WTF is going on with the Economy?!

WTF x AWI #092 - Off Target

Abroaden Insights Team June 24 2022 · 6 min read

This is issue #092 of our WTF is going on with the Economy x abroaden weekly insights newsletter talking about Target and the economy.

US consumer stocks went off-target (are we looking at a bear market)?

Last week, the general sell-off continued on stock exchanges around the world. Although many markets took a hit, American indices were particularly harmed, as the S&P 500, Dow Jones Industrial Average, and NASDAQ fell considerably. 

While the markets turning downward isn’t anything new (we’re in the midst of an 8-week losing streak), one sector heading south raised alarm bells: consumer discretionary

Consumer discretionary broadly defines stores that sell items like electronics, games, and other stuff we can (sort of) live without.

Generally, when the economy is hot like it is now, this sector performs well. 

Usually, when an economy grows, unemployment is low, and wages are up, consumers feel comfortable spending. 

However, we’re still not in a normal situation.

  • Inflation is high (although overstated by the media), which impacts how consumers feel about spending.
  • Oil prices are still way up due to Putin’s war.
  • The pandemic distorts the economy as both supply chains remain disrupted and consumers shift spending habits.   

These factors combined to take what should be a safe sector into the mud with other stocks. 

Target leads the way 

American giants Walmart and Target lead the way here. Both companies blame excess inventory, higher fuel prices, and inflation for hitting their sales forecasts. 

Given these poor results, should we panic and consider it’s game over for the economy? 

Not quite, and again, as we like to say here, context matters. 

First, commentators quickly blame inflation for these poor results, parlaying that into consumers having less spending power.

That argument skips over the fact that high gas prices are effectively sapping demand for discretionary purchases as people pay more to fuel up their cars. In the United States, most folks need their car to live. It makes complete sense that they have less money to spend on TVs right now. 

It’s also worth pointing out that higher gas prices impact bottom lines by increasing transport costs.

Second, the supply chain issues are still very real. China’s zero-covid strategy is disrupting exports from the PRC. Meanwhile, retailers are still stocking up on some items, trying to stay on top of potential shortages. 

Holding inventory costs companies money. When firms have more than usual, those charges hit their profit margins. 

Finally, consumers are shifting their habits by wanting more services (like travel) and fewer goods. 

Together, it’s not surprising that consumer companies took a big hit last week. For us looking to be more reasonable investors, context matters since it keeps our money decisions level-headed and on track. 

Get these insights straight to your inbox each Tuesday when we publish and never miss out on what people living abroad need to know about the economy.

Eurozone target interest rates could rise soon: what it means. 

Christine Lagarde, head of the European Central Bank, signaled in a blog post on Monday that the bank will soon raise interest rates above zero.  

She believes that with the European economy growing and inflation increasing, now is the time for the (small) hike. 

Her announcement is effectively bringing an end to nearly a decade of negative interest rates the central bank charged others to deposit their money with them. 

If you’re not familiar with why interest rates matter, you should definitely check out our article on our website

In short, the bank cut the rates below zero to get money out of savings accounts and into other investments that have far better returns. 

(The results were mixed. There’s been a decent amount of business activity since then. Real estate boomed due to cheap mortgages, but savings still remains stubbornly high). 

So what does this rate hike mean? Briefly: 

President Lagarde didn’t give a concrete deadline for the increase, but many expect it to happen within the next few months. 

We’ll let you know when it happens and what it means for people living abroad. 

New “trade” deal 

Just yesterday, US President Joe Biden announced the formation of a new trade agreement between the United States and 12 other countries. 

During a whistle-stop tour of East Asia, the President laid out his Indo-Pacific Economic Framework for Prosperity (IPEF). 

The agreement is supposed to get the US back involved with many of the nations that make up the Trans-Pacific Partnership, which former President Trump quit in 2017. 

The deal -- not technically a trade agreement -- covers a wide range of topics over intellectual property protection, supply chains, infrastructure, taxation, and corruption. 

From America’s perspective, Biden wants to get the US back in a leadership position in Asian economic activities. 

For other signatories, bringing the US back into the fold is the best alternative to getting the country into TPP, which isn’t politically viable right now in American politics. 

In any case, IPEF will help countries representing 40% of global GDP diversify away from China, which, in theory, will create a more resilient worldwide economy. 

Are international remote workers about to lose their pay advantage? 

For many of us working remotely from abroad, we have a not-so-secret secret. By living in a lower cost of living country, we can get paid way more than we would working locally. 

After all, a salary from a Boston BioTech goes a lot further in Barcelona, regardless of how many pinchos and glasses of wine we can toss back each week. 

Even for people working remotely in the same country, the same is true. Tech workers in San Francisco left the Bay Area early on in the pandemic to live in cheaper parts of the country (helping to fuel a colossal property bubble).

Now, though, the bumper pay might be over. According to Bloomberg, companies are starting to match compensation to the location average of their workers.

Companies are looking at in-country pay rates first. Could that spread to their remote workforce abroad?