June 8, 2018
Hot U.S. Economic Growth Is Burning Companies That Can’t Keep Up
A strengthening economy has its downsides. Just ask United Natural Foods Inc. As suppliers struggle with bottlenecks, the food distribution company said it is having trouble keeping shelves stocked and paying higher transportation costs. “Higher demand is pressuring our supply chain,” Chief Executive Officer Steven Spinner said on a conference call after reporting results late Wednesday for the fiscal third quarter. “A headwind from inbound freight expense” is likely to continue for at least the next six months. The hurdles underscore the capacity constraints that are increasingly crimping the U.S. economy’s long expansion. REV Group Inc., which makes buses and ambulances, cited “the availability of chassis” as a reason for weak second-quarter results. Oil producers have reported dwindling pipeline space, and a rail and trucker shortage that’s eating into profit as shipping costs increase. United Natural Foods fell 13 percent to $40.10 at 2:59 p.m. on the distribution concerns, as well as weak margins, accounting changes and other issues. That was the biggest intraday decline in almost a year. REV Group was poised for a record decline at the close, down 19 percent to $14.49. Economic growth has raised demand for transportation and led to a shortfall in drivers. Recent estimates from FTR Transportation Intelligence found that the U.S. has about 280,000 fewer truckers than it needs. The Institute for Supply Management cited “stockouts and shortages” in a report this week showing that U.S. service industries expanded in May at a faster pace than forecast. “It’s a capacity issue as it relates to gearing up for the business demand,” Anthony Nieves, chairman of the ISM non-manufacturing survey committee, said on a conference call.
Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020
U.S. economic growth could face a challenging slowdown as the Trump Administration’s powerful fiscal stimulus fades after two years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump “makes the Fed’s job more difficult all around” because it’s coming at a time of very low U.S. unemployment. “What you are getting is a stimulus at the very wrong moment,” Bernanke said Thursday during a policy discussion at the American Enterprise Institute, a Washington think tank. “The economy is already at full employment.” The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series. The timing of Bernanke’s possible slowdown would line up badly for Trump, who has called the current economy the best ever and faces reelection in late-2020. Bernanke, who stepped down from the U.S. central bank in 2014, is a distinguished fellow in residence at the Brookings Institution in Washington. The Congressional Budget Office forecast in April that the stimulus would lift growth to 3.3 percent this year and 2.4 percent in 2019, compared with 2.6 percent in 2017. GDP growth slows to 1.8 percent in 2020 in the CBO projections. Fed officials predicted 2 percent growth in 2020 in their March median projection. The degree of slowdown as stimulus fades is a matter of debate among economists, with some predicting the effects could last beyond two years if the U.S. boosts its capital stock and upgrades its workforce during this period of strong growth. Congress could also write new spending laws to smooth out the program, Bernanke noted. With the stimulus coming at a time of already-low unemployment — the jobless rate was 3.8 percent in May, matching the lowest in almost five decades — Fed officials have projected inflation as likely to overshoot their 2 percent target, resulting in a slightly restrictive monetary policy in the future.
U.K. Households’ Expectations for Higher Interest Rates Slips
Fewer British households expect an interest-rate increase in the next twelve months, according to a Bank of England survey. In May, 51 percent of respondents to a BOE survey expected rates to rise over the next year, down from 58 percent in February, a report published Friday showed. The central bank questioned 2,159 people between 4 and 8 May. Governor Mark Carney said last month that, while investors have bemoaned the BOE’s communication surrounding rates, the wider public still understood the bank’s key message that borrowing costs are headed gradually higher. Household expectations for inflation in the coming year were unchanged at 2.9 percent, the survey showed.
German Industry’s Bad News Just Keeps Coming
German industrial production unexpectedly fell in April, continuing a run of poor economic news from Europe’s largest economy. The 1 percent drop in output, along with a shock decline in factory orders reported earlier this week, indicates a moderate pace of expansion at the start of the second quarter. A separate report showed that exports fell 0.3 percent in April, while in France, industrial production also declined. The euro fell after the German data and was down 0.2 percent at $1.1772 as of 9:44 a.m. Frankfurt time. German industrial production unexpectedly fell in April, continuing a run of poor economic news from Europe’s largest economy. The 1 percent drop in output, along with a shock decline in factory orders reported earlier this week, indicates a moderate pace of expansion at the start of the second quarter. A separate report showed that exports fell 0.3 percent in April, while in France, industrial production also declined. The euro fell after the German data and was down 0.2 percent at $1.1772 as of 9:44 a.m. Frankfurt time. A series of downbeat numbers from across the euro area suggests that a slower pace of expansion is the new normal. The continued weakness even in the region’s largest economy, underscored by four months of sliding manufacturing orders, will cast a shadow over the European Central Bank’s crucial policy meeting next week, when officials plan to discuss the future of their stimulus program.
Love for China Is Real as Foreign Traders Spend Record on Bonds
Foreign bond investors are loving China. They’ve increased their holdings of the government’s securities for a 15th month to a fresh record of 835.9 billion yuan ($130.5 billion), up by 229.4 billion yuan since January, data from the China Central Depository & Clearing Co. show. That’s a meteoric rise from 2017, when foreign holdings of Chinese debt increased just 5.23 billion yuan. And that’s poised to continue, says Chang Ming, managing director and fund manager at Jwin Capital. The opening up of China’s domestic derivatives markets will make government bonds more attractive, and foreign investment will grow even faster, he says. The increase in overseas holdings this year has surpassed China’s government-bond net issuance of 207.8 billion yuan through May. It also represents more than three times the 74.3 billion yuan of debt bought by the nation’s commercial banks. April was particularly notable as monthly foreign holdings jumped the most in at least three years, helping accelerate a drop in the yield of five-year securities from a high in November. It slipped to a one-year low of 3.25 percent in April and now hovers around 3.51 percent, according to data from the China Central Depository & Clearing Co.
China’s $11 Trillion Bond Market Tested by Rising Defaults
China’s efforts to connect the world’s third-biggest bond market with the international financial system are hitting dual headwinds — a climb in global borrowing costs, and the country’s own campaign to reduce financial leverage. The dynamics have contributed to defaults by 12 bond issuers in 2018 through June 4, after 18 for the whole of 2017, according to Fitch Ratings. Firms from JPMorgan Chase & Co. to Fidelity International are warning to prepare for more. But with about 8.2 trillion yuan ($1.3 trillion) of domestic corporate and local-government securities due to mature in the coming 12 months, it’s an open question whether China is prepared to let chips fall where they may. Authorities started shifting away from the old model of implicit guarantees for practically all debt securities in 2014, allowing defaults for the first time. The idea: tap market discipline to punish inefficient companies and encourage a more productive capital allocation. Given the massive size of the market — now more than $11 trillion, with a further half trillion or so in dollar bonds — it was always going to be a delicate transition. Where would the lines be drawn on who goes bust? A global-standard credit-ratings industry could hardly be engineered overnight. And who would staff credit-research teams and risk-control desks? Not to mention creating a derivatives market to hedge risks. And with China’s door at its most open yet to overseas investors, the global spotlight is shining like never before on these securities. “The pace is so much faster today, that’s one of the things that’s missed from many investors” looking at China’s capital markets, said Brendan Ahern, chief investment officer at Krane Funds Advisors, which is expanding its line of fixed income products as China’s bond market opens. “If you have to take your eye off China, it moves so quickly that it’s way ahead of you.”