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Fed Hawkishness Will Be Kept At Bay By China’s Angst

Fed Hawkishness Will Be Kept At Bay By China’s Angst

Authored by Simon White, Bloomberg macro strategist,

China’s faltering recovery will…

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Fed Hawkishness Will Be Kept At Bay By China's Angst

Authored by Simon White, Bloomberg macro strategist,

China’s faltering recovery will restrain US and global inflation, further capping already-fading Federal Reserve hawkishness.

It was supposed to be “revenge spending” that did it. After almost three years of lockdown, the ending of restrictions in China was expected to unleash a flood of repressed consumers ready to splurge.

But if revenge is a dish best served cold, no-one’s eating it. China is in the midst of yet another false start to its recovery amid a deteriorating economic backdrop.

This has knock-on effects for the US and the rest of the world. Global inflation will remain on the soft side while still-subdued monetary stimulus will keep a lid on commodity prices. A re-acceleration in US inflation will be deferred, raising the possibility the Fed is at its peak rate.

The chart below starkly illustrates China’s diverging set of fortunes. Despite experiencing supply-and-demand-disrupting lockdowns along with everyone else, China is the only country to have seen consumer deflation since the beginning of 2020. Almost every other country has seen its largest price rises in decades.

For China’s recovery to evolve from a stumble to a run, more stimulus will be required, which will lead to rising consumer inflation, higher commodity prices, and thus a re-acceleration in global inflation.

This may seem like thinking too many steps ahead, but the fact is global disinflation is now in full swing, and therefore increasingly priced in by money markets and inflation-fixing swaps. The market upset will come when disinflation slows and price growth starts rising again.

Understanding why China has seen consumer deflation - when everyone else had the opposite - illuminates what is likely to happen next in the cycle.

During the pandemic, DM countries focused on protecting jobs and stimulating consumption. Many EMs had only nominal lockdowns as their finances were not in a position to backstop their economies. China, on the other hand, had stringent restrictions and gave little support to workers and consumers.

In short, China resorted to what it knows best, which is going for the low-hanging fruit of export-orientated growth at the expense of the household sector.

We can see this in China’s trade. Exports, predictably, surged in response to China’s pandemic stimulus. In a more balanced economy, some of this income would spread to the household sector, the largest net importer, and imports would rise too. Except imports in China stagnated even as exports rose to new highs. The wealth was not being spread.

Now exports are slowing as China hits the limits of what the world is currently willing to import. Unemployment is creeping higher, at just under 4%, but this obscures the more worrying picture in youth unemployment, rising fast and now over 20%.

China will be forced at some point to stimulate in a way that floats all boats, so-called flood-like stimulus.

That sort of easing is a big deal for China, and for the rest of the world. It was flood-like stimulus that meant China was responsible for 70% of the world’s money growth in the immediate aftermath of the GFC. It’s not hyperbole to suggest that without China, the global economy would have entered a depression.

But high debt levels and a reluctance to re-buoy the shadow-finance sector are likely staying China’s hand for now. But when job losses become too large to stomach, policy makers will relent.

We’ll know this has happened when we see a significant upturn in real M1 growth. Real M1’s inability to gain much momentum tells us why the recovery has yet to get going. But as the chart below shows, when it does it also means commodities should begin rising again.

Falling commodity prices have driven most of the decline in US headline inflation. The chart below shows headline PCE inflation split up into supply and demand components. As can be seen, the demand component has barely budged from its highs, while supply inflation – driven by commodities – has been responsible for most of the fall seen in the headline number.

The flip side is that an increase in commodity prices would quickly re-inforce still-elevated demand inflation and lead to a re-acceleration in US (and global) price growth.

China’s unemployment rate and other growth data will be key in gauging when policy makers are likely to significantly boost stimulus. Until then, the Fed and other central banks will probably become more risk averse - balancing growth concerns with the inflation outlook - with the (current) peak in rates very close (if not already here in the case of the Fed).

The faltering recovery in China will allow the Fed and other central banks to step back and perhaps even ease. But the inflation truce will only be temporary, and the underlying dynamics are such that they will have to return to the battle later in the cycle.

Tyler Durden Thu, 06/01/2023 - 11:15

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Angry Shouting Aside, Here’s What Biden Is Running On

Angry Shouting Aside, Here’s What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union…

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Angry Shouting Aside, Here's What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union address - in which he insisted that the American economy is doing better than ever, blamed inflation on 'corporate greed,' and warned that Donald Trump poses an existential threat to the republic.

But in between the angry rhetoric, he also laid out his 2024 election platform - for which additional details will be released on March 11, when the White House sends its proposed budget to Congress.

To that end, Goldman Sachs' Alec Phillips and Tim Krupa have summarized the key points:

Taxes

While railing against billionaires (nothing new there), Biden repeated the claim that anyone making under $400,000 per year won't see an increase in their taxes.  He also proposed a 21% corporate minimum tax, up from 15% on book income outlined in the Inflation Reduction Act (IRA), as well as raising the corporate tax rate from 21% to 28% (which would promptly be passed along to consumers in the form of more inflation). Goldman notes that "Congress is unlikely to consider any of these proposals this year, they would only come into play in a second Biden term, if Democrats also won House and Senate majorities."

Biden also called on Congress to restore the pandemic-era child tax credit.

Immigration

Instead of simply passing a slew of border security Executive Orders like the Trump ones he shredded on day one, Biden repeated the lie that Congress 'needs to act' before he can (translation: send money to Ukraine or the US border will continue to be a sieve).

As immigration comes into even greater focus heading into the election, we continue to expect the Administration to tighten policy (e.g., immigration has surged 20pp the last 7 months to first place with 28% in Gallup’s “most important problem” survey). As such, we estimate the foreign-born contribution to monthly labor force growth will moderate from 110k/month in 2023 to around 70-90k/month in 2024. -GS

Ukraine

Biden, with House Speaker Mike Johnson doing his best impression of a bobble-head, urged Congress to pass additional assistance for Ukraine based entirely on the premise that Russia 'won't stop' there (and would what, trigger article 5 and WW3 no matter what?), despite the fact that Putin explicitly told Tucker Carlson he has no further ambitions, and in fact seeks a settlement.

As Goldman estimates, "While there is still a clear chance that such a deal could come together, for now there is no clear path forward for Ukraine aid in Congress."

China

Biden, forgetting about all the aggressive tariffs, suggested that Trump had been soft on China, and that he will stand up "against China's unfair economic practices" and "for peace and stability across the Taiwan Strait."

Healthcare

Lastly, Biden proposed to expand drug price negotiations to 50 additional drugs each year (an increase from 20 outlined in the IRA), which Goldman said would likely require bipartisan support "even if Democrats controlled Congress and the White House," as such policies would likely be ineligible for the budget "reconciliation" process which has been used in previous years to pass the IRA and other major fiscal party when Congressional margins are just too thin.

So there you have it. With no actual accomplishments to speak of, Biden can only attack Trump, lie, and make empty promises.

Tyler Durden Fri, 03/08/2024 - 18:00

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United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

Shutterstock

United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

More Travel:

"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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