Goldman Sachs gets even gloomier on the US economy

[New Reporter]

Goldman Sachs gets even gloomier on the US economy

By Julia Horowitz, CNN Business

October 11, 2021

London (CNN Business)Goldman Sachs (GS) is becoming increasingly pessimistic about the US economy as coronavirus support from the government phases out and consumer spending remains on an uncertain path.

What's happening: Over the weekend, the Wall Street bank downgraded its forecast for America's economic growth, which is closely monitored by the investment community. Goldman Sachs now expects the economy to expand by 5.6% this year, compared to a previous estimate of 5.7%. In 2022, growth is projected to expand by 4%, down from 4.4%.

It's the second time Goldman Sachs has revised its 2021 forecast lower in two months.

Breaking it down: The bank's team of economists said two main factors drove the change in its outlook. One is that Covid-19 relief programs are set to wind down "significantly" through the end of the year, eliminating a source of income for some households.

The other concern is that consumers are not doling out enough money on services to compensate for a drop in spending on goods.

"Consumers' service spending will need to recover quickly to offset a decline in goods spending as the latter normalizes from its current elevated level," Goldman Sachs told clients. "This will likely prove challenging while Covid cases remain elevated, since many people still feel at least somewhat uncomfortable engaging in many activities that were routine prior to the pandemic."

It pointed to movie theater attendance as one sticking point. (James Bond film "No Time to Die" brought in $56 million at the North American box office over the weekend. That was a muted performance for the Bond brand, my CNN Business colleague Frank Pallotta reports.)

Goldman Sachs also thinks spending could decline as people continue to work from home, encouraging them to prepare their own lunches instead of popping into local restaurants.

Another view: Bank of America, for its part, has been encouraged by spending trends gleaned from US credit and debit card data. "We think the recent drop in cases has helped ease Covid concerns," said Candace Browning, head of BofA Global Research.

The bank found that spending at daycare centers in September was 52% above last year's levels and only 13% below the same period in 2019, which it called "an encouraging sign." It also observed that spending on travel and entertainment is "improving," though gains haven't been felt evenly across the country. People have been significantly more willing to splurge on entertainment in Florida than in states like New York and Pennsylvania.

Bottom line: The big picture for Covid-19 in the United States is looking a little brighter as new infections and hospitalizations decline.

"Hopefully it's going to continue to go in that trajectory downward," Dr. Anthony Fauci, the nation's top infectious disease expert, said Sunday.

But the country is still reporting about 95,000 new infections daily, which Fauci said is "way too high." That's making it difficult for economists to map out the way forward for America's economy.

Watch this space: US banks have strong insight on the health of US shoppers since they track money flows. Investors will closely monitor their commentary on the subject when they report earnings later this week.

Netflix supercharges its retail push with Walmart deal

Netflix (NFLX) doesn't just want you to binge its movies and shows anymore.

It also wants you to buy shirts, dolls and other novelty items inspired by its original programs — generating a new source of income for the company as it sheds subscribers in North America.

The latest: Walmart (WMT) announced Monday that it struck a deal with Netflix to sell merchandise from popular shows on its website, including a "CoComelon" bed set, "Squid Game" t-shirts and baking kits inspired by the reality show "Nailed It!"

"Walmart is now the official one-stop shop to bring your favorite Netflix stories home," Walmart executive Jeff Evans said in a blog post.

The backstory: Netflix launched an online shop in June — a sign it was interested in adopting the model perfected by competitor Disney, which makes tons of money off its intellectual property with theme parks and clothing sales.

The Walmart agreement indicates it's doubling down on its efforts. That makes sense.

While Netflix is quickly growing its international subscriber base, especially in Asia, it lost 433,000 subscribers in the United States and Canada between April and June. Partnering with Walmart opens up a new way to generate revenue — and could spur greater interest in its shows among shoppers.

Investor insight: Netflix shares had been struggling to break out this year. But they've recently staged a comeback, hitting an all-time high last week as investors got excited about the success of Korean thriller "Squid Game" (which I devoured, though I'm here to tell you about markets, not TV).

"Squid Game can help further open up the [Asia-Pacific] region," JPMorgan analyst Doug Anmuth said in a recent note to clients. "[And] it is another example of local content traveling well globally."

Does Russia stand to benefit from the energy crunch?

A global scramble for natural gas has put Russia in a position of power. At least, that's what investors believe.

See here: President Vladimir Putin's indication last week that Russia could step in to alleviate pressure on European energy markets eased the massive run-up in natural gas prices. Meanwhile, the Russian ruble hit a four-month high against the US dollar Monday, and the country's main stock index reached a record.

Rising energy prices could be a boon for Russia's economy.

"As the world's largest pipeline gas exporter and an emerging significant [liquefied natural gas] exporter, Russia seems to be a winning beneficiary of the market tightening," Vitaly Yermakov, a researcher at the Oxford Institute for Energy Studies, said in a report published last month.

But there are questions about how much the country can realistically boost output. In a recent note to clients, Bank of America said Russian gas giant Gazprom may have "limited" ability to supply additional volumes since it's still working to meet domestic needs. Plus, it's "already producing close to a 10-year high."

[New Reporter]

Goldman Cuts U.S. Growth Forecast As Oil Spike Continues

Barani Krishnan

Oct 11, 2021

Markets begin a new October week with Goldman Sachs warning that it has cut its forecasts for US growth this year and next, blaming a delayed recovery in consumer spending, as oil prices climbed relentlessly while those of gold remained anemic despite being an inflation hedge.

Goldman’s chief economist Jan Hatzius said in a note on Sunday that the Wall Street firm expects US growth at 5.6% this year versus its previous estimate of 5.7%. Officially, the US economy expanded by an annualized 6.7% in the second quarter of 2021.

For all 2022, Goldman forecast a growth of 4%, down from its previous expectation of 4.4%.

Hatzius and his team at Goldman cited downward pressure on consumer spending—which was closely-tied to inflation—as reason for the cutback:

“After updating our estimates of the key growth impulses that drive our consumption forecast—reopening, fiscal stimulus, pent-up savings, and wealth effects—and incorporating a longer-lasting virus drag on virus-sensitive consumer services spending, we now expect a more delayed recovery in consumer spending.”

That, along with the assumption that semiconductor supply won’t improve until the second half of next year and that inventory restocking will be postponed, “argues for a less front-loaded recovery from here than we had expected,” the Goldman note added.

Second Caution In Weeks About Slowing US Consumer Spending

The Goldman caution came after the University of Michigan said in its closely-followed consumer survey for September that US consumers were inclined to delay purchases whenever possible due to fears of slowing growth and higher inflation. Consumers account for 70% of America’s GDP.

The Labor Department is expected to report on Wednesday that the Consumer Price Index grew in September at about the same pace as August’s 0.3% monthly increase and the 5.3% annual gain.

Retail sales for September, due on Thursday, is expected to decline by 0.2% after a 0.7% bounce in August.

There will also be a reading on producer price inflation, or PPI, for September, scheduled on Thursday.

Oil opened Monday’s trading in Asia up for a fourth day in a row as US crude hit a new seven-year high above $81 per barrel while Brent hovered near $84.

The rally in crude prices has continued despite Russian Deputy Energy Minister Pavel Sorokin cautioning that OPEC+ shouldn’t allow the oil market to overheat, as it would risk destroying demand. Sorokin added that the market is balanced at between $45 and $60 a barrel.

Russian President Vladimir Putin also sought to ease soaring European natural gas prices last week by suggesting that Moscow could boost deliveries to record levels. Deputy Prime Minister Alexander Novak suggested that quick certification by the European Union of the controversial Nord Stream 2 pipeline—which would deliver gas across the Baltic Sea directly to Germany, avoiding transit across all countries in-between—would be one way to achieve this.

Russia’s Voice In OPEC+ Needs To Be More ‘Forceful’

Bloomberg oil analyst Julian Lee noted in his column on Sunday that Novak, interestingly, missed making the point on inflation from oil that Sorokin did.

He “should have argued that point more forcefully at Monday’s meeting” of OPEC+, Lee said, referring to Novak—the second most powerful person in the monthly virtual meetings of OPEC+, which bands the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 other oil producing nations steered by Russia.

With inflation accelerating, the Federal Reserve also looks set to taper its asset-purchase program, while the US central bank’s peers in Norway, Brazil, Mexico, South Korea, and New Zealand have already raised interest rates.

The Fed is to publish its September meeting minutes on Wednesday amid expectations that it will begin tapering monthly bond-buying of $120 billion before the end of this year, an important first step towards eventual rate hikes.

Friday’s weaker-than-expected payrolls report for September showed the US economy added just 194,000 jobs last month. That itself did little to alter expectations the Fed could begin to scale back its stimulus by the year's end.

Jerome Powell, chairman of the central bank, said last month that he only needed to see a "decent" September jobs report to be ready to begin tapering in November.

More Pain For Gold If Fed Gets Tough On Taper In Sept Minutes

If the Fed language in the September minutes suggests a more aggressive pullback of the central bank’s stimulus than investors may be ready for, it could have a particularly brutal effect on gold, which has already suffered its sharpest drop in three months (3.4%) in June.

Gold hovered at just under $1,760 in Monday’s Asian trade.

But ABN Amro analysts said they were looking at $1,700 by the year-end and $1,500 at end-2022, if US bond yields and the dollar continue surging at the expense of the yellow metal.

The benchmark yield on the 10-year US Treasury note returned to above its high-water mark of 1.6% on Monday while the Dollar Index, which pits the US currency against six other forex majors led by the euro, was firmly above the key 94 mark.