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What retail predicament shows about the market fight against inflation

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The retailer is missing and the big one is missing.It started last week Walmart When Goal As a result of showing the need for large inventory increases and price cuts, and it was followed up Weak earnings and outlook from Abercrombie & Fitch This caused the stock to fall in the same way that major retailers experienced.

Is retail a canary in a coal mine for the market? There are good reasons to ask a question, but for now it remains difficult to answer positively. Let’s start with the best scenario. Consumers are shifting their spending habits from commodities to services, retailers are caught up in the tide with pandemic strength, but the recent set of results is not a sign of weakening Consumers — changing I like it. No matter how hard low-income Americans struggle with inflation, trading down grocery shelves from premium to private label and steak to ham hasn’t forgotten the shift that Wal-Mart has shown. Please. Two-thirds of personal consumption is done by one person. One-third of high-income Americans.

Wal-Mart and Target’s results may reflect changes in the economic reality of low- and middle-income households still facing high inflation, says Kathy Bosjanchić., Chief US Economist at Oxford Economics. Conversely, high-income households are less susceptible to inflationary headwinds, and their balance sheets are in very good shape, even if they feel that their asset effects are negative.

“The levels of their wealth and pandemic savings will continue to support their strong personal consumption, especially as they continue to shift to more face-to-face service spending,” she said. Services hurt retailers’ sales volumes like Wal-Mart and Target, but it’s not a loss to the economy as a whole.

This view is one of the keys to keeping a recession from turning into a full-blown recession, and many economists still hold it.

Scott Hoyt, Senior Director of Moody’s Analytics, said: “High-end consumers make more sense.”

Best buy The outlook has weakened on Tuesday, We are not planning a “complete recession”.

Home DepotLast week’s results Behind the consumer equationHome remodeling and spending from professional contractors have been successful.

The decline in the stock market has put pressure on sentiment, and high-end consumers have historically been sensitive to it, especially for older consumers who have thrown away much more cash in recent years, especially because Pandemic has made holes. Among them is a unique environment with excessive savings, Whit said in their spending. “It doesn’t alleviate my concerns about low-end people, but from an economics point of view, the high-end is more important, especially if you still have a job …. to them if the low-end people can’t afford it. Ham has no job, so we have a real problem, “he added.

The retail inventory / sales ratio, with the exception of cars, isn’t flashing a warning signal that there is a large unintended accumulation of inventories that will begin to weigh on economic growth in the near future, Bostjancic said. rice field.

But given recent retail results, this is an economic data point that attracts more scrutiny.

“We’ve been talking for months about the fact that one of the biggest risks to the economic outlook is inventory fluctuations,” Whit said.

Whit said the company was so afraid that it didn’t have what it needed, so it was wrong on the “lot” ordering side. They make double orders to stock the doors, and then as demand subsides, they may become overstocked and have to reduce their existing stock to reduce prices.

“This is a classic inventory cycle that has historically caused a recession, and it’s not uncommon,” Whit said. “It has been very clear in our minds for quite some time.”

But this doesn’t mean that Wal-Mart and Target’s problem is “sufficient to say it was there and we can’t get out of it,” he added. “We need to know how popular it is.”

The economy remains tough, especially for retailers, as commodity price inflation is higher than service price inflation, with reasons for commodity demand to soften without shifting to the coal mine economy canary. A long way from a pandemic shift in service-to-goods spending to a complete reversal. “Even if we claim that it won’t be a complete reversal, it’s clearly not near equilibrium levels, which is a very tricky environment, especially for retailers,” Whit said.

These problems can be exacerbated before returning to school or the vacation season, and with the protracted pandemic problem in China, businesses are even more eager to secure inventories. But if inflation continues to heat up and inventories continue to weaken demand, the worst-case scenario could be on the card.

Government Inventory-to-sales ratio data It hasn’t suggested a problem yet, in fact it’s still low by pre-pandemic standards. Retail may be an example of an “isolated sector,” Whit said. But he emphasized, “This is certainly a warning flag. It’s a risk we’ve been aware of for some time and needs to be followed very carefully, but it’s in recession. I don’t know if you’re saying “”

He said the trend to focus on was not the rise in inventory sales, but too low, but the rate at which it began to exceed pre-pandemic levels and the rate at which it rose. Now, “we are not far from the desired level,” he said.

None of this can downplay that fact Walmart was a lot off — We got 32% more inventory than the previous year.

“It’s crazy,” Wal-Mart’s former president and CEO Bill Simon told CNBC last week. “”So 8% would have been high, 15% would have been terrible, 32% would be apocalyptic. That is billions of dollars in stock. Frankly, it’s not well managed. “

The target was 43% higher.

“I think they were ordering to work ahead of supply chain issues. Then the product came in, came in late, and the order wasn’t in time. That means there’s a possibility. There were a lot. Frankly, I shouldn’t have done that, “Simon told CNBC.

But for Grant Thornton’s Chief Economist Diane Swonk, retailer mistakes should be accepted by the market as a warning sign of something more fundamental and potentially prevalent.

Retailers’ sensitivity to low- and middle-income households, who find the point of spending from goods to services and the pressure on prices such as gas to be disproportionate, is a real and serious problem. “”People are buying luggage “Everything that has benefited retailers to mitigate the misery of quarantine, not what they bought before, is now reversed,” Squonk said. And it should slow down with the product. Until the pandemic, the product was hit by deflation. “

But while it may help the Fed lower goods prices somewhat, it doesn’t cool the economy enough.

With the rapid increase in inventories at major retailers, Squonk sees an inflationary economy perpetuating more booms and busts in it, which should not alleviate concerns about the macro environment. “The Fed is now in a boom-prone world,” Swonk said. “It’s as if the Fed couldn’t wake up like Alice, looking through the glass. It’s still in an alternative universe and never comes back,” she said.

The resilience of the US economy could ultimately increase the likelihood that the Fed will raise rates.

“The first four months of this year created 2.1 million jobs. It’s a year. [of job gains] “On average in the 2010s, many new salaries were paid,” Swonk said. “We are not in recession yet.” Well — take margin hits based on high costs, even when they pass price increases to consumers.

“This is what happens,” she said.

The whips experienced by Wal-Mart and Target did not come out of nowhere and are not limited to products — Amazon is overstaffed When the world got out of Omicron, Wal-Mart also pointed out labor factors in the recent disappointment of earnings.

“These are obviously important retailers, and that’s important,” Swonk said.

The blockade of “Zero Corona” is still a problem in China, and companies are still thinking “I don’t know if they can get the goods right now”, which will hurt small and medium-sized businesses more than retailers. Giants with their own discounts. Major retail giants can better absorb the impact of margins, but being hit by both high inventories and costs still adds one thing to them: “Take it on your chin. “Squonk said.

Supply chain vulnerabilities have not been eliminated and it is costly to build a cushion. “It’s been a while since I had something like this,” Squonk said.

What the market certainly knows from the recent series of retail disappointments is that commodity-to-service pivoting is underway, and inflation first hurt low-income households, which begins to squeeze business margins. .. But where does the squeeze end?

That’s the question Swonk says that markets already on the edge will have to answer.

The optimistic explanation is that the economy could hit this soft landing with the Fed’s “dull” tools and slowing demand in a world where supply is limited without hitting roads.

“The story has disappeared,” Swonk said. “The bumps are already there, even if part of the economy has benefited.”

Billionaire Hedge Fund Manager Bill Ackman outlined two options for the economy Inflation will fall sharply, “unless the Fed aggressively raises interest rates or the stock market plunges, causing economic collapse and disruption of demand,” Ackman said in a series of tweets on Tuesday. There is no prospect. “

The resort is booked for the summer and the airline is back after almost collapse. The transition to services is a big change, but it is also a check of the reality of the economy.

Stock market investors don’t care about the margin pressures faced by independent restaurant owners, but when it appears to the country’s largest retailers, investors begin to worry about where the margin pressures are elsewhere. increase. “It’s a fuss,” Swonk said. “And you will see it elsewhere.”

Inflation is now as big a problem for businesses as it is for households, and things can change all at once. “It turned into their favor for a while, but the reality is that inflation burns everyone,” she said.

When a large company known for its low cost and inventory and cost management feels the heat of inflation, it’s a call for awakening, not an isolated event.

What retail predicament shows about the market fight against inflation

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