toxic in US politics, making it difficult to sign deals that grant market access. Japan and other US allies in Asia remain frustrated that then-president Donald Trump withdrew from the Trans-Pacific Partnership, a 12-nation deal, in 2017. But Hillary Clinton, his Democratic opponent in the 2016 election, had also come out against the TPP due to the souring on trade deals among some voters.“The trade-off all along with IPEF has been between inclusiveness and participation — a more demanding launch commitment would mean fewer participants, since the US is not offering to discuss new market access,” said Kurt Tong, a partner at consultancy The Asia Group and a former US ambassador responsible for economic issues.

Tong said the IPEF needed to include a critical mass of south-east Asian and emerging economies to be successful. “There will be lots of critics calling the IPEF a glass-half-full, but really the disappointment is not so much about the IPEF, per se, as about the US’s inability to rejoin TPP,” he said.Wendy Cutler, a former US trade negotiator and now vice-president of the Asia Society Policy Institute, said the IPEF was always going to be a “balancing act”.“The price for attracting more participants in initiatives like these is to be less heavy-handed on substance, inviting others to help shape it,” she said.Myron Brilliant, head of international policy at the US Chamber of Commerce, said the IPEF was “not CPTPP clearly”, referring to the regional trade accord that the US abandoned.“The US business community welcomes the IPEF as it gets us back in the trade game,” he added. “But its impact will be most felt only if countries like Vietnam, Malaysia and Korea sign up for a high standard digital framework.”One additional challenge for the launch of IPEF is that Australia will hold a general election on Saturday. If a new cabinet is not sworn in by Monday, the government will not have a formal mandate to start “negotiations”.Follow Demetri Sevastopulo and Kana Inagaki on Twitter More

China has cut its main mortgage interest rate by the most on record as it seeks to reduce the economic impact of Covid lockdowns and a property sector slowdown.The five-year loan prime rate was lowered from 4.6 per cent to 4.45 per cent on Friday. The reduction in the rate, which is set by a committee of banks and published by the People’s Bank of China, will directly reduce the borrowing costs on outstanding mortgages across the country.A cut was widely anticipated following data this week showing worsening economic conditions across the economy, but the 15 basis point reduction exceeded analyst expectations and was the most since the country’s rate system was reformed in 2019.“The move marks the strongest signal and action to support the property sector in recent years,” analysts at Citi said in a research note.President Xi Jinping, who is this year bidding for an unprecedented third term in power, has intensified the country’s strategy of virus elimination even as the economy has slowed sharply and the real estate sector has fallen into a severe decline.The zero-Covid approach limited case numbers significantly for much of the past two years, but over recent months has struggled to stamp out an outbreak of the highly infectious Omicron variant. The Omicron wave has led to the closure of Shanghai for nearly two months and full or partial lockdowns of hundreds of millions of people across the country.Official data for April released on Monday provided the clearest evidence of a sharp decline in activity stemming from the wave of lockdowns, with retail sales in April falling 11 per cent year on year. Industrial production, a core driver of China’s rebound from the pandemic’s initial shock two years ago, fell 3 per cent — its first decline since early 2020.The measures unveiled on Friday added to a pattern of gradual monetary easing in China, which was already grappling with a debt crisis in its economically critical real estate sector before the latest lockdowns were imposed. Liquidity problems late last year sparked a wave of defaults from developers and a severe slowdown in the property market.The five-year LPR rate is set by banks but is influenced by various PBoC measures. The rate was also cut in January, and the further reduction this week was widely viewed as part of an attempt to support the real estate industry, where sales by floor space plunged 42 per cent in April. Last weekend, the effective benchmark for mortgage lending to first-time buyers was also cut by 20 basis points.The one-year LPR, which is instead mainly used to price corporate loans, remained unchanged at 3.7 per cent.“This is a very targeted approach . . . basically highlighting their desire to support the real estate sector, which is clearly under stress,” said Becky Liu, Head of China Macro Strategy at Standard Chartered, who added that the PboC was guiding the rate lower.

“What has been announced or what has been done has not led to a stabilisation of the real estate sector,” she added.Chaoping Zhu, global market strategist at JPMorgan Asset Management, noted that a recent decline in bank loans highlighted “a lack of confidence among both corporate and household sectors”.The cut to China’s benchmark rate for mortgages delivered a boost to Chinese equities. Hong Kong’s Hang Seng index jumped 2 per cent and the CSI 300 of Shanghai- and Shenzhen-listed stocks rose 1.3 per cent, though both indices were still down by double-digits for the year. More

Richard Thalheimer remembers the last time inflation was proving so challenging to US retailers: it was when he was trying to get The Sharper Image off the ground in the late 1970s and 1980s. In 2006 he left the consumer gadgets chain he founded, selling his stake before its 2008 bankruptcy. Ever since, he has been investing the proceeds of the watches, massage chairs, iPods and Razor scooters he sold, building a portfolio worth up to $350mn with stocks including Amazon, RH and Home Depot. “It’s been so much fun,” he said. “Until this year”. As inflation races at levels last seen four decades ago, the retail sector that made Thalheimer wealthy is now making other investors poorer and stoking recession fears. This week, unexpectedly bad earnings announcements from Walmart and Target, two of its largest constituents, led to their steepest stock market falls since Black Monday in 1987.Days earlier, analysts had been touting such companies as defensive shelters from the storm in tech stocks that had slashed the valuations of companies from Amazon to Netflix. Early this week, Baird named Walmart its top “recessionary playbook” idea. But the shockwaves from Walmart and Target rippled through the wider retail sector and gave market bears a new concern: that inflation may now be biting consumers even before the Federal Reserve starts raising interest rates more aggressively. Retailers were the biggest drivers of a broad market rout on Wednesday that pushed the S&P 500 stock index to its worst one-day fall in almost two years.Until this week, the S&P 500’s consumer staples sub-index, which includes “big box” retailers such as Walmart along with businesses like pharmacies and food manufacturers, was still roughly unchanged for the year. The only other parts of the index that had avoided declines were energy and utility stocks, which had benefited from surging energy prices.By the close of Thursday, however, the sub-index had fallen almost 9 per cent and was on track for its worst week since the start of the coronavirus pandemic in March 2020. The retailers’ earnings flagged up not just one cause for concern, but three: that price increases may have reached the limit of what consumers will tolerate, that retailers are struggling to contain their own costs, and that unpredictable demand and new supply disruptions are forcing them to build up inventories.The first of those three is being most closely watched for its broader economic resonance. “You’ve got a consumer that is starting to pull back,” said Steve Rogers, head of Deloitte’s consumer industry centre, whose surveys suggest that 81 per cent of Americans are concerned about rising prices. Americans’ bank accounts may not have changed dramatically since last year, he said, but headlines about inflation have shaken their confidence. Some are trading down or holding off big purchases as a result, he added, particularly in discretionary categories such as clothing, personal care and home furnishings. Walmart, long seen as a bellwether of the US consumer, noted that high inflation in food prices “pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food”. Rogers and others, however, see retailers’ own cost pressures as a clearer driver of their changed fortunes than consumer pullback. At Walmart, for example, US fuel costs last quarter were over $160mn higher than it had expected — more than it could pass through to customers.“We did not anticipate that transportation and freight costs would soar the way they have,” echoed Target’s chief executive Brian Cornell. Higher wages and costs for containers and warehouses are also weighing on retailers’ profit margins.Some of those higher costs stem from the third force at work: a disrupted global supply chain that has left retailers scrambling to secure stock at a moment when demand for it is uncertain. “Their inventories are exploding,” Cathie Wood, chief investment officer at Ark Invest, wrote in a Twitter post on Walmart and Target. The reason for carrying more inventory than usual is that “they lived through the stock-outs of the past two years and know what that cost them”, said Rogers. Walmart chief executive Doug McMillon indicated that some of the build-up was deliberate, saying: “We like the fact that our inventory is up because so much of it is needed to be in stock.” Still, he admitted, “a 32 per cent increase is higher than we want”. Target’s inventories rose even further, up 43 per cent from a year earlier, and it conceded that it had failed to anticipate consumer spending shifts in categories from televisions to toys. “We aren’t where we want to be right now, for sure,” said Target chief operating officer John Mulligan, adding that “slowness in the supply chain” had forced it to carry more stock as a precaution. Wayne Wicker, chief investment officer at pension plan manager MissionSquare Retirement, said it should not be surprising to see signs of consumers reining in some spending, but said this week’s results were nonetheless a “wake-up call” for some investors because many companies had until recently claimed they were handling inflation challenges well.Walmart and Target both provided upbeat forecasts in their previous quarterly update, and did not pre-announce any changes before this week’s reports.“Part of the price decline was reflecting the fact that the management of these large companies didn’t provide any indication that they were going to have such a miss,” Wicker said.For Denise Chisholm, Fidelity’s director of quantitative strategy, this week’s reports did not provide convincing evidence that the economy is in trouble, but they spooked investors who were already nervous after earlier sell-offs. Despite the visceral market reaction to Target’s results, for example, its new lower forecasts would only return profit margins to pre-pandemic levels.“If there’s any differentiating factor compared with [previous bear markets], it has been the strength of earnings, so any kind of concern over earnings gives more volatility from a near-term perspective,” Chisholm said. But, she added, “despite a lot of the concern in the market, it is hard to reach an empirical conclusion that says recession is any more likely given what we’ve seen”.Thalheimer, whose portfolio is down by about $50mn from its peak, thinks markets overreacted this week and is already wondering when it will be time to consider snapping up beaten-down retail stocks. “During most of the big sell-offs of my lifetime — 2009, the [bust following the] dotcom bubble or 1987 — almost every one of these times within two years you [saw] very strong recoveries,” he said. That will happen again, he believes, but with the combined uncertainties around supply chains, the war in Ukraine and historic inflation, “there are going to be some choppy waters ahead”. More