Finance

When china was locked down during the first wave of the pandemic in early 2020, economic forecasters had to make two predictions: how much would the economy suffer? And how much of this suffering would the official statistics be allowed to reflect? When China reported a historic 13.5% decline in industrial production in January and February 2020, compared with a year earlier, it surprised many forecasters not because it diverged from their bleak view of the economy, but because it challenged their cynical view of the statisticians.Now that China is squirming under its most stringent lockdowns since early 2020, the same conundrum has returned. How bad will the economy get? And how faithful will the data be? An early answer to both questions arrived this week. The data were worse than expected, and therefore worthier than feared. On May 16th China reported that industrial production fell by 2.9% in April compared with a year earlier. Compared with the previous month, it fell by over 7%, according to the National Bureau of Statistics. The number was the most consequential surprise since the spring of 2020, according to a measure by Goldman Sachs, which considers both the scale of the forecast error and the significance of the indicator. Retail sales fell by 14% compared with a year earlier, once adjusted for inflation. Catering fell by more than 22% and car sales by over 30% in nominal terms. In locked-down Shanghai, sales of cars were “about zero”, according to the Shanghai Automobile Sales Association.Some of the most spectacular declines were in the all-important property sector. Sales of new homes fell by 42% and housing starts by over 44%. Even China’s unemployment figures, long mocked for their uncanny stability, were morbidly interesting. In 2018 China rolled out a new unemployment survey in its cities. This superseded an older, spectacularly uninformative measure, which counted the number of people who qualified for, and were able to claim, unemployment benefits. The new survey showed unemployment rising to 6.1% in April, still a little below its peak of 6.2% in February 2020. But in 31 big cities, unemployment is now 6.7%, whereas it reached only 5.7% in 2020. This suggests that Omicron—or the policy response to it—has hurt China’s larger cities disproportionately. The pattern of economic pain is different this time. It remains to be seen whether these grimly realistic monthly indicators will translate into a similarly unflattering official gdp figure for the second quarter. When the pandemic first struck, China had yet to commit itself to an official growth target for the year. That perhaps gave it more leeway to report a big drop in first-quarter gdp. This year, by contrast, China’s leaders have already set a target of around 5.5%, and promised as recently as April 29th to try to meet their economic goals. It is just not clear how. On May 15th China’s authorities said the floor on mortgage rates would be cut for first-time buyers. But that will make little difference if people cannot go out to view properties. The government has also placed great emphasis on infrastructure investment. But this increased by only 4.3% in nominal terms in April, compared with a year earlier—far short of the 18% pace that Natixis, a bank, thinks it needs to reach if China is to grow anywhere near 5% this year.Until the authorities relax their covid controls, their efforts to revive growth are likely to be ineffective. They must therefore be hoping that Omicron recedes fast enough to allow growth to catch up later in the year. Alternatively, if China cannot bring itself to abandon its growth target, it may have to fiddle its gdp figures. That would be a pity. Many of China’s economic indicators may be shrinking dramatically. But their credibility edged up this week. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City.
Spencer Platt | Getty Images

Stock futures dipped in overnight trading Wednesday after the Dow Jones Industrial Average experienced its biggest one-day drop since 2020.
Futures on the Dow Jones Industrial Average shed about 30 points. S&P 500 futures eased 0.1% and Nasdaq 100 futures shed 0.2%.

The moves after hours came following a steep market sell-off as big-box retail earnings indicated inflation weighing on corporate profits.
Back-to-back quarterly reports from Target and Walmart showed higher fuel costs and restrained consumer demand hurting results amid the hottest inflation in decades.
The Dow shed more than 1,100 points in the average’s biggest decline since June 2020. The blue-chip average closed at its lowest level since March 2021. The S&P 500 lost about 4%, also its worst drop since June 2020. The Nasdaq Composite fell 4.7%
“This is continuing the narrative that … we’re going to be meaningfully lower this year in stocks before we find a bottom,” Guggenheim Partners Global Chief Investment Officer Scott Minerd told CNBC’s “Closing Bell: Overtime” on Wednesday.
The sell-off Wednesday was broad with all 11 S&P 500 sectors closing down. Consumer discretionary stocks were hardest hit, down 6.6%.

Investors will get more corporate earnings to parse through Thursday with companies like BJ’s Wholesale, Kohl’s, Applied Materials and Ross on deck.
Initial jobless claims are also slated for release Thursday morning.

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At Block’s first investor day since 2017, executives describe how crypto and music-streaming businesses make up an “ecosystem” beyond the original card reader. 
The future of Block, formerly known as Square, will also be focused on CEO Jack Dorsey’s long-term belief in the cryptocurrency bitcoin. 
 “Calling Block a payments company is like calling Amazon a bookseller,” CFO Amrita Ahuja tells CNBC. “We’ve grown in so many different ways across multiple dimensions.”

Twitter CEO Jack Dorsey addresses students during a town hall at the Indian Institute of Technology (IIT) in New Delhi, India, November 12, 2018.
Anushree Fadnavis | Reuters

Block executives no longer want the firm to be seen as a payments pure play.
The San Francisco-based company held its first investor day in five years Wednesday, where the C-suite made its case to Wall Street that the money app, along with its crypto and music-streaming businesses, should be valued as an “ecosystem” instead.

“Calling Block a payments company is like calling Amazon a bookseller,” CFO Amrita Ahuja told CNBC in a phone interview. “We’ve grown in so many different ways across multiple dimensions.”
Co-founder and CEO Jack Dorsey, who formerly ran Twitter, kicked off Wednesday’s presentation with a keynote on the evolution of Block and bitcoin’s role in it going forward. It’s “difficult” to fit a company like Block into a single category, he said.

“We are no longer just a payments company,” Dorsey said during the livestreamed event. “A lot has changed since our last investor day.”
Square was founded in 2009 and made its name by creating a credit card reader for mobile phones. The company expanded its scope to peer-to-peer payments and bank-like products with Cash App. It also acquired Afterpay and Jay-Z’s Tidal music streaming service. The company also operates an FDIC-insured bank, and it offers stock and cryptocurrency trading.
Square’s corporate renaming to Block was meant in part to reflect that widening aperture and broader plans around crypto and blockchain. 

While fintechs were among the best performers during the coronavirus pandemic, Block and its peers have been pummeled in 2022 amid rising interest rates. Ark’s Fintech Innovation ETF, a basket of fintech names, is down more than 60% year to date. Block itself has fallen more than 45% in 2022.

Focus on profits

Still, Block’s CFO, Ahuja said the company is outperforming its peers on profitability. Block released updated profit margins Wednesday — an increasingly important metric as investors prioritize the bottom line over growth.
Adjusted profit margins for the Square side of the business last year were 34%, and they were 12% for Cash App, according to the company. On the pure-growth side, Cash App now has 46 million monthly active users and 80 million annual actives as of March.
“Wall Street analysts are going to want to understand our growth profile, and our margin structure as a company — you can see based on our track record we are outgrowing the rest of the industry,” Ahuja said. “We operate in a large and growing market and are still taking share.”
Block closed a $29 billion deal to buy Australian fintech company Afterpay earlier this year as it expands into the installment loan market. The CFO highlighted the cross-selling opportunity with roughly 6% of its Cash App users also using AfterPay. 
The lending sector has become popular for consumers and merchants, along with a surge in online shopping. It spreads out the cost of a larger purchase into four interest-free installments. Despite pushback from consumer watchdogs, Ahuja contended that it’s safer than a traditional card because consumers can’t take on additional loans if they miss a payment. 
“Millennials and Gen Z’s are quite frankly skeptical of traditional forms of credit, that leave people in debt spirals,” she said.
Block also acquired Jay-Z’s music streaming business Tidal for roughly $300 million last year — at the time a head scratcher for some payment analysts. Dorsey said it was a bet on the creator economy, which he argues will continue to grow as artificial intelligence removes “more and more of the need for mechanical work.”
“This will be a massive economy in the future, and we see an opportunity to be a big part of it, all using the tools and platform we’ve already built,” Dorsey said. “We acquired Tidal because we saw that artists take a path similar to small businesses, and that there’s a significant gap in the market around artist tools.”

Dorsey’s case for bitcoin

As of the quarter ended in March, bitcoin still only accounted for roughly 5% of Block’s gross profits. But executives are betting on crypto as a secular trend in which Block could be well positioned. Dorsey described it as the “open standard for global money transmission” and said it will allow Block’s “entire business to move faster globally.”
Block first started offering bitcoin trading through the Cash App, and the company holds it on its balance sheet as an alternative to cash. The world’s largest cryptocurrency is down more than 50% from its high and has struggled to regain its value so far this year.
Block’s crypto businesses have expanded to a bitcoin hardware wallet, a bitcoin-mining business, and an open-source business called TBD for developers. On top of that, there’s an independent, bitcoin-focused business within Block called Spiral. 
Dorsey is not as bullish on other cryptocurrencies and said the “internet requires a currency native to itself, and in looking at the entire ecosystem of technologies to fill this role, it’s clear that bitcoin is currently the only candidate.”
“Its development may feel slow relative to other candidates, but that’s a result of the deliberateness required to preserve the attributes necessary for money storage and transmission,” Dorsey said.

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A man passes under a Cisco logo at the Mobile World Congress in Barcelona, Spain February 25, 2019.
Sergio Perez | Reuters

Check out the companies making headlines after the bell: 
Cisco Systems — Shares of the networking company sank nearly 13% after hours as the company forecast a surprising decline in revenue for the current quarter. Cisco also missed revenue expectations in its fiscal third quarter. The company posted an adjusted profit of 87 cents per share versus the Refinitiv consensus estimate of 86 cents per share.

Bath & Body Works — The retailer saw shares fall more than 5% in extended trading after forecasting lower-than-expected second-quarter earnings. Bath & Body Works did, however, beat Wall Street estimates on the top and bottom lines in its first quarter. The company posted earnings of 64 cents per share on revenue of $1.45 billion. Analysts were expecting earnings of 53 cents per share on revenue of $1.43 billion, according to Refinitiv.
Synopsys — The software stock rose 4% in after-hours trading after the company reported an earnings beat. The company posted an adjusted quarterly profit of $2.50 per share on revenue of $1.28 billion. Analysts surveyed by StreetAccount were expecting a profit of $2.37 per share on revenue of $1.26 billion.

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Shoppers walk in front of a Target store at the Lycoming Crossing shopping plaza in Muncy, Pennsylvania.
Sopa Images | Lightrocket | Getty Images

Check out the companies making headlines in midday trading.
Target – Shares plunged 24.9% after the retailer reported disappointing quarterly results, citing high fuel costs and inventory troubles. Target posted an adjusted quarterly profit of $2.19 per share, below the $3.07 Refinitiv consensus estimate. The big-box retailer reported lower-than-expected sales of discretionary products.

Walmart – Walmart dropped 6.8%, falling for a second session after suffering its worst one-day loss since 1987 on Tuesday. Target’s quarterly report echoed similar inflationary challenges Walmart reported in its disappointing first-quarter report Tuesday.
Lowe’s – The home improvement retailer’s shares fell 5.2% on the back of weaker-than-expected revenue for the first quarter. Lowe’s posted revenue of $23.66 billion versus $23.76 expected, according to Refinitiv. Lowe’s said cooler spring weather hurt demand for outdoor project supplies.
Dollar Tree, Costco – Retail names were dragged lower Wednesday by industry giants Target and Walmart, both of which reported struggling with rising costs and inventory woes. Dollar Tree shares tumbled 14.4%, Dollar General lost 11.1% and Costco slid about 12.5%.
TJX Companies – Shares of the retailer jumped 7.2% after the company reported quarterly earnings that beat analysts’ estimates by about 8 cents per share, according to Refinitiv, as other retailers report seeing inflation cut into their profits.
Shoe Carnival – Shares rose 16.5% after the footwear retailer beat Wall Street expectations in its latest quarter. Shoe Carnival reported a quarterly profit of 95 cents per share, 9 cents above the Refinitiv consensus estimate. The company also raised its full-year outlook.

Container Store – Shares gained 7.1% after the storage and organization products retailer posted better-than-expected profit and revenue for its latest quarter. The container Store also said it aimed to reach $2 billion in annual sales by 2027.
Doximity – The cloud-based platform dropped 10.3% after issuing a current-quarter revenue forecast below Wall Street estimates.
Warby Parker – The stock dipped 6.1% after Goldman downgraded Warby Parker to neutral from buy. Goldman said it sees a longer path to growth for the eyewear retailer, which reported lower-than-expected quarterly earnings earlier this week.
— CNBC’s Tanaya Macheel contributed reporting

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Scammers are tricking parents into paying steep prices for baby formula through fake websites and social media profiles, according to the Federal Trade Commission.
A formula shortage has gotten worse in recent weeks after a recall and plant closure by Abbott Nutrition, the nation’s biggest producer.
The White House is taking measures to try boosting the supply.

Sod Tatong | Moment | Getty Images

Scammers are exploiting a nationwide baby formula shortage, tricking consumers into paying hefty prices through fraudulent online stores, the Federal Trade Commission said Wednesday.
The con artists lure “desperate parents and caregivers” via fake websites or social media profiles with images and logos of recognizable formula brands, according to a consumer alert. Consumers think they’re purchasing from a company’s official website but formula never arrives, the FTC said.

“Scammers exploiting the high demand for baby formula have sunk to new lows,” the agency said.
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A shortage of baby formula started early in the Covid-19 pandemic, but has worsened in recent weeks. The scarcity is partly due to the closure of a Michigan manufacturing plant in February; two infants who consumed formula produced there caught bacterial infections and died.
The Food and Drug Administration reached a deal with the plant’s owner, Abbott Nutrition, the nation’s largest formula manufacturer, on Monday to help ease the shortage.
The White House said last week it would make it easier to import formula from abroad, among other measures.

Tips

Here are some ways the FTC recommends avoiding a baby formula scam:

Use a search engine to check out the company or product. Use search terms like “review,” “complaint” or “scam.”
Only scammers will demand payment by gift card, money transfer or cryptocurrency. Paying with a credit card often provides the most protection; you can sometimes get your money back if you ordered something that never arrived.
Know your rights. Sellers are supposed to ship an online order within the time stated in their advertisements (or within 30 days if the ads don’t give a time). If a seller can’t ship by then, it must give you a revised shipping date, with the chance to cancel for a full refund or accept the new shipping date.
Search for local resources. For example, your pediatrician may have formula in stock and might be able to help. Participants in the Women, Infants and Children (WIC) nutrition assistance program can contact their local office to find formula.

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Goldman Sachs CEO David Solomon is advising his clients to be more cautious with their finances because the Federal Reserve’s moves to combat inflation could result in recession or other negative consequences.
Higher interest rates and a reversal in the Fed’s bond-buying programs are “going to have an impact on a number of things in your business that are hard to predict,” Solomon told CNBC’s Andrew Ross Sorkin on Wednesday.
“You have to think about the fact that there’s a reasonable chance at some point that we have a recession or we have, you know, very, very slow, sluggish growth,” Solomon said

Goldman Sachs CEO David Solomon is advising his clients to be more cautious with their finances because the Federal Reserve’s moves to combat inflation could result in recession or other negative consequences.
Higher interest rates and a reversal in the Fed’s bond-buying programs are “going to have an impact on a number of things in your business that are hard to predict,” Solomon told CNBC’s Andrew Ross Sorkin on Wednesday.

“You have to think about the fact that there’s a reasonable chance at some point that we have a recession or we have, you know, very, very slow, sluggish growth,” Solomon said. “If you’re running a significant enterprise, you have to be looking through a lens with a little bit more caution right now than you might have been when we were sitting here a year ago.”
The combination of rising prices for raw materials, continuing supply chain issues and the Fed’s tightening monetary policy has damaged the confidence of corporate executives, according to a business survey released Wednesday. While a majority of respondents are expecting a recession, Goldman economists peg the odds at about 30% over the next 12 to 24 months.
Target shares sank on Wednesday after disclosing that rising costs for labor and shipping and lower sales for discretionary items took a bite out of earnings.
The Fed boosted its benchmark interest rate twice so far this year and has said it will shrink its balance sheet by tens of billions of dollars a month, “a journey in progress of tightening economic conditions,” Solomon said.
That change, a sharp reversal from the easy money policies of the last decade, has stung investors and caught some companies off guard as they attempt to raise capital, he said.

“There are a number of companies that thought that they’re going to have easy access to capital, that now probably have a harder journey to raise the capital they need,” Solomon said.
During the wide-ranging interview, Solomon also discussed topics including crypto and fintech — saying he was a “real bull” on the digital disruption of finance — to his investment bank’s new vacation policy. The bank is giving partners and managing directors greater flexibility to take time away from work because “historically, our people haven’t taken the vacation they’re entitled to,” Solomon said.

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China’s share of global bitcoin mining capacity plummeted to zero in July after authorities launched a fresh crackdown on cryptocurrencies.
But several underground mining operations have since emerged in the country, with miners taking care to work around Beijing’s ban.
New research from the Cambridge Centre for Alternative Finance shows that Chinese bitcoin mining activity has quickly rebounded.

By September 2021, China made up just over 22% of the total bitcoin mining market, according to Cambridge University research.
Paul Ratje | The Washington Post | Getty Images

Bitcoin miners aren’t giving up in China despite Beijing’s ban on the practice.
China was once the world’s biggest crypto mining hub, accounting for between 65% to 75% of the total “hash rate” — or processing power — of the bitcoin network.

But the country’s share of global bitcoin mining capacity plummeted to zero in July and August 2021, according to Cambridge University data, after authorities launched a fresh crackdown on cryptocurrencies.
Among the steps China took was to abolish crypto mining, the power-intensive process that leads to the creation of new digital currency. That resulted in several miners fleeing to other countries, including the U.S. and Kazakhstan, which borders China.
But, as CNBC has previously reported, several underground mining operations have since emerged in China, with miners taking care to work around Beijing’s ban.
Now, new research from the Cambridge Centre for Alternative Finance shows that Chinese bitcoin mining activity has quickly rebounded. By September 2021, China made up just over 22% of the total bitcoin mining market, data from Cambridge researchers show.

It means China is once again a top global player in bitcoin mining — second only to the U.S., which eclipsed China as the largest destination for the sector last year.

There is one caveat: The research methodology relies on aggregate geolocation from huge bitcoin mining “pools” — which combine computing resources to more effectively mine new tokens — to determine where activity is concentrated in different countries.
This approach may be vulnerable to “deliberate obfuscation” by some bitcoin miners using a virtual private network (VPN) to conceal their location, researchers said. VPNs make it possible for users to route their traffic through a server in another country, making them handy tools for people in countries like China, where internet usage is heavily restricted.
Nevertheless, they added this limitation would “only moderately impact” the accuracy of the analysis.

What is bitcoin mining?

Unlike traditional currencies, cryptocurrencies are decentralized. That means the work of processing transactions and minting new units of currency is handled by a distributed network of computers instead of banks and other intermediaries.
To facilitate a bitcoin payment, so-called miners need to agree that the transaction is valid. That process entails making complex calculations to work out a puzzle that increases in difficulty as more and more miners join the network, known as the blockchain.

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Whoever is first to solve the puzzle gets to add a new batch of transactions to the blockchain and is rewarded with some bitcoin for their effort.

Why is Beijing worried?

This method of reaching consensus, known as “proof of work” consumes a lot of energy — roughly as much as entire countries, such as Sweden and Norway.
China has frequently issued warnings about crypto. But its most recent crackdown was arguably the most severe.
The world’s second-largest economy was dealing with a multi-month energy shortage last year, which led to numerous power cuts.
China is still heavily reliant on coal, and is increasing investment in renewable energy in a bid to become carbon neutral by 2060. Authorities see crypto mining as a potential obstacle to that plan.
Now, a resurgence of bitcoin production in China has catapulted the country to the second-largest destination for people hoping to find new digital currency — there’s still 2 million bitcoins left to be mined. It might be a less profitable endeavor now, though, with the bitcoin price down more than 50% from its November peak.
China’s National Development and Reform Commission and the People’s Bank of China — which have both issued strong warnings against crypto mining and trading — were not immediately available for comment when contacted by CNBC.
– CNBC’s Mackenzie Sigalos and Evelyn Cheng contributed to this report

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