Investors look for consumer pressure ahead of new tariffs

In this June 10, 2019, file photo, a man walks past a money exchange shop decorated with different banknotes at Central, a business district of Hong Kong. (AP)
Updated 11 August 2019

Investors look for consumer pressure ahead of new tariffs

  • Investors and analysts are anxious about the impact of Trump’s planned 10 percent tariff on the remaining $300 billion in Chinese imports, which will largely affect consumer goods

NEW YORK: As President Donald Trump prepares to slap new tariffs on Chinese imports, investors are bracing for signs of pressure on US consumers as top retailers begin reporting quarterly results next week and key consumer sentiment and retail sales data is released.
Investors and analysts are anxious about the impact of Trump’s planned 10 percent tariff on the remaining $300 billion in Chinese imports, which will largely affect consumer goods, unlike the previous round that fell heavily on industrial and business products. That could be a double-whammy for the US economy, which is about 70 percent driven by consumers, and retailers.
Mona MaHajjan, US investment strategist at Allianz Global Investors in New York, is among analysts focusing on the fallout from the tariffs, noting that the planned new round will “disproportionately” impact consumer goods. “We’ll be watching the data particularly around retail sales and consumer confidence,” MaHajjan said.
“We’ll continue to monitor the softening in manufacturing and inflation as well, but more important for the US economic picture is the consumer right now.”
Excluding autos, July retail sales  are expected to have grown 0.3 percent compared with 0.4 percent in June, according to a Reuters poll. On Friday, The University of Michigan’s preliminary August reading of consumer sentiment is expected to show a slip to 97.7 from 98.4 in July.
The S&P Retail index fell a total of 5.3 percent in the first three trading sessions following Trump’s Aug. 1 tariff announcement. As of Thursday’s market close, the index was down 1.6 percent for the month so far.
UBS analyst Jay Sole said fears that the tariffs could eventually increase to 25 percent were also an overhang for stocks. Morgan Stanley has estimated that 25 percent tariffs would lead to a global recession.

We’ll continue to monitor the softening in manufacturing and inflation, but more important for the US economic picture is the consumer right now.

Mona MaHajjan, US investment strategist

Retailers will have the dilemma of deciding whether to pass the tariffs on to consumers in the form of higher prices or absorb the higher costs, which would reduce profit margins.
“If you’re in a competitive environment you’re going to take some action to keep your customers,” said Charles East, an equity analyst covering consumer companies at SunTrust Private Wealth Management, who said that department stores are particularly vulnerable.
“I really don’t think they can push prices up because their sales are already weak,” East said. “The margins are under pressure. Perhaps they can accelerate cost-cutting.”
With two thirds of US footwear coming from China, for example, UBS’s Sole will look for comments in earnings calls and statements on how retailers and footwear companies plan to handle the tariffs.
“It’s a big deal. Our assumption is that there will be an attempt to raise prices on the goods,” Sole said.
“We think consumers are going to resist those price increases,” he added, citing a UBS survey of 7,660 consumers in July that showed 77 percent of respondents were worried the China trade war would cause prices to rise.
Retailers reporting next week include Macy’s Inc, Walmart Inc. and Tapestry Inc, whose brands include Coach, Kate Spade and Stuart Weitzman. The following week Kohls Corp, Target and Nordstrom Inc. will all report.
The S&P Consumer Discretionary index, which includes big retailers, is expected to report a 1.2 percent increase in second-quarter earnings, according to IBES data from Refinitiv.
But estimates for the rest of the year have been falling. Wall Street now expects third-quarter earnings growth of 1.8 percent compared with a 6.8 percent expectation on July 1 while the fourth-quarter estimate has fallen to 6.5 percent from 9.8 percent.
Mitigating factors for consumer companies include a strong labor market, low inflation, declining interest rates and low gas prices, according to David Joy, chief market strategist at Ameriprise Financial in Boston.
But Joy cautioned that recent strength in the Conference Board’s Consumer Confidence index may not last.
“When confidence is at these types of levels, it may have peaked and will decline if the economy slows further or the stock market sells off sharply,” he said.


Saudi Arabia raises more than SR15bn in bond sale

Updated 28 March 2020

Saudi Arabia raises more than SR15bn in bond sale

  • Gulf oil exporters are increasingly turning to debt sales to help fund spending in a low oil price environment

JEDDAH: Saudi Arabia has sold more than SR15 billion in Islamic bonds, as the Kingdom seeks to develop its local debt market.

The Kingdom’s Finance Ministry said on Friday that it had closed the book to investors on its March 2020 riyal-denominated sukuk program.

The total amount raised by the sukuk sale was SR15.568 billion, divided into three tranches that mature in five, 10 and 30 years.

Gulf oil exporters are increasingly turning to debt sales to help fund spending in a low oil price environment while at the same time developing their own capital markets as part of ongoing diversification reforms.

“The closure of the issuance of government bonds exceeding 15 billion riyals shows many positive elements,” said Abdullah Ahmad Al-Maghlouth, a member of the Saudi Economic Society. 

“Such as confirming the robustness of the Kingdom’s credit rating and the strength of the Saudi economy; that the Kingdom’s debt-to-GDP ratio is still far lower than many other G20 countries; the Finance Ministry’s ability to deal with the requirements of asset and liability management; as well as the Kingdom’s strong foreign-exchange reserves in dollars, among others.”

The Kingdom’s strong credit rating means it can borrow more cheaply than many other Mideast economies despite a weaker oil price.

Economic analyst Fahd Al-Thunayan said: “The Ministry of Finance, represented by the National Debt Management Center, continued its efforts in developing local debt markets and providing the required balance in financing public-budget expenditures, through the optimal mixture of the use of reserves and borrowing within the upper limits, like a percentage of the GDP, where the local issuances reached 65 percent of the total debt in the year 2019.”