MarketMinder

Headlines

Here we analyze a selection of third-party news articles—both those we agree and disagree with.

Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.


Italy Passes $20 Billion Aid Package Focused on Energy Relief

MarketMinder’s View: This article details Italy’s plan to step up aid for consumers and small businesses by subsidizing households via a one-off €200 payment to millions of lower-income Italians and a gasoline tax cut, which operates on two misperceptions. Whatever you think of the idea of aiding Italian households, the plan is funded by an increase to the windfall profits tax on Energy firms, first enacted in March. The rate will rise from 10% to 25% on “extra” profits earned due to high electricity and oil prices, an effort to ensure the subsidies don’t increase Italy’s deficit, for fear of piling on more debt that many analysts are sure the country can’t afford. However, taxing Energy firms’ profits when prices are high dissuades investment in increasing production and injects uncertainty into a highly cyclical industry—bad economics, in our view, that could prolong a period of high prices if enacted on a wider scale than this. Two, we are unconvinced Italian debt is the looming crisis so many think. As we discussed around the end of last year, Italian interest payments’ share of tax revenue is at the lowest point on record. Yes, that does hinge on bond yields, which have risen lately. But they are still historically low and, critically, 77% of Italian debt is fixed-rate with an average maturity just over 7 years, per the Italian Treasury. That means short-term changes in yields like we have seen this year won’t affect Italy’s ability to fund its debt materially. We aren’t recommending they do so—we aren’t in the public policy prescription business—but if the country wanted to borrow to fund an aid package, we suspect it could easily do so.

‘Flash Crash’ Hits Stocks in Europe

MarketMinder’s View: The reporting here, which is fact-packed and objective, is fine. We just don’t understand all the hoopla in general, as so-called fat-finger errors aren’t unusual. Likening every one of them to 2010’s “Flash Crash” exaggerates them, in our view. That crash neared -10%, lasted over half an hour and resulted in countless orders getting cancelled. It was a big old mess that triggered years of investigations and breathless reporting. This crash was shallower, and the full V-shaped pattern lasted only about 15 minutes. Circuit breakers kicked in, as they are designed to do. So far, the exchanges haven’t canceled any orders. Life went on quickly. Glitches like this are interesting, but they are also just an occasional part of everyday market activity in the digital age.

Hungary Floats Veto Threat as EU Works to Ban Russian Oil

MarketMinder’s View: Last week, when Germany signaled it was willing to support a gradual, phased-in EU ban on Russian oil and natural gas imports, a lot of pundits acted like an official ban was just around the corner. We thought that seemed a tad hasty—partly for the technical reasons discussed in our commentary on the topic, and partly because EU member-states have varying degrees of dependence on Russia. Coastal countries can receive liquefied natural gas by supertanker, for instance, but landlocked countries have far fewer options. One such country is Hungary, which relies on pipelines from Russia to deliver the goods. For Hungary, curbing reliance on Russia would likely require a massive infrastructure build, which is why the country isn’t on board with a ban. EU sanctions require unanimity, so as long as Hungary holds out, a full ban probably stays off the table. Now, we could wind up with an EU ban that carves out some countries and takes effect very gradually. We won’t weigh in on the effect of that from a geopolitical standpoint, as markets are generally cold to such things. But from an economic standpoint, that is a pretty far cry from a shocking, sweeping ban, which should help reduce the likelihood of a widely feared energy crunch inducing a sharp regional recession.

China Factory Activity Contracts in April at Steeper Pace as Lockdowns Bite

MarketMinder’s View: Unsurprisingly, Chinese purchasing managers’ indexes (PMIs) tumbled across the board in April as lockdowns advanced across several major economic hubs. This piece focuses on manufacturing PMIs, which slipped in the mid-40s, but the official services PMI was also quite grim at just 40.0, per FactSet. Readings over 50 indicate expansion, so a read this far below isn’t pretty. But also, these data simply confirm what analysts and commentators have warned of for weeks—that lockdowns would have a sharp immediate economic impact, which stocks also already knew. In a way they help reduce uncertainty, as we are now getting some numbers weighing the extent of the impact, which can replace the guessing. Moreover, these metrics tell us what just happened, not what will happen, which is crucial since stocks are forward-looking. We don’t know when China’s lockdowns will abate, but there is now a solid history of economies bouncing fast when they do. Soon stocks will shift to pricing in this future, if they haven’t started doing so already.

Eurozone Ministers Seek to Forge Ahead With Banking Union

MarketMinder’s View: Yep, this is still going on. Longtime readers may recall that way back during the eurozone debt crisis in 2011 – 2013, eurozone leaders and the ECB earmarked a banking union as a way to avoid future panics. Back then, everyone was worried about the so-called “doom loop” of troubled banks and sovereigns. Meaning, banks developing balance sheet trouble because of large holdings of troubled sovereign debt, requiring government bailouts, which required more government borrowing, which made debt more troubled, which further undermined confidence in banks and triggered a run on deposits as people sought to move money from troubled national banking systems to more stable countries. At the time, policymakers surmised that a banking union would prevent this capital flight, strengthening the system overall. Yet as allegedly make-or-break as it was, leaders couldn’t agree on it. They kept releasing proposals, disagreeing on the specifics, holding summits, announcing vague plans and releasing more proposals. They are still at it, and there doesn’t appear to be much optimism. “The German government has been reluctant to sign up to an arrangement that could leave its taxpayers exposed to weaknesses in the Italian financial system. Italian banks have strengthened their balance sheets since the eurozone crisis through mergers and capital raisings, but regulators are still concerned about some lenders. … In an interview last month, [Irish Finance Minister Paschal] Donohoe told Financial News: ‘If we can’t gain agreement on this plan now, it is not obvious to me when else we might be able to gain it in the near future.’” We have long said reform initiatives like this would become part of the long-term backdrop for eurozone stocks, without much market influence. So it is with this, as the incomplete union hasn’t prevented eurozone stocks—including bank stocks—from doing overall fine since the crisis.

Russia Uses Domestic Dollar Stash to Avoid Defaulting on US Bonds

MarketMinder’s View: In the latest episode of Russia Default Watch, it looks like Russia has avoided that outcome for now. Early in April, Russia tried to pay interest on a dollar-denominated bond in dollars, but the transfer bank blocked the payment, citing sanctions. Then it tried paying in rubles, leading credit ratings agencies to deem the bond in “selective default” since the contract had no provision for payment in alternate currencies. Now, with days to spare before the grace period runs out, the ever-reliable unnamed sources familiar with the situation say Russia has paid the bond using its on-shore stash of dollars and the US authorities are letting it go through. The reprieve is probably very short-term, however, considering US banks’ special license to continue processing Russian payments expires on May 23. So stay tuned, although this isn’t the biggest deal for the global financial system given how little exposure Western banks and investors have to Russian debt, which markets have long since valued at pennies on the dollar. Mostly, we view the reality of Russian default—whenever it occurs—as something likely to help uncertainty fall. Markets have pre-priced that event, so its actual occurrence would likely let the world move on with few ripples.

Making Your Cash Work Harder as Interest Rates Rise

MarketMinder’s View: Look, we get that it is exceedingly frustrating that checking and savings account interest rates aren’t rising with the fed-funds target range, forcing bank deposits to earn zero interest even as the CPI inflation rate passed 8%. That is just, ouch. And we also get the urge to find a higher yield for cash and think there are some sensible ways to do that. This article’s suggestions, however, strike us as a mixed bag, as some ignore one of the primary reasons to hold cash: liquidity. We like I Bonds just fine, for instance, but if this cash is your emergency fund, the one-year lockup period is a detriment. We like short-term bonds, but a laddered approach using individual securities is a fixed income investment, not cash, and exposes you to the risk of loss if you have to sell before the securities mature. It is critical to keep your goals and needs in mind—the why behind your cash position—when deciding what to do with it. As for the other solutions this article offers, our advice, as always, is to do your own due diligence and consider all potential risks and tradeoffs.

U.S. Consumers Shrug Off High Inflation, Lean on Savings to Boost Spending

MarketMinder’s View: This is an overall pretty good write-up of today’s personal consumption expenditures (PCE) data for March, which showed inflation-adjusted consumer spending rising 0.2% m/m as consumers continued shifting from goods (-0.5% m/m) to services (0.6%). “Spending was boosted by demand for international travel, dining out at restaurants as well as hotel stays. There were also increases in healthcare spending and outlays on recreation and transportation services.” In other words, the end of Omicron restrictions has boosted demand for travel and leisure services, helping offset the headwinds higher prices pose to demand for non-essential physical goods. Now, these data were folded into Q1 GDP, so nothing here is new for stocks, but they show positive consumer trends continuing into March despite inflation’s acceleration that month, which the retail sales report had called into question. So, good news. This report also included the Fed’s preferred inflation gauge, the PCE price index, which accelerated to 0.9% m/m and 6.6% y/y, due largely to energy and food prices. (The rise in core prices slowed from 5.3% y/y to 5.2%.) We wouldn’t go so far as to say the peak is in, as the article surmises, but we do agree with the broader points underpinning expectations for inflation to slow gradually over the period ahead: “Economists expect the increase in the annual PCE price index to start slowing in the coming months as last year's large gains drop out of the calculation. In addition, the shift in spending back to services from goods is seen easing pressure on supply chains.” Lastly, while we do think it is fair to expect the inflation rate to remain high even as it slows, since it takes a while for big prior price increases to fall out of the inflation math, we don’t think the Employment Cost Index is a good predictor. Wages follow consumer prices, not the other way around.

Japan’s Factory Output Growth Provides Some Relief for Fragile Economy

MarketMinder’s View: Japan’s factory output rose 0.3% m/m in March, extending February’s 2.0% rise, while retail sales beat expectations at 0.9% y/y. Just two data points, but they show Japan’s economy growing as the quasi-state of emergency over Omicron ended—and factories weathering the supply chain storm. We won’t be shocked if industrial production hits some speedbumps this spring, as March data don’t yet reflect the full extent of China’s latest lockdowns. The major industrial hub of Shenzhen was locked down in March, but lockdowns in Shanghai and throughout the country didn’t arise until the end of March and April. So April data might register more of an impact. Regardless, for now, Japan is participating in the global reopening recovery, which is welcome news for stocks.

The Growing Threat of Global Recession

MarketMinder’s View: Are the world’s biggest economies leading the way into a global recession later this year? This article describes one way it could play out: Lockdowns in China worsen already-strained supply chain issues, the Russia-Ukraine war slams demand in Europe and roils business confidence, while a rapid US Fed interest-rate cycle hurts demand and sends the world’s largest economy into a downturn. Sounds bad, and we don’t dismiss that possibility. Yet successful investing is based on probabilities, and the likelihood that dire scenario happens appears low right now. China’s latest lockdowns are a negative, but supply chain issues aren’t new, and the global economy has managed to grow through them for months. The Russia-Ukraine war is a humanitarian tragedy, but regional conflicts generally lack the scale to start a global recession. Note, too, eurozone economic activity appears to be holding up despite the war. Fed rate hike cycles aren’t inherently bad for the economy, and for investors, stocks can handle them just fine. Given the prevalence of global recession chatter today among supranational organizations, private forecasters and other experts—including the views shared here—markets also have plenty of information and views about these issues, likely meaning they are already reflected in prices, sapping negative surprise power. As scary as times sound today, we urge investors to view the economic environment as markets do: coldly and rationally. Slowdowns and even regional recessions may occur, but stocks don’t need perfect conditions to rise—only for reality to exceed expectations. With dour sentiment dominant today, the positive surprise upside is high, in our view.

‘Peak Subscription’ a Red Flag for U.S. Economy and Markets

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations, and any companies mentioned here are coincident to a broader theme we wish to highlight. According to this analysis, online subscription and streaming services are the latest economic bellwether—and the recent cancellation trend may indicate where the broader economy is headed next. “Soaring inflation and the resulting ‘real’ income squeeze is forcing consumers to rethink spending habits and one of the most explosive trends of the COVID lockdown era is in danger of reversing. … ‘People are tightening the purse strings and being more selective about where they spend their money,’ Yahya Mokhtarzada, Truebill’s chief revenue officer, told Reuters. ‘We may have hit peak subscription.’” The back half of this article concludes Tech and Tech-related sectors benefited most from the pandemic, but with society working its way back to normal, those companies may struggle for the foreseeable future. In our view, this analysis reads a lot into a handful of earnings announcements and recent market movement. Look, we agree with some of the high-level concepts laid out here. Easing COVID restrictions allows consumers to shift spending back to services that were previously unavailable (e.g., travel). Elevated inflation is likely forcing some households to cut back on certain discretionary purchases. But we think it is off base to think this narrow slice of consumer spending reveals clues on macroeconomic trends. Consider: That presumes streaming and subscription services comprise the lion’s share of Tech and Tech-like sectors. Yet the Entertainment industry—home to a couple prominent streaming services—makes up about 15% of Communication Services (and that sector makes up 8.5% of the S&P 500, per FactSet). To think an industry comprising 1.3% of the S&P 500 will tell you much about the broader market’s direction seems like a stretch to us. For more, see our 11/12/2021 commentary, “Look Beyond ‘Bellwethers.’

Germany Drops Opposition to Embargo on Russian Oil

MarketMinder’s View: Before presuming Germany’s titular shift means an EU ban on Russian oil is forthcoming—and speculating about the related economic fallout—keep an eye on the details. “EU officials designing the next sanctions proposals have to factor in that it will take some European oil refineries time to adapt to receive non-Russian crude. … The bloc is considering the option of combining a gradual phaseout of oil purchases with more immediate measures to reduce demand or cut payments to Moscow, such as a price cap or a tariff on oil imports. Another possibility is to phase out shipped oil purchases quickly and pipeline deliveries more slowly.” The publicized proposals suggest any ban would play out over some time, not overnight. Note, too, that while Germany agrees with the idea of phasing out Russian oil, the country’s officials aren’t so keen on the EU’s plans. “German officials doubt that Mr. Putin would maintain oil deliveries if the EU unilaterally cut the price it pays, and they caution that Russia could easily sell its oil to other customers such as India and China instead of accepting a lower European price.” Whatever your personal feelings may be about sanctions, we caution investors against taking politicians’ tough talk to the bank—a ban isn’t automatic and may look a lot different than headlines portray.

UK Retail Sales Slump as Soaring Energy Prices Hit Households

MarketMinder’s View: According to the Confederation of British Industry (CBI), UK retail sales volumes fell sharply in April, with many blaming soaring prices—particularly for gas, electricity and fuel. “Compiled from a survey of 108 companies, including 51 retailers, in the weeks immediately after Rishi Sunak’s spring statement, the CBI survey showed that sales volumes were considered to be poor for the time of year in April. The headline retail sales balance on the lobby group’s distributive trades survey fell to -35 in April from +9 in March, significantly below the average of -3 expected in a Reuters poll of economists.” While elevated inflation along with this month’s energy price cap increase and stealth tax hikes are likely taking a bite out of many households’ wallets—forcing them to cut back on some types of spending—rising prices aren’t the sole cause for weak retail sales volumes. “The CBI said some of the drop in sales reflected consumers switching back to spending more on services – such as eating out in pubs and restaurants and travelling on holiday – after the easing of Covid restrictions. Retail sales had soared in lockdown while other opportunities to spend were limited.” Despite different timeframes, the CBI’s April findings are consistent with the headline takeaways from the Office for National Statistics’ March retail sales report, which was released last week, and consumption trends in America’s Q1 GDP report. We sympathize with households’ hardships with higher prices and taxes, but these reports confirm realities markets are already well aware of. Rather than fixate on the past, we suggest looking ahead: Elevated inflation may linger for longer than we anticipated, but it needn’t necessarily derail economic growth or markets.

Britain Ditches Post-Brexit Physical Checks on Food in Major Customs Overhaul

MarketMinder’s View: This article focuses on one sitting politician, and as always, we don’t prefer any politician or party—we assess policies’ potential economic and market impact only, and this piece happens to also be chock full of policy. Specifically: “Britain will never introduce post-Brexit physical checks on fresh food and plants being imported from the EU, under radical new plans being drawn up by Jacob Rees-Mogg. The Brexit Opportunities Minister plans to digitise all checks and paperwork at the border forever amid the worsening cost of living crisis. … A Whitehall source said Mr Rees-Mogg wants to make the ‘suspension of physical checks permanent’ after pushing back the introduction of the next checks until the end of 2023. They added the UK will move from ‘costly physical checks to developing our digital border policy which will be much better for supply chains and consumers’. However, there will still be a ‘tiny fraction’ of random physical spot checks that will be carried out.” When it comes to politicians and the elusive “sources” sharing confidential insight, take words including “never” and “permanent” with a grain of salt: Things can change based on the political winds. But in a world where lockdowns, supply chain bottlenecks and port backups dominate headlines, we think this development offers a timely reminder that feared post-Brexit trade chaos has yet to materialize—a small silver lining, but one worth acknowledging, in our view.

These 3 Social Security Mistakes Could Cost You Money You’re Entitled To

MarketMinder’s View: News you can use! If you are wondering about how Social Security can factor into your retirement finances, this article provides some basic tips to maximize your benefits. To avoid the three titular mistakes: 1) Don’t wait too long to file, especially after age 70 when benefits no longer increase; 2) activate spousal benefits you may have—worth 50% of your spouse’s eligibility amount—when you reach full-retirement age; and 3) try working full time at least 35 years, since “The monthly Social Security benefit you’re entitled to in retirement will hinge on how much money you earned during your 35 most profitable years in the workforce.” Everyone’s situation is different, so these suggestions are more of a starting place than a one-size-fits-all solution. Social Security may not be your main source of cash flow after you claim benefits, but it could provide a good chunk of change—knowing how to get the most out of them doesn’t hurt.

88% of Adults Support Requiring Personal Finance Education in High School, Survey Finds

MarketMinder’s View: Please note, MarketMinder doesn’t advocate for or argue against any policy, so whether high schools require personal finance education or not—as this article explores—isn’t why we point out this news. That said, we are big fans of financial literacy in general and improving one’s personal finance education—regardless of age and experience—is useful. This piece notes the growing interest in boosting young people’s knowledge in particular: “The number of states that mandate a personal finance course for high schoolers has grown in recent years. In March, Florida became the largest state to require personal finance in high school, and Georgia’s governor is set to sign a similar bill into law this week. Currently, 25% of high school students in the U.S. have guaranteed access to a personal finance course, according to a recent report from nonprofit Next Gen Personal Finance. In addition, more states have active bills that would mandate personal finance education if passed, and some are poised to become law this year.” Now, this says nothing about what is being taught, and the quality of the courses may vary greatly—e.g. stock-picking contests are hardly helpful, in our view. But to the degree kids grow up knowing more about the basics of budgeting, saving and investing, the better prepared we think they will be for financial success later in life. So consider taking an interest in the financial education of young folks you may know—it could greatly appreciate!

Graying of Canada’s Workforce Threatens to Worsen Labor Crunch

MarketMinder’s View: In our view, it is important for investors to dive into the claims demographics may present long-term economic challenges and question the underlying assumptions. The study cited here alleges Canada will face increasing labor shortages in years to come based on 2021 data showing a record number of Canadians nearing retirement outnumbering those joining the workforce. It then extrapolates this situation far into the future: “Although Statistics Canada expects the gap to shrink before growing again around 2036, it warned that working-age Canadians’ share of the population was falling. Meanwhile, the number of those aged 85 and older is projected to triple by 2051.” However, as the article acknowledges, people are working longer (whether by choice or necessity), and immigration policy can help meet labor demand. If some “nearing retirement” don’t actually retire and immigration provides needed workers, how reliable are far-future prognostications warning about shortages? For markets that look about 3 to 30 months ahead, supposed demographic problems are distant background noise—generally too slow moving to matter much in the short term and with too many variables to assign reliable probabilities to in the long term.

Hot Job Market, an Economic Relief, Is a Wall Street Worry

MarketMinder’s View: What—if any—relationship does employment have with stocks? We found this in-depth article a mixed bag overall, though it contains some good nuggets. For example, it notes upfront, “the unemployment rate’s status [is] as a ‘lagging indicator’ — letting people know how the economy was faring in the immediate past — while the stock market itself constantly serves as a ‘leading indicator,’ coldly, if somewhat imperfectly, projecting an evolving consensus about the fate of companies as time goes on.” Yep: Markets look ahead, and labor indicators confirm what just happened. But the article then explores what tight labor markets might mean for stocks, suggesting higher employment costs may offset corporate profits. It also argues a hot job market is fueling inflation, which will cause the Fed to tighten the reins and possibly weigh on the economic expansion. Thus, it posits the key indicator to watch today is wage growth—its moderation will allow labor costs to ebb, too, which may then boost stocks. But wage data simply reflect the price of labor—and are still backward-looking. Moreover, though jobs figures have political and sociological implications—some of which are touched on here—we suggest investors look at them from the market’s perspective. Stocks are efficient discounters of widely known information, and they have likely priced in much of the information (and associated discussion) reflected in lagging labor numbers. In our view, stocks move most on the gap between expectations and reality. While jobs concerns and other related fears could weigh on sentiment in the short term, that also lowers expectations, giving reality a low bar to clear—bullish since that can propel stocks further up the proverbial wall of worry.

Most French Voters Do Not Want Parliament Majority for Macron - Poll

MarketMinder’s View: As always, MarketMinder is nonpartisan, favoring no party nor any politician. We analyze elections for their potential economic and market impact only. We would also add that opinion polls are far from infallible, but we think they can help illuminate scenarios stocks are pricing in. In this case, “61% of French voters would prefer that parliament elections on June 12 and June 19 result in a majority of members of parliament in opposition to [recently re-elected French President Emmanuel] Macron. That percentage rises to 69% among working-class voters and close to 90% among far-right and far-left voters.” This shows the uphill battle Macron’s coalition likely faces maintaining its majority—and a big reason why bullish government gridlock looks set to harden in France. For more on France’s political outlook, please see Monday’s commentary, “Political Uncertainty Falls in France.”

Palm Oil Is in Half Your Groceries. Here’s Why Prices Might Shoot Up

MarketMinder’s View: Little-discussed palm oil, an ingredient in tons of consumer products, is seeing prices swing wildly as Indonesia—producer of 59% of the global supply—is capping certain exports after prices shot up following Russia’s invasion of Ukraine, which forced some to shift from sunflower oil to it. While crude palm oil is reportedly exempted, the country is banning a refined version (palm olein), “which is used for cooking oil and makes up an estimated 40% to 50% of Indonesian exports, according to analysts. That would fuel inflation, just as global food prices hit all-time highs.” It is likely the ban, should it last long, would send prices upward to some marginal extent, although it probably isn’t very big in the developed world vis a vis the Emerging Markets. Now, policymakers say they plan to keep this policy in place through next week only, which would likely limit the impact if accurate. That said, Indonesia’s policies toward palm oil are a masterclass in how not to run an economy, in our view. With inventories running low, the country first restricted exports in January by requiring producers to sell 20% of their export volume domestically. Then they capped retail prices for cooking oil. When that didn’t cool prices, the government took this latest action, further restricting exports. It won’t work either, in all likelihood. When you restrict producers’ ability to sell globally, what you actually do is discourage production. That has never been proven to lower prices anywhere, just the same as capping prices hasn’t. Keep this in mind as it pertains to policies like “energy independence” occasionally talked up in the US.