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Macro Overview for the Week Ahead

Investors will focus on three types of events next week. First, the flash July PMI reports will be released. The preliminary estimates do a fairly good…



Investors will focus on three types of events next week. First, the flash July PMI reports will be released. The preliminary estimates do a fairly good job anticipating the final readings and typically steal their thunder. The tighter financial conditions and the cost-of-living squeeze translate into weaker economic momentum.  

The US and eurozone June composite PMI had nearly converged at 52.3 and 52.0, respectively. The UK's composite PMI was at 53.7 and Japan's at 53.0. In Bloomberg's surveys, the median forecast sees a 45% chance the eurozone and UK are entering a recession in the next 12 months at 45%, and the US is slightly lower at 33%. Canada and Japan are at 25%.  

Survey data might not capture the market's imagination like inflation updates. Japan, Canada, and the UK report June CPI. Japan remains the outlier. It has taken the biggest energy and food shock in a generation to lift Japan's core CPI (which excludes fresh food) to its 2% target. Japan's May CPI was up 0.8% over the past 12 months, excluding food and energy. Even if the core rate moves to 1%, it is unreasonable to expect the Bank of Japan to alter its monetary policy. BOJ Governor Kuroda insists that inflation is not sustainable unless wages rise and May's cash earnings are weaker than expected (1.0% year-over-year vs. 1.5% median forecast in Bloomberg's survey). The April series was revised to 1.3% from 1.7%. In turn, household spending was weaker than expected as well. Japan's industrial production in May collapsed by a dramatic 7.5% (month-over-month) as reverberations from China's lockdowns appeared to have taken a serious toll.  

Another jump in Canada's CPI could help push market sentiment toward expecting another 75 bp hike at the Bank of Canada's next meeting on September 7. The swaps market has a 72% chance of a 75 bp hike discounted. Price pressures still appear to be accelerating in Canada. In three of the four months through May, consumer prices rose by more than 1%. The Bank of Canada has three core measures. They averaged 4.7% in May, up from 3.3% in December 2021. In contrast, the US core rate slowed for the third consecutive month in June. US average hourly earnings in June also decelerated for the third month. Canada's hourly rate for permanent workers accelerated to 5.6%, doubling December's 2.7% pace, jumping by more than C$1.0 for the second consecutive month. Before the pandemic (at least since 1998), this did not happen even once, let alone twice. 

Canada also reports May retail sales. Canadian consumers have been shopping. In the first four months of the year, retail sales have averaged a monthly increase of 1.2%. This is a nominal measure, and the rise of prices exaggerates the real growth (volume), but it is notable that the average increase in the Jan-Apr period last year was also 1.2%. That said, some yellow flags in the April report are worth bearing in mind when reviewing the new data. The interest rate-sensitive sectors--autos and building materials (housing activity) were hit the hardest. General merchandise stores increased sales by slightly more than 4%, while gasoline stations saw a 3% increase (5.4% in volume terms; prices temporarily dipped).

The UK's inflation is running the fastest in the G7 at 9.1% in May (matched by the US in June). If the month-over-month rise is more than 0.5%, the year-over-year pace will increase. It might not matter much. The Bank of England had already warned that inflation will likely rise to 11% as the gas cap is lifted again. On the other hand, the UK will report June retail sales on July 22. It is reported in volume terms and has been simply horrible. They have fallen in six of the past seven months. In fact, April's 0.2% increase was the first since the 0.1% rise in June 2021.  

The BOE has persuaded the market that, like the Federal Reserve, it is willing to risk a recession if necessary to bring inflation back to its target. After four quarter-point moves this year (and a 15 bp hike last December), the market has nearly fully priced in a 50 bp move at the August 4 MPC meeting and favors another half-point hike at the following two meetings (September 15 and November 11). Many Tory candidates to succeed Johnson as Prime Minister want to cut taxes. At stake is the pace of fiscal consolidation. The budget deficit peaked at 12.3% of GDP in 2020 and fell to 7.4% last year. The Office of Budget Responsibility projected it to fall to 3.9% this year and 1.9% next. That said, there probably are upside risks to estimate, given its assumption that the economy will expand by 3.8% this year.

That brings us to the third set of events that will draw investor attention. The Bank of Japan and the European Central Bank meetings. The Bank of Japan is the easier of the two. There is no reason to expect a change in monetary policy. The BOJ will update its forecasts, and the risk is an upward revision of inflation and a small reduction in the growth projections. The earlier forecast had core CPI, which excludes fresh food prices, at 1.9% this year and 1.1% in the following two years. This year's projection will probably be lifted slightly above 2%. The next two years may be increased marginally. Only an inflation forecast close to or above 2% in 2023 or 2024 would be material.  

The BOJ saw the economy expanding 2.9% this year and slowing to 1.9% next and 1.1% in 2024. The World Bank and the OECD see Japanese growth this year at 1.7%. The median forecast in Bloomberg's survey also is for 1.7% growth. While the BOJ's forecast for next year is only slightly firmer than other official projections, the World Bank is particularly pessimistic, forecasting 1.3% growth next year and 0.6%in 2024. 

The ECB meeting is far more interesting than the BOJ meeting. The ECB has signaled its intention to raise for the first time. ECB President Lagarde has indicated a 25 bp hike but with price pressures still rising and the euro declining, which boosts inflation, the swaps market is pricing in about a 16% chance that the ECB lifts the rate by 50 bp. The market has nearly 90 bp of tightening discounted by the end of Q3 (July and September meetings) and another 70 bp in Q4.  

In addition to the rate hike, investors are looking for concrete details of the new Transmission Protection Mechanism.   The TPM would be a tool the central bank could use to ensure that its monetary policy is not redistricted by unwarranted widening of interest rate differentials. An existing tool, Open Market Transactions, had the same purpose, but the conditionality was so onerous that it has not been used. Yet, it also contained a feature to neutralize (or sterilize) the impact on the ECB's balance sheet so as not to confuse it with QE. The TPM seems different, and it seems as if it might be triggered by the ECB rather than the peripheral country, though it is not clear. At the same time, the Italian political crisis shows non-economic considerations that could produce an undersirable divergence of interest rates.  

The need for the TPM, at least in part, grows out of the fact that nearly a quarter of a century after the launch of EMU, it remains incomplete. It also offers a prima facie case that the common bonds issued by the EU during the Covid pandemic were not the game changer many argued at the time. Just as Draghi led the ECB into the vacuum left by political and fiscal authorities to prevent the demise of EMU, so too is Lagarde leading the ECB to ensure that its monetary policy is properly transmitted despite the very real divergence in underlying conditions.  

In addition to the rate hike and details about the Transmission Protection Mechanism, there is a third piece of the ECB puzzle. While the expansion of central bank balance sheets was driven by bond purchases, every central bank has its own idiosyncratic elements. For example, the ECB did not only buy bonds but its extended long-term loans at attractive interest rates. About a quarter of the ECB's almost 8.8 trillion-euro balance sheet is composed of such loans (Targeted Long-Term Refinancing Operations) granted during the Covid pandemic. The first repayments are due in September and extend through the end of 2024.  

In June, the ECB raised the TLTRO rate to its deposit rate (-0.50%), and banks repaid almost 75 bln euros early, less than many had projected. The interest rate on the loans is determined by the average deposit rate over the three-year life of the loans. Therefore, these loans are still very attractive in a rising interest rate environment. Moreover, as banks return funds to shareholders through dividends and share buybacks, what amounts to be a subsidy for banks is being re-examined. According to press reports, for example, last year, 15% of the pre-tax profits of Germany's large bank (Deutsche Bank) came from the nearly 500 mln euros earned from TLTROs.   

Outside of emergencies, in its actions, the ECB has revealed its preference for announcing policy changes at quarterly meetings with fresh staff forecasts in hand. However, this week's meeting is an exception. Nevertheless, the new EC forecasts may have pointed in the direction of where the ECB may move. It shaved its forecast for growth this year (2.6% from 2.7%) and cut next year's projection by more (1.4% vs. 2.3%). Its inflation forecast was also raised by 7.6% this year (from 6.1%) and 4% next year (from 2.7%).

Ahead of the ECB meeting next week and the Federal Reserve the following week, there is no compelling reason to expect the market (equities, financials, commodities) to calm down. However, the price action itself may warn of a new market phase. September  WTI recovered from around $88.25 (a four-month low). Euro buying emerged below parity. The S&P 500 and NASDAQ gapped higher ahead of the weekend and were left open. The Fed's two leading hawks, St. Louis Fed President Bullard and Governor Waller, both seemed to push against speculation of a 100 bp hike. The market trimmed the odds (from 60% after the CPI report) to less than 20% ahead of the weekend. The year-end rate rose three basis points last week to slightly more than 3.50%. It peaked a month ago 20 bp higher.  


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Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.



Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

DON'T MISS: Why You May Not Want to Fly Southwest Airlines

That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.


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Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after…



Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after Mayor Eric Adams on Friday signed off on a ban that will affect not only employment, but also housing and access to public accommodations -- a term that encompasses most businesses. 

We're in safe company using the word "fat," as champions of the cause refer to themselves as "fat activists." With the mayor's signature, two more categories -- both weight and height -- are added to New York City's list of protected personal attributes, which already included race, gender, age, religion and sexual orientation. 

As Mayor Adams signs the law, self-described (and everyone else-described) fat activist Tigress Osborn consumes more than her share of the backdrop (James Messerschmidt for NY Post)

Embracing one of 2023's innumerable strains of Orwellian brainwashing, Adams declared, "Science has shown that body type is not a connection to if you’re healthy or unhealthy. I think that’s a misnomer that we’re really dispelling.”

Even the Centers for Disease Control and Prevention say obesity is an invitation to a host of maladies, including to high blood pressure Type 2 diabetes, coronary heart disease, stroke, gall bladder disease, many types of cancer, mental illness and difficulty with physical functioning. 

“Size discrimination is a social justice issue and a public health threat," said Councilmember Shaun Abreu, who introduced the measure. "People with different body types are denied access to job opportunities and equal wages — and they have had no legal recourse to contest it," said Abreu. "Worse yet, millions are taught to hate their bodies." 

A full 69% of American adults are overweight or obese, but our woke overlords would have us believe the real "public health threat" is a nice restaurant that doesn't want Two-Ton Tessie working the reception desk, or a landlord who's leary of a 400-pound man breaking a toilet seat or collapsing a porch.  

The enticingly-named Tigress Osborn, who chairs the National Association to Advance Fat Acceptance, said New York's ban "will ripple across the globe" -- perhaps something like what would happen if the hefty Smith College Africana Studies graduate were dropped into a swimming pool.  

Councilmember Shaun Abreu said he gained 40 pounds during the pandemic lockdowns and noticed people treated him differently

The New York Times reports that witnesses who testified as the measure was under consideration included "a student at New York University said that desks in classrooms were too small for her [and] a soprano at the Metropolitan Opera [who] said she had faced body shaming and pressure to develop an eating disorder." 

Some have dared to speak out against the measure. “This is another mandate where enforcement will be primarily through litigation, which imposes a burden on employers, regulators and the courts,” said Kathryn S. Wylde, president of the Partnership for New York City, speaking in April. 

Implicitly putting the weight ordinance in the same category as Brown vs Board of Education, Abrue said, “Today is a monumental advancement for civil rights, size freedom and body positivity and while our laws are only now catching up to our culture, it is a victory that I hope will cause more cities, states and one day the federal government to follow suit.” 

Taking effect in six months, the law has an exemption for employers "needing to consider height or weight in employment decisions" -- but "only where required by federal, state, or local laws or regulations or where the Commission on Human Rights permits such considerations because height or weight may prevent a person from performing essential requirements of a job." 

We pray there's a federal exemption for employers of strippers and lap dancers. 

Think we're joking? We remind you that the chair of the National Association to Advance Fat Acceptance is named "Tigress" -- and this is her Twitter profile banner photo:

via Tigress @iofthetigress
Tyler Durden Sun, 05/28/2023 - 15:30

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‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans…



'Kevin Caved': McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans have been outright rejecting the debt ceiling deal which raises it by roughly $4 trillion for two years, doesn't provide sticking points sought by the GOP.

In short, Kevin caved according to his detractors.

Some Democrats aren't exactly pleased either.

"None of the things in the bill are Democratic priorities," Rep. Jim Himes (D-CT) told Fox News Sunday. "That's not a surprise, given that we're now in the minority. But the obvious point here, and the speaker didn't say this, the reason it may have some traction with some Democrats is that it's a very small bill."

*  *  *

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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