Retailer margin squeeze ominous sign of stagflation

The share price of Target has been slammed after missing on earnings. The share is currently trading down 25% from yesterday's close. For us, the story is in the economic implications. CEO Brian Cornell said, "Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations."

Target reported a day after Walmart, which had higher revenue but still missed earnings. I.e., Walmart is also feeling the pinch from much higher costs. In other words, supply chain and transportation costs have played a leading role in squeezing company margins. This headwind is likely to be compounded by the natural inclination for retailers to raise prices to stabilise margins. This will hurt demand and filter through to wage demands in an effort to keep standards of living. An inflation spiral is a real possibility. The Fed absolutely needs to prevent this from happening and will likely need to shoot past neutral.

As its hiking cycle progresses it will impinge on an already erratic demand side of company margins. This is the quintessential stagflation conundrum – in fighting inflation, economic activity is effectively cannibalised.

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Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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