Economy

Walmart shares suffered the biggest one-day drop since the eve of the Black Monday stock market crash after the company, cut its earnings guidance following a quarter in which it was wrongfooted by the rapid pace of inflation in the US.The share price reaction, a particularly severe one by the standards of typically less volatile consumer staple stocks, came after the company revealed profits in its latest quarter had taken an “unexpected” hit owing to higher wages, a jump in fuel costs and softness in general merchandise sales at its US businesses.As the world’s largest retailer, and long-regarded as a bellwether of the American consumer, Walmart’s commentary comes at a time when investors are scrambling to measure the impact of inflation, rising interest rates and supply chain snarls on the US economy.“US inflation being this high and moving so quickly, both in food and general merchandise, is unusual,” said chief executive Doug McMillon. “We knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food.”The company expects the higher staffing costs, affected by the winter wave of the coronavirus pandemic, to be isolated to the first quarter. McMillon said a “timing issue” with fuel costs, which accelerated in the quarter “faster than we were able to pass them through” and were $160mn higher in the US than the company had forecast, should be resolved by the end of the first half.Issues around US inflation — at its highest level in 40 years and which the Biden administration has dubbed its “top economic priority” — are more likely to persist.Walmart executives acknowledged more customers had switched towards cheaper private-label items, particularly in groceries, and away from branded goods. McMillon said inflation in food was running at a double-digit pace and he was “concerned that inflation may continue to increase”.Helped by higher prices for some of its items and consumer demand that remains robust overall, Walmart said it expected net sales for its 2023 fiscal year to increase 4 per cent in constant-currency terms, up from the 3 per cent forecast it provided in February. However, full-year earnings per share would now be down 1 per cent because of the unexpected costs that emerged in the first quarter, it said, having previously guided to a mid-single digit increase.In the current quarter, Walmart said operating income and earnings per share would each be “flat to up slightly”, having previously forecast an increase in the low to mid-single digits.The cuts to guidance caught investors off guard, given that Walmart had indicated three months ago it was continuing to navigate cost pressures and supply chain challenges. Shares closed 11.4 per cent lower, handing the stock its biggest one-day drop since October 16 1987 — the session before the Black Monday crash — and its second-largest decline in the past 40 years.Do-it-yourself retailer Home Depot was better able to cushion the blow from price pressures. Earlier on Tuesday, the company lifted its 2022 outlook after defying forecasts for a quarterly earnings decline. The company has encountered rising prices in many of its core commodity categories, such as lumber and copper, but chief executive Ted Decker said it was not entirely clear how inflation would affect consumer behaviour in the future.“Inflation is definitely higher than we thought,” Decker said on an earnings call. “But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected.”Data on Tuesday suggested US consumers have continued to spend at a robust pace despite rampant inflation. Retail sales, which include spending on food and fuel, rose 0.9 per cent in April, according to the US Census Bureau, matching economists’ forecasts, while March’s increase was revised higher to 1.4 per cent.The retail control group, which excludes building materials, motor vehicle parts and petrol station sales, rose 1 per cent, surpassing economists’ expectations for a 0.5 per cent increase. This was a slight moderation from March’s upwardly revised 1.1 per cent increase, after previously reporting a 0.1 per cent decline.Walmart’s $141.6bn in first-quarter revenue cruised past Wall Street’s forecast for almost $139bn. Reported net income of $2.05bn in the first three months of this year was down from $2.73bn a year ago. More

“What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that,” Powell said at a Wall Street Journal event. “If we don’t see that, we will have to consider moving more aggressively” to tighten financial conditions.”Achieving price stability, restoring price stability, is an unconditional need. Something we have to do because really the economy doesn’t work for workers or for businesses or for anybody without price stability. It’s the bedrock of the economy really.”Acknowledging the possible “pain” that controlling inflation might cause in terms of slower economic growth or higher unemployment, Powell said there were “pathways” for the pace of price hikes to ease without a full-blown recession.But if inflation does not fall, Powell said the Fed would not flinch from raising rates until it does.”If that involves moving past broadly understood levels of ‘neutral’ we won’t hesitate to do that,” Powell said, referring to the rate at which economic activity is neither stimulated nor constrained. “We will go until we feel we are at a place where we can say ‘yes, financial conditions are at an appropriate place, we see inflation coming down.'”The Fed has raised its benchmark policy rate by three-quarters of a percentage point this year, and is on track to increase it again in half-percentage-point increments at its next two meetings in June and July. Market interest rates on Treasury bonds, 30-year mortgages and other forms of debt have risen much faster in a financial tightening predicated on upcoming Fed actions. What happens next – how much more the central bank hikes rates, and how fast – depends on how the economy and inflation evolve, something Powell said the Fed would evaluate “meeting by meeting, data reading by data reading.”His remarks solidified expectations in rate futures markets that the Fed’s target rate would reach at least 2.75% to 3.00% by the end of this year and perhaps more, steadily rising from the current range between 0.75% and 1%. CME Group’s (NASDAQ:CME) FedWatch tool on Tuesday showed a greater than one-in-four prospect for the policy rate to end the year at between 3.00% and 3.25%, up from about a one-in-10 chance on Monday.’UNTIL SOMETHING BREAKS’Economists meanwhile are divided between those who feel inflation will collapse on its own and let the Fed do less, and those who feel the central bank may need to hike in increments of three-quarters of a percentage point to ever get control of inflation that reminds some of the shocks of the 1970s and early 1980s.Data in recent weeks have been chock with conflicting signals. Retail sales, hiring, and manufacturing output all show an economy that is itself unflinching, so far, in the face of higher borrowing costs.”The economy is strong. Consumer balance sheets are healthy. Businesses are healthy,” Powell said, contending that strength is one reason the Fed can push interest rates higher and slow growth enough to cool inflation without causing the sort of painful contraction the central bank has used in the past to clamp down on prices. At the same time, the war in Ukraine is making food and fuel more expensive around the world, while a new round of coronavirus lockdowns in China threatens to keep prices rising for manufactured goods and industrial inputs.Coupled with still strong consumer demand in the United States, that could force the Fed into even tougher action.The Fed targets an inflation rate of 2% annually, but prices using the central bank’s preferred measure are currently rising at more than three times that level. Inflation that is too fast can distort household and business planning, and, more to the point for the sense of urgency felt by Powell and his Fed colleagues, erode the ability of the central bank to keep it under control.”Once the Fed starts hiking, they continue to hike until something breaks. Now the question becomes is what we should be looking at as a potential break? The equity market? Is it credit? Is it housing? I think that’s going to be this cycle’s big unknown,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. More

The commodity-dependent economy is plunging into recession amid double-digit inflation after Russia sent thousands of troops into Ukraine on Feb. 24, triggering sweeping sanctions from the West that isolated the Russian economy and its financial sector.Russia needs a significant increase in “critical imports as well as imports required to modernise the … economy and raise its technological and production independence along with increasing investment in the purchase of necessary foreign assets”, VEB economists said in a report.Russia’s economy minister said last week the main challenges facing the Russian economy were supply chain disruptions and a significant reduction in imports.Russia’s imports could have fallen by 70-80% in April, according to CentroCreditBank’s analyst Evgeny Suvorov.”The scale of Russia’s isolation is shocking. And it could have dire consequences,” Suvorov said.In the report called “the Russian economy in conditions of a hybrid war”, VEB did not specifically mention the Ukrainian conflict, but said Russia needs “mobilisation of freedom and responsibility instead of a mobilisation economy”.Highlighting the need to invest in developing wealth, education, health, science and technology, VEB economists said the economy had “fairly high potential for resilience to short-term and medium-term shocks, but a new long-term policy needs to be built.””Under the conditions of the economic blockade by the West, the task of accumulating state savings, especially in the form of foreign exchange assets, loses its meaning.”Russia’s gold and forex reserves were above $600 billion before Moscow started what it calls “a special military operation” in Ukraine, but Western sanctions have frozen around half of Russia’s state coffers.VEB economists said they expected gross domestic product to shrink 10.2% in 2022 under its base scenario after 4.7% growth in 2021, and inflation to accelerate to 18.7% from 8.4%, projecting the central bank’s key rate at 12% by year-end.Real disposable incomes are projected to fall by 9.2% this year, under VEB’s base scenario.A drop in incomes is a sensitive issue, especially with rising prices hitting living standards. For years, President Vladimir Putin has promised to raise real disposable incomes.If the central bank cuts the key rate to 8% by the end of 2022 from the current 14%, it will lead to an extra increase in lending of 1 trillion roubles ($15 billion), VEB economists said.This would help reduce the contraction in GDP by 0.4 percentage points, they said. ($1 = 64.7520 roubles) More

Jay Powell said the Federal Reserve will continue tightening monetary policy until it sees “clear and convincing” evidence that inflation is coming back down towards the US central bank’s longstanding 2 per cent target.The Fed chair on Tuesday sought to affirm the central bank’s commitment to taming price pressures, saying restoring price stability was essential to the smooth functioning of the economy and vowing to raise interest rates to a level that actively constrains demand if necessary. “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,” he said during an interview at a Wall Street Journal event. As part of the Fed’s plans to move monetary policy “expeditiously” to a “neutral” setting that no longer stimulates demand, the Fed has raised interest rates by 0.75 of a percentage point since March from near-zero levels that had been in place for roughly two years. Further 0.5 percentage point rate rises such as the one the central bank implemented earlier this month are likely, with at least two more in the next two months. The Fed may consider a fourth half-point rate rise at its policy meeting in September if inflation does not moderate significantly by then, before dialling back the size of its increases to quarter-point increments. Traders now expect the federal funds rate to reach roughly 2.8 per cent by the end of the year, a sizeable jump from its current level of between 0.75 to 1 per cent. That is also within the 2 to 3 per cent range that Fed officials have previously indicated is considered “neutral” when inflation is at 2 per cent.Powell on Tuesday said the Fed “won’t hesitate at all” to raise rates above neutral if warranted by the data, although he reiterated that officials do not know with “any confidence” where that level is, given the strength of the labour market and the extent to which inflation is above the central bank’s target.He said the Fed would instead look at how financial conditions and the economy are adapting in real time. Powell’s comments come at a sensitive moment for global financial markets, which have gyrated wildly in recent weeks as investors weigh the odds of the US tipping into a recession as the Fed tries to tame high inflation. Powell added that there are “pathways” for the Fed to damp demand and bring down inflation without substantial labour market losses, although he said the unemployment rate may rise “a few ticks” from its very low 3.6 per cent level today.That would constitute a “soft or softish landing”, he said, although he acknowledged significant challenges to achieving that — including the run-up in commodity prices as a result of the war in Ukraine, which he said has “added to the degree of difficulty to what was already a challenging project”. More

PARIS (Reuters) – Global aircraft leasing faces a new shake-up this week after SMBC Aviation Capital’s deal to buy smaller rival Goshawk Aviation for $6.7 billion.The move comes as firms report a stronger than expected U.S.-led recovery — but one increasingly overshadowed by inflation, rising borrowing costs and the effects of the conflict in Ukraine.SMBC’s deal puts it in the no.2 industry spot globally, leapfrogging Dublin-based rival Avolon, behind AerCap.The long-awaited agreed takeover of Goshawk, which was confirmed by the company on Monday after a Reuters report last week, could increase pressure on smaller rivals to follow suit as funding costs rise with higher interest rates, analysts said.”It means only the biggest and strongest lessors can compete at the levels you need to compete at to win,” consultant Paul O’Driscoll of advisory firm Ishka, told Reuters.Leasing companies now control more than half the world’s fleet of aircraft and bankers say private equity firms are also hovering over at least one lessor as the industry matures.SMBC Chief Executive Peter Barrett, among the crop of leaders that emerged to run the Dublin-led aircraft leasing industry from the roller-coaster empire of Irish tycoon Tony Ryan, has said he expects the industry’s growth to continue.Speaking at the Airfinance Journal conference in Dublin two weeks ago, Barrett told delegates that a series of industrial and economic crises would reshuffle the deck.He did not address longstanding rumours of a tie-up with Goshawk at the event, one of a pair of back-to-back conferences in the world’s air leasing capital.”You need the motivation of sellers and that is going to change, also because of increased funding costs. That’s going to be a factor in whether owners hold these assets or trade them,” Barrett told the conference.SMBC declined further comment on the Goshawk deal after Monday’s announcement.AerCap Chief Executive Aengus Kelly, who shook up the industry by buying ILFC in 2013 and then GECAS last year to secure the no.1 spot, says size brings increased clout in crucial negotiations with repair shops and jetmakers.”You’re just at a different level to the rest of the industry,” Kelly told last week’s Airline Economics conference.”No one wants to do consolidation just to get bigger for the sake of getting bigger… but I would say it’s going to be something that will happen over time.” Leasing pioneer Steven Udvar-Hazy, however, warned against deals for their own sake.”It’s not going to change the total worldwide need for aircraft. It’s just a redistribution of who’s supplying those aircraft to the airlines,” the executive chairman of U.S.-based Air Lease (NYSE:AL) Corp said.”We’d rather add more airplanes than more staff and more bureaucracy…So we’ll continue to look at it and if there’s a golden opportunity will grab it,” he said.HIGHER LEASE RATES, FARESAfter a two-year absence during the coronavirus pandemic, delegates at the Dublin conferences trumpeted rising demand.The speed of the U.S. recovery in air travel has defied expectations, flouting amber warnings from higher interest rates to inflation, high oil prices and geopolitical risk.For now, there are shortages of key aircraft after Boeing (NYSE:BA)’s two-year 737 MAX safety grounding, then COVID-19 and most recently the confiscation of hundreds of planes in Russia.Even wide-body jet markets are seeing more tightness after years of oversupply, Kelly told analysts on Tuesday.Lessors warned airlines they were ready to pass on higher funding costs, which for travellers means higher ticket prices.”The lessors after many years have leverage over lease rates,” said Marjan Riggi, senior managing director for corporate aviation at Kroll Bond Rating Agency.But whether and how quickly inflation and lower disposable incomes could come back to bite the industry is unclear.David Power, special adviser to Aergo Capital and former chairman of Orix (NYSE:IX) Aviation, sees inflation as a hangover from years of central bank stimulus, but still reasonably manageable.”Growth is the cause; inflation is the effect. And the other reason for inflation is massive liquidity put into the system at a very low interest rates,” he told the Airline Economics event.Others fear that could trigger recession and cut traffic. Leasing veteran Norman Liu, who built GECAS out of the ruins of Ryan’s leasing empire in the 1990s, warned financiers over a return to growth-free inflation and questioned how long the travel snapback would last.”While everyone’s talking about a great summer for travel, when you talk to people about the fall…do we get into travel not being a novelty anymore?,” Liu said at the Airfinance Journal conference.”In the stagflation environment, what does that mean for the industry?” Liu added. More

“What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that,” Powell said at a Wall Street Journal event. “If we don’t see that we will have to consider moving more aggressively” to tighten financial conditions. The Fed will not hesitate to move beyond a neutral policy, if needed, he said. COMMENT:IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK“One of the biggest takeaways from our perspective, and this is why we’re seeing the front-end of the (Treasury) market sell off, is he observed that neutral rates do not represent a stopping or looking around point. So, we’ve always known that neutral is very difficult to estimate, and so the idea that the Fed was going hike a while and then pause and look around was out there, and it was on the table, but he just told us that isn’t going to occur. Now this is very consistent with what we’ve seen in the past, which is once the Fed starts hiking, they continue to hike until something breaks. Now the question becomes is what we should be looking at as a potential break the equity market? is it credit? is it housing? I think that’s going to be this cycle’s big unknown. It’s clearly not the equity market given the price action so far year-to-date and Powell effectively said we’re going to continue hiking until inflation eases.”“I think it was confirmation that they’re going 50 and 50 in June and July … and the big question is whether they will go 50 in September, that is the unknown.” More

Jerome H. Powell, the chair of the Federal Reserve, said that the central bank is focused on getting rapid inflation under control and that it is ready to intensify its efforts to tamp down price pressures if they do not begin to ease as policymakers expect.“What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down — and if we don’t see that, then we’ll have to consider moving more aggressively,” Mr. Powell said, speaking Tuesday afternoon on livestream hosted by The Wall Street Journal. “If we do see that, then we can consider moving to a slower pace.”Consumer prices climbed 8.3 percent in April from the prior year, and while inflation eased somewhat on an annual basis, the details of the report suggested that price pressures continue to run hot.The central bank has begun raising interest rates to try and cool the economy, announcing a quarter-point increase in March and a half-point increase earlier this month, which was the Fed’s largest increase since 2000. Mr. Powell and his colleagues have signaled that they will continue to push borrowing costs higher as they attempt to restrain spending and hiring, hoping to bring demand and supply into balance.They could raise rates by half-percentage-point increments at each of the Fed’s next two meetings, Mr. Powell suggested after the central bank’s May meeting. He repeated that message on Tuesday.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.“There was very broad support on the committee for having on the table the idea of doing additional rate increases of that magnitude at each of the next two meetings,” Mr. Powell said. “That’s short of a prediction.”While Mr. Powell emphasized the economic outlook is very uncertain, he and his colleagues have suggested that they want to push interest rates up to a neutral setting — a place where they are neither stoking nor slowing growth — “expeditiously.” But Mr. Powell suggested that officials are willing to raise rates beyond that if it is necessary to do so to control inflation.“We won’t hesitate at all to do that,” he said. “We will go until we feel like we’re at a place where we can say, ‘Yes, financial conditions are at an appropriate place, we see inflation coming down.’”The Fed chair said that the central bank can no longer simply hope that supply chain issues improve and help inflation to fade, and that it has to instead be proactive in trying to restrain prices by cooling down the economy.“We clearly have a job to do on demand — there is an imbalance in the economy broadly between demand and supply,” Mr. Powell said. He pointed in particular to the labor market, where workers are in short supply and wages are rising swiftly as employers compete to hire them.Inflation F.A.Q.Card 1 of 5What is inflation? More

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde has given national central bank chiefs a bigger say in policy meetings, asking her own board to speak less and set aside more time for debate, sources familiar with the process said.Lagarde has told chief economist Philip Lane and fellow board member Isabel Schnabel to limit their presentations and leave more space for the central bank chiefs of the euro’s 19 countries to air their views, six sources told Reuters.Marshalling consensus among different countries has always been a tricky task for the Frankfurt-based central bank and complaints about the structure of the meetings, where a few voices typically dominate, predate Lagarde’s tenure.Such criticism has grown since last summer as Lane and his staff repeatedly underestimated the size and duration of inflationary pressures. The surge in prices, which some ECB policymakers warned were persistent, eventually prompted the central bank to change tack and open the door to higher interest rates this year.Lagarde has now decided to limit board member presentations to 20 pages and told staff to wrap up seminars by lunchtime on the first day of the ECB’s policy meeting, the sources said.On top of that, the two-day policy meeting now starts on Wednesday morning rather than the afternoon and the Thursday session begins 30 minutes earlier than previously, all with the aim of leaving more space for debate, the sources said.The changes, which have not previously been reported, were already in use at the April 14 meeting.”We are now providing more comprehensive analysis in supporting documents prior to the meeting so that presentations can be more concise to avoid repetition,” an ECB spokesperson said. “By starting meetings earlier, the Governing Council has given itself more time to reach a shared assessment of the economic outlook and take collective monetary policy decisions.” As the person who oversees economic forecasts and the author of policy recommendations at the ECB, Lane’s presentations and proposals are the centre piece of its policy meetings, which include an informal dinner on the Wednesday evening attended by the national bank chiefs and the six ECB board members.Before the changes where introduced, some of Lane’s presentations ran to over 60 pages, three of the sources said, leaving little time for discussion.Although the new directive also applies to Schnabel, the other board member who addresses the meeting and who is head of the ECB’s market operations, her presentations on financing conditions tend to be relatively short, three sources said.Lane, who had inherited the meeting structure from his predecessor under Mario Draghi’s presidency, has recently been sending briefing materials to governors ahead of meetings, freeing time for others to speak.He declined to comment for this story.Inflation in the euro zone is currently nearly four times the ECB’s target and may not fall back below 2% for years, according to a host of public and private sector projections.Some policymakers had publicly warned that price surges could be bigger and more durable than the ECB predicted and disputed Lane’s view that the record jump would ease without tougher action. Some policymakers said privately they felt the contrasting views were given short shrift by Lane.”Philip has an oversized voice in the discussion so it’s good to balance that out,” one of the sources said. None of the sources wished to be identified due to the sensitivity of the matter.Lane and all other ECB policymakers who have spoken in public have now recognised that high inflation was here to stay at least until next year and rate hikes are likely needed.JOACHIM?In what one source saw as a possible change of approach at the April policy meeting, Lagarde called on Bundesbank chief Joachim Nagel in the early exchanges of the debate, even though Nagel had not yet appeared to ask to speak.Nagel, who started on the job in January, has repeatedly called on the ECB to curb stimulus and raise rates several times this year as high inflation, now at 7.5%, was at risk of getting entrenched.”Lagarde said ‘I think Joachim wanted to say something,'” one of the sources said.The ECB has acknowledged errors in its inflation projections but has noted that other forecasters looking at the euro zone were similarly wrong and errors in “conditioning assumptions”, particularly for energy prices, accounted for three-quarters of the mistake.Other central banks including the U.S. Federal Reserve and the Bank of England have also failed to predict the recent price surge which has been stoked by successive waves of the coronavirus pandemic and Russia’s invasion of Ukraine. However, both were quicker to admit that inflation is not as transitory as once hoped.The errors in the ECB’s forecasts forced the bank into an unprecedented policy pivot, with Lagarde first saying that a rate hike this year is highly unlikely, then just months later cementing expectations for a move around mid-year.Frustration that the bank had to switch gears so abruptly and as well the format of debate at policy meetings have prompted some policymakers to leak details of the policy meetings, the sources said.”Christine (Lagarde) is really annoyed by the leaks and this is another step in trying to stop them,” one of the sources said.When she took office in late 2019, Lagarde pledged to make the policy-making process more inclusive after the fractious final months of Draghi’s presidency – when a number of policymakers vocally opposed policy decisions.Her move to restructure meetings is seen as part of this commitment.Shortening presentations in favour of discussion brings the ECB closer into line with the practices of other central banks, including the Fed. 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