Finance

The euro hit parity with the U.S. dollar on Wednesday, meaning they had a 1:1 exchange rate. The last time the currencies were equal in value was 2002.
Americans traveling to one of the 19 European Union countries that accept the euro are essentially getting a 15% discount on purchases today relative to a year ago due to the exchange rate.
There are certain ways travelers can use their debit and credit cards to boost those savings, however.

The value of the euro relative to the U.S. dollar hit a two-decade low on Wednesday — and that’s good news for Americans traveling to Europe this summer.
A favorable exchange rate means travelers’ dollars will go further when making purchases abroad.

“Right now, your money goes further in Europe than it has in quite a few years, and it’s a great time to have that dream trip you’ve been putting off to Italy, France or Spain,” said Kate McCulley, a travel writer who lives in the Czech Republic and publisher of travel site AdventurousKate.com.

Parity approach ‘is like getting a 15% discount’

Not all European countries use the euro — it’s the official currency for 19 out of 27 European Union members.
Those countries are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
The euro hit parity with the U.S. dollar Wednesday morning, meaning the two currencies had a 1:1 exchange rate. That hasn’t occurred since 2002, when the euro was in its infancy.
At the currency’s low point on Wednesday, €1 was briefly worth $0.9999 before a slight rebound. It was trading at $1.0058 as of 10:40 a.m. ET.

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Triggers for the relative decline of the euro include the ongoing war in Ukraine, which has fueled fear of an energy crunch and recession, as well as U.S. interest rates moving sharply higher, pushing investors toward the dollar and from the euro.
One euro is down 11% from nearly $1.13 at the beginning of the year and down 15% from about $1.18 on July 13 last year.
As an example, an American who bought a €15 sandwich in Paris a year ago would have paid about $17.70. Today, that traveler would pay just over $15.
“It’s kind of like getting a 15% discount,” according to Sara Rathner, a travel expert at NerdWallet. “It’s more gentle on people’s travel budgets,” she added.
The U.S. dollar has also gained strength relative to many other currencies in the past year, such as the the Australian dollar, British pound, Chinese renminbi, Indian rupee and Japanese yen.

Inflation is raising travel costs

Brabo Fountain and City Hall, Antwerp, Belgium.
Shaun Egan | The Image Bank | Getty Images

That discount comes at a good time: Stubbornly high inflation has made it an expensive time to travel almost anywhere.
Costs at home in the U.S. for items like airfare, lodging, recreation and meals were up almost 19% in May relative to the same time in 2019, before the pandemic, according to the U.S. Travel Association’s Travel Price Index. (Domestic travel costs are also up more than 19% versus last year, but that partly reflects a comparison to low pandemic-era prices, the association said.)
Meanwhile, Americans’ appetite for international travel appears to be growing, spurred by factors like the recent scrapping of a Covid-19 testing requirement for international travelers flying to the U.S., as well as the lifting of a separate mask mandate on airplanes.

About 34% of U.S. travelers are likely to travel abroad this year, up 6 percentage points in a month, according to Destination Analysts, a tourism market research firm. The firm polled 4,000 travelers June 15-23.
When asked to list the foreign destinations they most want to visit in the next 12 months, European destinations comprised 6 of the top 10 most commonly named, according to Destination Analysts.
Flight searches to some top European destinations increased by double digits from July 3-11 relative to the previous week, according to Expedia data. Searches for Paris and Frankfurt flights each jumped 25%, while interest in Brussels and Amsterdam each rose 20%, and Dublin, 15%.
Lodging interest was also elevated in some cities, according to Hotels.com. Searches for lodging in Copenhagen rose 30%, and were up 15% for Athens and 10% for Madrid.
“It’s become an expensive time to travel,” Rathner said. “But people want to get back out there.
“People are ready to travel again,” she added.

How to take advantage of favorable exchange rates

Manarola fishing village in Cinque Terre, Italy
Matteo Colombo | Moment | Getty Images

Americans who want to take advantage of the favorable exchange rate should use a credit card without a foreign transaction fee whenever possible. Those fees can add 3% to the cost of each purchase, thereby eating into the euro-dollar savings, Rathner said.
Bring a backup credit card (if you have one) in addition to your primary in case yours isn’t accepted in certain establishments, she advised. This is generally due to card brands — while Visa and Mastercard are widely accepted around the world, that’s less true of American Express and Discover, Rathner said.
Further, travelers booking hotels or tours in advance (and have the option to be charged now or later) may wish to pay now to make sure they’re taking advantage of the low rate, McCulley said. It’s not a given the exchange rate will continue to get more favorable.
Travelers using cash should generally avoid converting their currency ahead of a trip, according to experts. “Ninety-nine percent of the time, it’s unnecessary, and you’ll get a worse conversion rate,” said McCulley.
Instead, travelers typically get a better rate by withdrawing money from an ATM in their destination country, experts said.

There are some caveats, however. For one, travelers should call their bank to make sure foreign ATMs accept their debit card. Banks also generally charge fees to withdraw money from ATMs overseas; travelers can assess how much cash they’ll need for the whole trip and make one big withdrawal instead of several smaller withdrawals to reduce those fees, according to Rathner.
Further, ATM operators may ask if users want money “with or without conversion,” or a similarly worded prompt. Basically, this practice, called “dynamic currency conversion,” means the ATM operator does the currency conversion instead of the bank.
However, travelers should decline the conversion offer since the ATM operator’s exchange rate is often worse, experts said. The same principle applies to local merchants that ask a similar question relative to credit or debit card transactions.

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Check out the companies making headlines before the bell:
Delta Air Lines (DAL) – Delta shares slid 2.9% in the premarket after reporting a mixed quarter. The airline earned an adjusted $1.44 per share for the second quarter, shy of the $1.73 consensus estimate. Revenue exceeded estimates on strong travel demand, but margins took a hit from higher fuel prices and higher operational costs.

Twitter (TWTR) – Twitter added 2% in premarket trading after the company sued Elon Musk to force him to adhere to the terms of their $44 billion takeover. Musk said earlier this week he was backing out of the deal, alleging that Twitter had violated the terms of their agreement.
Snap (SNAP) – The social media company is set to introduce a feature that would allow NFT artists to showcase their designs on Snapchat, according to people familiar with the situation who spoke to the Financial Times. Snap initially rose 1.7% in premarket action before paring those gains.
Stitch Fix (SFIX) – The clothing styler’s shares rallied 9.5% in the premarket following news that Benchmark Capital’s Bill Gurley bought one million shares. Gurley paid an average of $5.43 per share, according to an SEC filing. Gurley, who serves on the Stitch Fix board, already owned 1.22 million shares prior to the latest purchase.
Unity Software (U) – The provider of interactive software technology announced an all-stock merger agreement with ironSource (IS), an Israel-based software publisher. The transaction values ironSource at approximately $4.4 billion. Unity also announced it was cutting its full-year revenue guidance. Unity slumped 8.2% in premarket trading, while ironSource soared 57%.
Novavax (NVAX) – The drug maker’s stock added 2.4% in premarket action after Politico reported the company’s Covid-19 vaccine could receive FDA approval as soon as today.

DigitalOcean (DOCN) – The cloud computing company’s stock received a double-downgrade at Goldman Sachs, which cut its rating to “sell” from “buy.” Goldman’s move is based on expectations of softening demand, especially in international markets, as well as fading tailwinds in segments that have done well over the past 12 to 18 months. DigitalOcean fell 3.5% in the premarket.
Gap (GPS) – The apparel retailer’s stock fell 1.3% in the premarket as Deutsche Bank downgrades the stock to “hold” from “buy.” Deutsche Bank said there is little visibility about a sales recovery at Old Navy, as well as concern about an elevated level of promotions at both Gap and Old Navy. The stock fell 5% Tuesday following news that CEO Sonia Syngal was stepping down.
Fastenal (FAST) – The maker of industrial fasteners saw its stock slide 7% in premarket trading after it said it saw signs of softening demand in May and June. Fastenal’s comments came as it reported quarterly numbers that were generally in line with analyst forecasts.

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Bitcoin and other cryptocurrencies fell sharply as investors dump risk assets. A crypto lending company called Celsius is pausing withdrawals for its customers, sparking fears of contagion into the broader market.
Nurphoto | Nurphoto | Getty Images

Finance carries inherent risks, and while technology can change the way these risks are managed and distributed, it cannot eliminate them, says Bank of England Deputy Governer Jon Cunliffe.
Bitcoin has fallen more than 70% from its record high hit in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to CoinDesk data.
The extension of regulatory framework to encompass crypto “must be grounded in the iron principle of ‘same risk, same regulatory outcome.'”

Regulators need to “get on with the job” of bringing the use of crypto technologies within the “regulatory perimeter,” says Jon Cunliffe, Bank of England’s deputy governor for financial stability.
Speaking at the British High Commissioner’s residence in Singapore on Tuesday, Cunliffe shared insights on the recent “crypto winter,” which refers to a period of falling crypto prices that remain low for an long time.

Finance carries inherent risks, and while technology can change the way risks are managed and distributed, it cannot eliminate them, he added.
“Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse,” said Cunliffe.

Innovators, alongside regulators and other public authorities, have an interest in the development of appropriate regulation and the management of risk.

Jon Cunliffe
Deputy governor, Bank of England

Bitcoin has fallen more than 70% from its record high hit in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to CoinDesk data.
As investors dumped crypto amid a broader sell-off in risk assets, the market cap of crypto fell below $1 trillion, down from $3 trillion at its peak in November.
Cryptocurrencies may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk,” Cunliffe said, but he said he suspects the boundaries between the crypto world and the traditional financial system will “increasingly become blurred.”

“The interesting question for regulators is not what will happen next to the value of crypto assets, but what do we need to do to ensure that … prospective innovation … can happen without giving rise to increasing and potentially systemic risks.”

‘Same risk, same regulatory outcome’

Regulators have increasingly been sounding the alarm about crypto, and Cunliffe said the extension of a regulatory framework to encompass crypto “must be grounded in the iron principle of ‘same risk, same regulatory outcome.'”
“For example, if a stablecoin is being used as a ‘settlement asset’ in transactions … it must be as safe as the other forms of money,” he said.
Stablecoins are a type of cryptocurrency that are supposed to track a real world asset, usually another currency. Many of them attempt to peg themselves one-to-one with the U.S. dollar or another fiat currency. Some of them are backed by real-world assets such as bonds or currencies.
They were designed to offer a sound store of value to minimize price volatility. However, the collapse of terraUSD (UST) — a so-called “algorithmic” stablecoin that’s pegged to the U.S. dollar — sent shockwaves through crypto markets. Unlike other stablecoins, terraUSD was not backed by real assets. Instead, it was governed by an algorithm which attempted to peg it one-to-one with the U.S. dollar. That algorithm failed.

The holders of such stablecoins must have a clear legal claim that enables them to redeem the coin within the day and “in par, with no loss of value” in central or commercial bank money, Cunliffe said.
“Needless to say, such a requirement is a long way from the world of Terra and Luna,” he said, referring to TerraUSD, which plunged as low as 26 cents even though it’s meant to maintain a one-to-one U.S. dollar peg.
Its sister token Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST, also lost nearly all of its value.
“Implicit in our regulatory standards and frameworks are the levels of risk mitigation we have judged necessary. Where we cannot apply regulation in exactly the same way, we must ensure we achieve the same level of risk mitigation.”
He recommended that the activities be halted “if and when for certain crypto related activities this proves not to be possible.”

The Bank of England official said that for the “same risk, same regulatory outcome” approach to be effective, it needs to be carried forward across international standards and incorporated into domestic regulatory regimes.
The U.K. Financial Stability Board will publish a consultation report later this year with recommendations for promoting international consistency in regulatory approaches to non-stablecoin crypto assets, markets and exchanges, he added.
Innovators, regulators and public authorities have an interest in developing appropriate regulation and managing risks, he said.
“It is only within such a framework, that [innovators] can really flourish and that the benefits of technological change can be secured,” Cunliffe added.

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China’s retail sales have lagged ever since the pandemic began in 2020. Locals’ inclination to save, rather than spend or invest, has climbed to its highest in 20 years, according to People’s Bank of China surveys.
Guangdong-based Miniso’s founder and CEO Jack Ye said sales in New York City are growing rapidly, and he plans to open a North America product development center this year.
In the last few years, home appliance companies Midea, Hisense and Haier Smart Home have expanded overseas, where revenue sometimes grows faster than within China.

BEIJING — Some Chinese consumer brands are looking for growth overseas, in markets like the U.S. and Southeast Asia.
Take Miniso, a Guangdong-based seller of toys and household products. Sometimes called China’s Muji, Miniso opened a flagship store in New York City’s SoHo in February.

The store’s gross merchandise value — a measure of sales over time — is clocking around $500,000 a month, with $1 million a month likely by December, founder and CEO Jack Ye told CNBC in late June.
More importantly, he said that for directly operated stores in the United States, Miniso’s gross profit margin is well above 50%.
“If we can gain a firm foothold here and create a good business, we will have no problem in the U.S. overall,” Ye said in Mandarin, according to a CNBC translation. His goal is to become the first “$10 and under” retailer worldwide.
Miniso stores began popping up in mainland China nearly 10 years ago, with overseas expansion beginning in 2015 in Singapore. As of March, the company said 37% of its 5,113 stores were overseas.

Faster growth outside China

Like many businesses, Miniso saw sales drop during the pandemic. More than two-thirds of its revenue still comes from China. But in the last several months, data showed a relatively rapid pickup internationally versus domestically, a result of the varying effects of the pandemic.

In the nine months ended March 31, the company said, its China revenue grew by 11% year on year to 5.91 billion yuan, versus 48% growth overseas to 1.86 billion yuan.
China’s retail sales have lagged ever since the pandemic began in 2020. A slump in the housing market hasn’t helped. Locals’ inclination to save, rather than spend or invest, has climbed to its highest in 20 years, according to People’s Bank of China surveys.

“Chinese companies expanding into overseas markets will be a major trend going forward,” said Charlie Chen, head of consumer research at China Renaissance. “China has actually entered a relatively wealthy stage with a relatively high per capita GDP.”
He pointed out that for products like air conditioners, penetration among rural households was 73.8% in 2020 — and even higher at 149.6% in urban areas. China Renaissance expects those penetration rates will increase steadily in the next few years.
“There is very little incremental volume or incremental demand that can be created in China in a short period of time,” Chen said. “For these air conditioner, home appliance companies, where they can get more revenue, it’s overseas.”

Miniso opened its first flagship store in New York City’s SoHo in February 2022.

In Southeast Asia, air conditioners have a household penetration rate of 15%, according to the International Energy Agency.
Home appliance companies Midea, Hisense and Haier Smart Home have pressed into markets outside China over the last several years. Haier even acquired General Electric’s appliance unit for $5.4 billion in 2016. Hisense’s goal is that by 2025, overseas markets will generate half of its total revenue.
Those companies are seeing strong growth overseas, if not faster than in China.
“Definitely if [Chinese companies] want to get into overseas markets, [they] need to build their brand, need to fight with existing competitors,” Chen said. “The cost will not be low. Initially they would not be profitable. But they are investing.”
If Chinese businesses are able to build their brand overseas, they can compete with lower selling prices since they own or work directly with factories in China. That has helped companies like Shein become an international e-commerce giant.

Similarly, Miniso’s Ye said his strategy in the U.S. is combining the company’s supply chain network in China with New York designers’ work — so products can go from designs to store shelves in about three months.
That process could take six months or even a year if the design firm needed to find its own factories, Ye claimed.
“Overseas, what we lack right now are design ideas suitable for locals,” he said. He said Miniso plans to open its North America product development center later this year and is looking for office space in New York.

June expansions

Other Chinese companies have pressed on with overseas expansion despite Covid travel restrictions.
Ant Group, the fintech affiliate of Alibaba, announced in June it launched a digital wholesale bank in Singapore after receiving approval from the Monetary Authority of Singapore.
Also in June, Hong Kong-listed toy company Pop Mart tested U.S. waters by opening its first temporary location near Los Angeles. The company sells sets of collectible toy figures — in unmarked boxes. That means a customer might get a new toy to add to a collection, or the same toy as the customer has already bought.
Like Miniso, Pop Mart stores have become commonplace in Chinese malls. There’s even a Pop Mart store at Universal Beijing Resort.

Localization challenges

It remains to be seen whether recent overseas growth will last for those Chinese companies.
For business or geopolitical reasons, many Chinese businesses haven’t found success abroad. Take ZTE’s failure to expand its smartphone business in America after U.S. sanctions.
Wildly successful companies like short video company TikTok, owned by Beijing-based ByteDance, have come under U.S. government pressure over data security concerns.

Read more about China from CNBC Pro

That’s not to mention the inherent challenge of becoming an efficient international organization. A CNBC report on Chinese tech companies found the business culture at home — which involves heavy use of Mandarin and long hours — often made its way overseas and discouraged local employees from staying.
But whether in electric cars or home appliances, conversations with many Chinese businesses reveal a deep-seated but vague ambition that hasn’t been swayed by the pandemic: to become a global company.
Disclosure: NBCUniversal is the parent company of Universal Studios and CNBC.

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Stock futures were little changed in overnight trading on Tuesday as investors awaited a key inflation report that is expected to show a fresh high.
Futures on the Dow Jones Industrial Average edged up 18 points. S&P 500 futures and Nasdaq 100 futures were both flat.

The consumer price index, slated for at 8:30 a.m. ET Wednesday, is expected to climb by 8.8% in June on a year-over-year basis, according to Dow Jones’ survey of economists. That would be even higher than May’s 8.6% reading, which was the biggest increase since 1981.
“The market is anticipating that June will be the new peak,” said Lindsey Bell, Ally’s chief markets and money strategist. “The reading is likely to confirm what the jobs report on Friday told us – that the Fed will stick to their aggressive rate tightening timeline.”
The likely hot reading could prompt the central bank to hike another 75 basis points during this month’s meeting. Last month, the Fed raised its benchmark interest rates three-quarters of a percentage point to a range of 1.5%-1.75% in its most aggressive hike since 1994.
“The Fed’s credibility will be tested in coming months with the release of inflation numbers and corporate earnings,” said Andy Sparks, head of portfolio management research at MSCI. “The Fed’s recent aggressive actions to bring down inflation also run the risk of overshooting, pushing an economy that had been showing signs of weakness into a full scale recession.”
Meanwhile, investors will monitor second-quarter corporate earnings as major banks are set to report this week. JPMorgan and Morgan Stanley are slated to post results Thursday before the bell. Delta Air Lines reports before the bell Wednesday.

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In recent years government debt seemed to matter less and less even as countries borrowed more and more. Falling interest rates made debts cheap to service even as they grew to levels that would have seemed dangerous a generation before. The pandemic put both trends into overdrive: the rich world borrowed 10.5% of its gdp in 2020 and another 7.3% in 2021, even as long-term bond yields plunged. Now central banks are raising interest rates to fight inflation and debt is becoming more burdensome. Our calculations show that government budgets will feel a squeeze far more quickly than is commonly understood. In May America’s budget officials raised by a third the forecast cumulative interest bill between 2023 and 2027, to 2.1% of gdp. That is lower than forecast before the pandemic, but it is already an underestimate. Officials optimistically assumed the federal funds rate would peak at 2.6% in 2024, but markets now expect the rate to exceed 3% in July 2023. In the euro zone, as interest rates have risen, the premium indebted countries like Italy must pay to borrow has gone up, reflecting the danger that their debts may eventually become too onerous to service. Britain’s officials forecast in March that its government would spend 3.3% of its gdp servicing its national debt in 2022-23, the highest share since 1988-89. For a given cost of borrowing, three main factors determine the cost of servicing legacy debts. Two are straightforward: the level of debt, and the proportion of it whose value is pegged to inflation or prevailing interest rates. Britain’s debt-service costs have risen so sharply, for example, because an astonishing one-quarter of its debt is inflation-linked.The third factor is more complex: the maturity of the debt. When governments issue long-dated bonds, they lock in the prevailing interest rate. In 2020 America’s Treasury issued about $200bn-worth of 30-year debt at yields of less than 1.5%, for example. The more long-dated debt, the longer it takes for budgets to take a hit when rates rise. The most common measure of this protection, the weighted average maturity (wam) of debt, can be a source of comfort. Britain, in particular, has a lot of long-dated bonds: the wam of its bonds and treasury bills is about 15 years.But measures of maturity can mislead. The wam can be skewed upwards by a small number of very long-dated bonds. Issuing 40-year debt instead of 20-year debt raises the wam but does not change the speed with which rising interest rates affect budgets over the next few years. The Office for Budget Responsibility (obr), Britain’s fiscal watchdog, has suggested an alternative measure. Suppose you line up every pound (or dollar) a government has borrowed by the date on which the debt matures. Halfway along you would find the median maturity—the date by which half the government’s borrowing would need to be refinanced at higher rates. Call it the interest-rate half-life. Though Britain’s wam is 15 years, its interest-rate half-life is lower, at about 10 years.There is another complication. Central banks in the rich world have implemented huge quantitative-easing programmes (qe), under which they have bought trillions of dollars worth of government bonds. To do so they have minted fresh electronic money, known as central-bank reserves. These reserves carry a floating rate of interest, the adjustment of which is the main tool of monetary policy. When rates rise, the cost to central banks of paying interest on the ocean of reserves created under qe rises immediately. Raising interest rates thus reduces central-bank profits. And because those profits typically flow straight into government coffers, taxpayers suffer.The effect of qe is therefore the same as if governments had replaced vast amounts of debt for which the interest rate was locked in with debt carrying a floating rate. For most of the history of qe this refinancing operation has been highly profitable, because bond markets repeatedly forecast interest rates would rise sooner than they did. From 2010 to 2021 the Fed remitted over $1trn to America’s Treasury. qe has been particularly lucrative for central banks in euro zone countries whose long-term debt is risky and therefore carries a high yield. National central banks such as the Bank of Italy carry out most of the ecb’s qe locally, bearing the default risk and earning the yield on the bonds of their respective home states, while also paying their share of the ecb’s interest costs. Earning the yield on Italian government debt while paying out much less in interest on reserves helped the Bank of Italy to remit profits worth 0.4% of gdp to the government in 2020.As short-term rates rise, profits from qe will gradually dry up, and could even turn negative. In May the Federal Reserve Bank of New York, which manages the Fed’s qe portfolio, projected that interest rates one percentage point above what was expected by market participants in March would be enough to turn the portfolio’s net income negative for a short time—a scenario that today looks likely. Another percentage point on interest rates would lead to negative net income for two to three years. A full accounting of interest-rate sensitivity must thus adjust for the holdings of central banks, treating the associated debt as carrying a floating rate of interest. Refreshing the obr’s calculations, we find that qe reduces Britain’s interest-rate half-life to just two years, meaning 50% of Britain’s government liabilities will roll on to new interest rates by late-2024. We have also replicated the exercise for bonds and bills issued by governments in America, France, Italy and Japan (see chart). For France and Italy the interest-rate half-life is an estimate. The central banks involved disclose which bonds they hold, and the wam of their holdings, but do not reveal how much they have bought of each bond issuance. Our calculations assume they hold a flat proportion of each bond’s outstanding value (which in both cases produces a portfolio whose wam roughly matches the disclosure).In every case, the interest-rate half-life is much lower than the reassuring wam. Most striking are the results for Japan and Italy, which have the highest debts. Because the Bank of Japan has replaced nearly half the Japanese bond market with its reserves, the interest-rate half-life is vanishingly short. Thankfully inflation in Japan is only 2.5% and expected to fall. There is little pressure to raise interest rates. The same cannot be said for the euro zone, where the ecb is projected to raise rates rapidly so as to tame inflation. It is often noted that Italy’s huge debts of over 150% of gdp at least carry a wam of over seven years. But Italy will in fact inherit higher funding costs quickly because its interest-rate half-life is little more than two years. Were the ecb’s policy rates to reach 3%, the Bank of Italy’s share of the interest costs would immediately rise by an annual 1.2% of gdp. Every one percentage point increase in the financing costs on the €462bn of debt (net of central banks’ estimated holdings) coming due by July 2024 would cost the government another 0.3% of gdp annually. Is there any way for indebted countries to avoid higher interest costs? It might seem tempting to unwind qe faster, by selling bonds (rather than waiting for them to mature, as several central banks are currently doing). But selling bonds would cause central banks to book capital losses, because rising yields have eroded the value of their bondholdings. At the end of March the Fed’s unaudited financial statements showed an unrealised capital mark-down of $458bn on its qe portfolio since the start of the year; Paul Kupiec and Alex Pollock of the American Enterprise Institute, a think-tank, estimate that the hole has since grown to about $540bn.Another option is to find a way for central banks to avoid paying interest on reserves. A recent report by Frank Van Lerven and Dominic Caddick of the New Economics Foundation, a British think-tank, calls for central banks to pay interest on only a sliver of reserves that affects their decision making, rather than the whole lot. The ecb and the Bank of Japan already have such a “tiered” system. It was designed to protect commercial banks from the negative interest rates they have imposed in recent years.Using tiering to avoid paying banks interest while their funding costs went up would be a tax in disguise. Banks, considered together, have no choice but to hold the reserves qe has force-fed into the system. Compelling them to do it for free would simply “transfer the costs [of qe] to the banking sector,” Sir Paul Tucker, a former Deputy Governor of the Bank of England, told a parliamentary inquiry in 2021. It would be a form of financial repression which may impair banks’ ability to lend. A third option is to tolerate high inflation rather than raise rates. Despite rising interest costs, many countries’ debt-to-gdp ratios will fall this year as inflation eats into the real value of their debts. Many prominent economists have argued that an inflation target of 3% or 4% would be better than one of 2%. For now the idea is pie-in-the-sky. Central banks are too worried about their credibility to switch targets, and with good reason: break your promises on inflation once and people may wonder if you will do it again. But because making the switch would deliver a one-time fiscal windfall at the expense of long-term bondholders, and because inflation can be painful to get down, it could eventually appeal to indebted governments.Whether it is banks, taxpayers or bondholders, somebody has to pay the bills that are now falling due. Rising interest costs will further squeeze government budgets already under pressure from higher energy costs, rising defence spending, ageing populations, slowing growth and the need to decarbonise. With inflation high, it is also a bad time to let deficits grow—a path that might force central banks to raise rates even more. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

A Gap store in New York, August 2, 2020.
Scott Mlyn | CNBC

Check out the companies making headlines in midday trading.
Gap — Shares of the apparel retailer dropped more than 5% after Gap announced Monday that CEO Sonia Syngal is stepping down from her position. Wells Fargo downgraded the stock to equal weight from buy following the move, saying the firm can no longer recommend a stock that is dealing with so many challenges within its own company — especially as investors deal with a difficult economic backdrop.

Boeing — The aerospace company’s shares jumped more than 7% after it reported that its deliveries have reached their highest monthly level since March 2019. Boeing delivered 51 airplanes in June, totaling 216 jets during the first half.
Airline stocks – Shares of American Airlines jumped nearly 10% after the company updated its second-quarter guidance, expecting total revenue to rise by 12% compared to the same period in 2019. Delta Air Lines gained about 6.15% ahead of its earnings, which are scheduled for Wednesday. Southwest also rose 4.64% after Susquehanna upgraded the stock to a positive rating from neutral.
Peloton – Peloton shares added 3.7% after the fitness equipment maker said it’s suspending its in-house manufacturing operations and broadening its partnership with Taiwanese manufacturer Rexon Industrial.
Twitter – Shares of the social media company rebounded more than 4% following a 11% decline in the previous session. Twitter said Monday in a letter that Elon Musk’s bid to terminate his proposed $44 billion acquisition of the social media company is “invalid and wrongful.”
Dave & Buster’s – Shares of Dave & Buster’s fell nearly 4% to a 52-week low after the entertainment-themed restaurant announced a slew of executive changes to its C-suite. The hires will take effect August 1.

PriceSmart—Shares of discount retailer PriceSmart plunged nearly 10%, touching a 52- week low a day after the company reported earnings that missed analysts’ expectations, even though sales outperformed. PriceSmart also said it is trying to offload excess inventory at discount prices, as it’s been hit by shifts in consumer demand and supply chain disruptions.
Canoo—Shares of EV maker Canoo surged 53.16% after Walmart agreed to purchase at least 4,500 of its upcoming electric delivery vans. Through the agreement, Walmart may purchase up to 10,000 of the electric vans.
Microsoft – Microsoft slipped 4.10% after Morgan Stanley lowered its price target on the company to $354 from $372. The firm also said that the stock is not immune to macro risks.
— CNBC’s Sarah Min, Samantha Subin and Yun li contributed reporting

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Goldman Sachs is adding Alphabet’s Jared Cohen to help start a new innovation group, CEO David Solomon said Tuesday in a memo obtained by CNBC.
Cohen is a protege of former Google CEO Eric Schmidt and founder of Jigsaw, an incubator at the tech giant.
The group, called the Office of Applied Innovation, will be lead by Cohen and co-chief information officer George Lee.
“Working closely with leaders across Goldman Sachs, George and Jared will specifically identify and advance commercial opportunities for the firm that are at the intersection of a changing global marketplace, shifts in the geopolitical landscape and rapidly evolving technology,” Solomon said.
Both will report directly to Solomon.

Jared Cohen
Anjali Sundaram | CNBC

Goldman Sachs CEO David Solomon has hired another senior executive from the technology sector.
The investment bank is adding Alphabet’s Jared Cohen, a protege of former Google CEO Eric Schmidt and founder of Jigsaw, an incubator at the tech giant, to help start a new innovation group, Solomon said Tuesday in a memo obtained by CNBC.

It’s the latest step Solomon has taken to inject a technology focus into the 153-year-old investment bank. The group, called the office of applied innovation, will be lead by Cohen and co-chief information officer George Lee. In 2019, Solomon hired former Amazon Web Services executive Marco Argenti as co-chief information officer.
“Working closely with leaders across Goldman Sachs, George and Jared will specifically identify and advance commercial opportunities for the firm that are at the intersection of a changing global marketplace, shifts in the geopolitical landscape and rapidly evolving technology,” Solomon said. Both of the men will report directly to him, Solomon added.
Cohen is joining New York-based Goldman at its senior-most rank: He’ll be a partner and management committee member and will also serve as president of global affairs, Solomon said.
The moves leave Argenti as sole chief information officer starting in October, he added.

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