Central Bankers In A Bind

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What's going on here?

The euro has strengthened significantly so far this year and the European Central Bank (ECB) is beginning to worry that this could impede the eurozone’s recovery…

What does this mean?

Economic growth tends to lead to higher interest rates, and this makes a currency more attractive to investors as it gives them a higher return. This is because when growth is picking up, central banks start to worry about the prices rising too much (a.k.a inflation) and are more likely to raise interest rates (raising interest rates makes it more expensive to borrow money to spend on stuff, which is one way they dampen prices).


So far this year, the eurozone’s economy has grown more quickly than the economies of Britain and the US. This has led to increased speculation that the ECB will take steps to, gradually, allow interest rates to go up. This has helped the euro rise by more than 10% versus the US dollar (and about 6% versus the pound) this year.

Why should I care?

The bigger picture: A stronger currency can create a headwind for economic growth.

In the notes of its most recent meeting, the ECB expressed some concern about the strengthening euro. Its worries stem from the fact that a stronger currency makes eurozone companies’ exports more expensive for foreigners, thereby making growth more difficult to achieve. It also makes imported goods cheaper, which puts downward pressure on inflation (and, remember, inflation is currently well below the ECB’s target). As such, the ECB is wary of indicating definitively that interest rates will go up, which could push up the euro so much that it starts acting against the ECB’s aims.


For markets: Like other central banks, the ECB is stuck between a rock and a hard place.

The ECB, as well as central banks in the US, UK and Japan, is facing a difficult challenge: withdraw support (for example, by buying fewer bonds each month) that is slowly becoming unnecessary without withdrawing it so quickly that it endangers the burgeoning economic recovery.

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Wal-Mart’s Expensive Fight

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What's going on here?

Wal-Mart reported its 12th consecutive quarter of sales growth on Thursday, but the amount it’s spending to compete with Amazon (and others) is eating into its profitability big time…

What does this mean?

A few years ago, Wal-Mart made a strategic decision to improve its in-store experience and substantially beef up its ecommerce offering (including acquiring Amazon competitor Jet.com). Its efforts are largely paying off, as Wal-Mart’s sales continue to expand while most other retailers are experiencing flat or declining sales growth. However, the improvement has come at a cost: expenses in its latest quarter were almost 4% higher versus a year ago and its margins continued to decline.

Why should I care?

For markets: Wal-Mart is bucking the trend among retailers – but investors now want to see that translate into higher profitability.

Wal-Mart’s stock is up about 15% so far this year, while stocks of major retailers, in aggregate, are down more than 10% – that’s a big outperformance by Wal-Mart! However, its stock fell about 2% following its results on Thursday. This partly reflects investors’ high expectations (Wal-Mart would have had to post extraordinarily good results to send its stock up further), but it also likely suggests that the key unanswered question for Wal-Mart is how its investments will translate into higher profits (a.k.a. margins).


The bigger picture: The strongest companies invest for the future.

Wal-Mart is such a large and stable company that it can handle a few years of lower profits in order to invest for the future. Retailers that lack either the strategic initiative and/or the cash to do so are in a much more precarious position. Some of its competitors, like Target, are belatedly making an effort to invest. Other competitors, particularly those with lots of debt (like Toys “R” Us), are facing an even shakier future.

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Apple Heads For Hollywood

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What's going on here?

According to The Wall Street Journal, Apple is moving into show business and has set aside around $1 billion to develop its own video content next year (tweet this).

What does this mean?

Apple is planning to create as many as ten new TV series that it hopes can compete with the likes of House of Cards and Game of Thrones, either through its existing Apple Music service (which is starting to include video) or through a yet-to-be announced video streaming platform. The company has already hired two entertainment executives from Sony to lead the project.

With a budget of $1 billion, Apple is set to spend nearly as much as dedicated media companies like HBO on new programming – keep in mind that just one episode of Game of Thrones can cost up to $10 million to make!

Why should I care?

For markets: The video streaming world is getting more and more competitive.

These days, everyone from Disney to CBS to Viacom is trying to perfect a package of video content that can woo over consumers. More competition means that companies like Apple will potentially have to market their offerings at a fairly low price to win over customers – and that means their streaming service could be unprofitable at first if their content costs a lot to produce (that said, Apple has enough cash to take a few risks).



The bigger picture: Apple’s reimagining its media content strategy.

Apple’s iTunes used to account for 50% of all movie sales and rentals in 2012; today, its share has dropped to less than 35% as subscription services like Netflix have beaten out Apple’s piecemeal approach to renting and selling movies. Apple seems to be pivoting towards the subscription model and might bundle together access to its extensive music library (via Apple Music) with its library of original video content.

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Good Job, Mate!

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What's going on here?

Britain’s getting down to work! Data out on Wednesday showed that British workers’ paychecks grew by more than expected last month and that unemployment in the UK hit its lowest level in over 35 years.

What does this mean?

According to the data, almost 80% of the 125,000 jobs created in Britain since June were full-time positions. That’s great news for the UK because it suggests that employers think that the economy is on good footing and are looking for consistent work to meet the demand for UK products and services.


However, there are still some grey patches in the British economy. Economic growth has started to slow down, for one. On top of that, things are getting more and more expensive in the UK, and stronger wage growth in July still wasn’t enough to offset the fact that British households are spending proportionately more than they used to on everyday goods.

Why should I care?

For markets: The pound gained slightly against both the dollar and the euro on Tuesday.

Investors possibly interpreted Wednesday’s data as signs of a strong economy and bought up more of the pound to get in on the action. That was a welcome respite for the currency, which dropped against its two major counterparts after weaker than anticipated inflation data came out earlier this week.



The bigger picture: Low unemployment could lift up inflation, pushing the Bank of England to raise interest rates.

Wednesday’s news has also stirred some excitement since the UK’s unemployment rate is now below what the Bank of England (BoE) considers to be the “natural” rate of unemployment. According to the bank, any further drops in unemployment mean that inflation should increase (usually, if more people are working, wages are increasing and prices go up with them). That all means that lower unemployment might add pressure on the BoE to raise rates, but most think inflation is too low right now to justify a rate hike.

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Air Berlin Bites The Dust

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What's going on here?

Mayday, mayday! Air Berlin, Germany’s second-largest airline, announced on Tuesday that it’s filing for bankruptcy!

What does this mean?

Since the 1990s, Air Berlin has attempted to be an airline that occupies the gap somewhere between classic full-fare airlines and low-cost carriers like Ryanair and EasyJet. However, the airline hit major turbulence as the company’s revenues have been declining (it’s lost more than a quarter of its passengers in the past year) – even while the size of its outstanding debts (which it used to keep funding its operations) continued to balloon.

Etihad Airways, Air Berlin’s largest shareholder, has been trying for the past year to find a workable solution for the ailing airline. However, on Tuesday, Etihad announced that it was calling it quits and would cease to keep funding Air Berlin’s operations. Without that important lifeline of cash, Air Berlin was effectively prompted to declare bankruptcy.

Why should I care?

For markets: Unsurprisingly, Air Berlin’s stock took a nosedive on the news.
When the airline declared bankruptcy, investors in Air Berlin ran for the hills and pushed down the stock by over 40% (shareholders usually lose all of their investment when a company goes under). It’s now rumored that chunks of Air Berlin will be sold to its bigger German rival, Lufthansa. Investors are clearly into this idea, as they sent Lufthansa’s stock up by around 5% on Tuesday.



The bigger picture: This could signal a consolidation of Europe’s fragmented airline market.

American airlines are more than twice as profitable as their European counterparts, largely because there are fewer of them! With fewer competitors, American airlines can scale their operations across the country at a relatively lower cost. European airlines, however, are far more numerous and face more competition than their American counterparts. Some have said that Air Berlin’s collapse is, at best, a welcome push towards consolidation in the overpopulated European airline market.

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US Consumers Make It Rain

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What's going on here?

Data released on Tuesday showed that retail sales (e.g. for stuff like apparel and electronics) in America increased by their most in seven months in July – signaling that the American economy is picking up momentum!

What does this mean?

Consumer spending accounts for more than two-thirds of the American economy. Retail sales track the strength (or weakness) of part of this spending and help predict how much consumption might play into economic growth.

So far this year, retail sales have been fairly weak, but Tuesday’s stronger than expected retail data suggests that consumer spending might finally be picking up – and that’s obviously good news for the world’s largest economy.

Why should I care?

For markets: The dollar jumped on the news but American retailers’ stocks were largely down.

Since America’s economy seems to be heating up, investors bought up the dollar on Tuesday (remember, investors like to invest in growing economies and thus tend to buy the currency of such economies). However, the rosy data on retail didn’t seem to do much for retailers’ stocks on Tuesday, which are still on a protracted slide this year as sales growth has been anemic and competition continues to ramp up from ecommerce titans like Amazon.


The bigger picture: Stagnant wages are still a worry though.
If consumer spending is increasing even while wage growth is at a historically low level, that means Americans must be saving less money or are buying stuff on credit. Many economists warn that this kind of increase to consumption can’t be sustained indefinitely, so consumers’ wages will eventually need to go up. However, that’s a tough bargain for employers, for whom “labor productivity” (how much economic value their workers produce on average) has been relatively flat in recent years. Put simply, it means that raising wages would have to come at the expense of companies’ profits.

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China Slows Down To Bulk Up

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What's going on here?

Data released on Monday indicated that the Chinese economy (the world’s second largest!) is showing the first signs of a mild slowdown that, some say, is likely to continue through the rest of the year

What does this mean?

Recently, Chinese authorities have been ramping up their attempt to reduce the amount of risky debt (i.e. loans that might not be able to be paid back in full) in the Chinese economy by effectively making it more expensive for banks to lend.


A big part of China’s economy runs on borrowed cash, however, and if companies in China are borrowing less money that means that they’re probably not generating as much economic activity (e.g. by foregoing hiring someone to build a house, whose wages would then be used to buy, say, a phone). Data released on Monday suggests that the clamp down on lending is passing into the economy: retail sales and industrial activity in June both grew by less than expected, while spending on buildings and infrastructure declined in June compared to the month prior.

Why should I care?

The bigger picture: A mild slowdown this year could actually promote sustainable economic growth in China.

Ever since the 2008 financial crisis, the Chinese economy has been particularly reliant on borrowed cash to propel its economy. When another financial crunch comes around, it’ll likely be very difficult for Chinese companies to borrow new cash in order to pay their old debts – increasing the chances of a default on these debts and a worsened economic slowdown. While fixing this problem might somewhat slow down the Chinese economy, the measures will probably benefit the country much more in the long run.



For markets: Companies might feel the pinch from more expensive lending.

China’s economy has grown by more than expected this year, which has been good news for companies that do a lot of business there! However, a big risk for them is how China’s tougher rules on lending will reverberate through the economy (i.e. it might impact construction-focused projects more than other sectors).

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Aldi Serves Up Groceries 2.0

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What's going on here?

Discount grocer Aldi has announced that it’s partnering with delivery startup Instacart to offer online grocery delivery to its customers as it looks to take a bigger slice out of the American market for groceries.

What does this mean?

Instacart’s partnership with Aldi, which is on track to become America’s third-largest supermarket by 2022, proves just how much grocery companies are betting on the digitization of their industry.

But even if ecommerce presents a big opportunity for grocers overall, many challenges in this already struggling market remain: for one, competition is increasing even more as foreign grocers, including Aldi and Lidl (a German discount grocer that’s opened its first stores in the US earlier this year), continue to expand their low-cost operations into the country. On top of that, lukewarm wage growth has made it hard for them to raise their prices (and boost profits).

Why should I care?

The bigger picture: Supermarkets are beginning to adjust their business models around ecommerce.

Compared to retail markets like bookselling and apparel, grocery shopping hasn’t been as radically changed by the rapid growth of ecommerce. However, Amazon’s recent acquisition of Whole Foods has led many to think that this evolution is now imminent. Even though most people still buy their groceries in stores, experts suspect that this market could grow massively as stores begin to market online groceries at a relatively lower price and begin to bundle retail products across a single ecommerce platform (which is what Amazon might do with Whole Foods).



For markets: Investors are distancing themselves from grocers who aren’t prepared to innovate.

Shares in Kroger and Target, two of America’s largest grocers, are both down by more than 20% this year as both have struggled to develop a convincing ecommerce strategy. Walmart’s stock, meanwhile, touched a two-year high earlier this year as investors have rewarded the company’s continued acquisition of ecommerce startups like Jet.com and Bonobos and its push to digitize its retail business.

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Inflation Ain’t Pulling Through

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What's going on here?

Prices for consumers rose more slowly than expected in the US in July, indicating that the US Federal Reserve (“the Fed”) may hold off from raising its target interest rate any time soon.

What does this mean?

Consumer prices rose by 0.1% in July, a rate that has only been surpassed once since January. So, while prices have risen 1.7% over the past year, the pace in recent months suggests inflation is slowing. This is somewhat surprising given the apparently strong job market. As more workers get employed, wages should go up and companies that sell goods to consumers should be able to raise their prices more quickly – but that doesn’t seem to be happening.


It’s important to note that the price data showed a big drop in the cost of hotel rooms and similar temporary accommodation – which may have been a mistake.

Why should I care?

The bigger picture: Technology is likely helping to keep prices down.

An optimist would argue that improvements in technology are making the economy more efficient, which is driving prices down. For example, the proliferation of Airbnbs is likely putting downward pressure on the cost of hotel rooms. The impact of these sorts of changes on the overall economy isn’t yet clear, but greater efficiency is usually a good thing.


For markets: Inflation will likely have a big impact on the Fed’s target interest rate.

The Fed has already increased its target interest rate twice this year, despite low inflation (it argued that inflation would soon pick up). It also looks set to announce at its September meeting that it will begin to reduce its purchases of bonds on the open market (this is a way of raising interest rates – click here for more background). So, for now, it’s kind of ignoring the low inflation. But if inflation doesn’t pick up, the Fed is less likely to raise its target interest rate later this year. How do rising interest rates affect investments? Click here.

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Less Debt Becomes A Valuable Commodity

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What's going on here?

In another sign of the mining industry’s recovery, London-based global miner Anglo American had its credit rating upgraded on Friday – indicating that it is now at a much lower risk of bankruptcy than in previous years.

What does this mean?

Just like people, companies have credit ratings too. On Friday, S&P (a major credit rating agency) said Anglo American once again qualified for an “investment grade” (IG) rating. It had been demoted to sub-IG in February 2016 when commodity prices (like iron ore) were at their lowest level and Anglo American’s heavy debt load made it more vulnerable to bankruptcy (partly because it couldn’t sell its products for as much money, endangering its ability to pay back its debt). The distinction between IG and sub-IG grades is an important one, because many investment funds don’t like to buy bonds of sub-IG companies – they are often deemed too risky.

Why should I care?

The bigger picture: Hunkering down to survive is a viable strategy during a crisis.

During the commodity price meltdown, Anglo American took drastic action to reign in costs and sell off some of its mines that weren’t essential, which reduced its debt. The subsequent big rebound in commodity prices, driven largely by the Chinese economic recovery, also played a big role in its recovery – Anglo American is now in a much safer position than it was just 18 months ago.


For markets: Mining stocks have recovered spectacularly – but the ending could have been much different.

It’s risky to own stock in a company with a heavy debt load because, in the event of a bankruptcy, those that have lent the company money (e.g. bondholders) get to take control of the company – and shareholders are usually left with nothing. When a crisis hits a heavily indebted industry, as it did in mining in 2015-2016 and banking in 2008, stock prices tend to drop sharply to reflect the higher risk of bankruptcy. When that risk lessens, the returns to shareholders can be massive: Anglo American’s stock price is now more than five times its low.

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