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Friday June 09 2023

Economies can suffer from shrinkflation too.

Markets

S&P500 Close

4,293.93

+0.62%

S&P500 Futures

4,335.25

-0.15%

10Y Treasury

3.726%

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As of FRI, JUN 09, 2023 • 02:15 ET

What you need to know today

The euro zone slipped into recession in the first quarter of the year, after Germany and Ireland revised down their first-quarter gross domestic product. The euro zone’s GDP shrank 0.1% for in the first quarter of this year and the last quarter of 2022.

China’s economy isn’t doing so hot either. The country’s consumer price index in May rose 0.2% year over year, while producer prices sank 4.6% — the sharpest drop in seven years. Indeed, the Organization for Economic Cooperation and Development expects China’s economy to grow slower than India’s this year and the next.

The U.S., on the other hand, seems to be perpetually avoiding a recession, thanks to the strength of consumer spending and the labor market. Goldman Sachs even thinks there’s a 75% chance the U.S. might completely dodge a recession in the next 12 months.

The U.K. is trying to boost its economy. Though the anticipated free trade agreement with the U.S. still eludes the U.K., the island nation just signed an “Atlantic Declaration” with the U.S. It comprises a series of miniature deals establishing cooperation on artificial intelligence, clean energy, critical minerals and international security.

Markets were buoyant. All three major stock indexes in the U.S. traded higher Thursday, with the S&P 500 hitting its highest closing level this year. Asia-Pacific markets were mostly up Friday too. Japan’s Nikkei 225 continued rallying, adding around 1.8%, but Chinese markets were flat on the back of disappointing economic data.

PRO GameStop’s shares sank 17.9% after the company fired its CEO and appointed Ryan Cohen, known as the “meme king” in online retail trading circles, as its executive chairman. Here’s what analysts think about the sudden move.

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The bottom line

Yeo Boon Ping | Friday June 09 2023

Everyone hates it when companies jack up prices while reducing the size of their products — a phenomenon called “shrinkflation.” What’s scarier is the shrinkflation that’s happening in economies.

The euro zone entered a technical recession — defined as two quarters of negative economic growth — in the first quarter of the year. Meanwhile, inflation in the bloc’s still high, with annual headline inflation of 6.1% in May. To be sure, that’s lower than expected and a drop from April’s 7% reading. But that reading’s still “too high” and “set to remain so for too long,” said the European Central Bank’s President Christine Lagarde. Translation: More interest rate hikes — and more economic pain — will come.

That trend’s playing out across the world. The central banks of Canada and Australia hiked interest rates this week, shocking economists who had expected the banks to hold rates, as they both had in their prior meetings. Notably for Australia, the hike came even as the country reported slowing economic growth amid slumping exports. But with April’s inflation jumping higher than expected to 6.8%, the central bank seems compelled to slow the economy further. Indeed, the head of the Reserve Bank of Australia, Philip Lowe, acknowledged that the economic outlook is “going to be painful for a while yet.”

I raise those examples to show how important next week’s consumer price index report will be to the Federal Reserve. Investors are betting there’s a 72% chance the Fed will keep rates unchanged at its next meeting, according to the CME FedWatch Tool. Even if it does, that doesn’t mean the U.S. central bank is done with its hiking cycle, especially if inflation data comes in hotter than expected.

Yesterday’s gains in markets is certainly welcome, but investors should beware shrinkflation hitting the U.S. economy as well.