Axios Markets

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⛅️Morning folks. Matt here. Plenty of economic data due this morning, with updates on GDP, pending home sales and jobless claims on tap. We already know lower-income Americans are feeling the pressure of rising inflation, which we detail below.

  • Plus, we’re talking monopoly, government debt and crypto excess in Davos.
  • What’s not to love?

Today's newsletter, edited by Kate Marino, is 1,154 words, 4.5 minutes.

1 big thing: Feeling the pinch

Illustration of a gas station covered in an American flag
Illustration: Annelise Capossela/Axios

Inflation and surging gas prices are changing the behavior of low-income Americans, Matt writes.

Why it matters: U.S. economic growth hinges on consumer spending. So, signs of strain among the less-affluent could complicate the Federal Reserve's efforts to gently slow down the economy with higher rates.

  • "High inflation, especially with respect to gasoline, acts as a regressive tax on consumers, and they are feeling the burden of it," Morgan Stanley analysts wrote in a recent research note.
  • "As such, we are more negative on companies that are levered to low-income consumers."

What's happening: In recent weeks, the impact of inflation — and nosebleed gas prices — have clearly shown themselves to be weighing on Americans, especially those who earn less than the median household income of $68,000. Let's take a look ...

Walmart: Last week America's largest retailer, Walmart, delivered drastically lower-than-expected earnings, despite solid sales numbers, as budget-conscious investors flocked to its stores for less-profitable items like groceries.

  • Executives spotlighted the fact that low-income customers were switching from name-brand lunch meats, deli items and dairy, to generics, as prices surged.

Credit card debt: It's growing at its fastest annual rate in six years, according to first-quarter data recently published by the Federal Reserve Bank of New York, as consumers look to cover rising costs of everyday items like food and gasoline.

  • Rates for those not paying off their monthly balances are rising — generating a windfall for card issuers.

Auto loans: Some are starting to fall behind on monthly payments.

  • The share of subprime auto loans — those with high rates made to people with less-than-stellar credit scores — that were more than 60 days late has increased in each of the last eight months, and now sits at 8.5%, the WSJ reports.
  • "[What] we're watching most closely would be the lower-income consumer in our subprime auto," said Clarke R. Starnes, chief risk officer at Truist Financial, when asked by analysts on a conference call about any credit concerns the bank has.

Yes, but: While these may be signs of increasing financial stress on less affluent Americans, there's little evidence so far that this will turn into a serious problem for the economy.

  • For instance, while delinquencies are rising on subprime auto loans, they're still much lower than they have been historically.

The bottom line: Pandemic-era programs, like the child tax credit, which gave lower-income Americans financial breathing room, are gone. So wages and employment will be even more important.

Go deeper.

2. Catch up quick

☁ Broadcom is buying VMware for about $61 billion. (Axios)

⬆️ Apple is increasing pay for workers. (WSJ)

📉 Russia cuts rates as ruble rise eases inflation worries. (FT)

🐦 Musk's commitment to Twitter bid is now $33.5 billion. (CNBC)

3. Monopolies' role in inflation

Illustration of a sweating Monopoly Man
Illustration: Shoshana Gordon/Axios

High levels of corporate concentration — where just a few companies make up an entire industry — contribute to inflation, finds a new paper from economists at the Federal Reserve Bank of Boston, Emily writes.

Why it matters: There's currently a raging debate over what exactly is causing record inflation in the U.S. This paper, coming from a less partisan source than, say, the White House, boosts the arguments of Democratic lawmakers and progressive economists who say companies are taking advantage of this moment to push prices up.

Details: The paper's authors looked at company data from 2005 to 2018 in 35 industries to see how businesses of varying sizes within sectors reacted to "positive cost shocks" (when the price to make stuff goes up).

  • In more concentrated industries, companies passed 25 percentage points more of those costs on to consumers.
  • The paper's estimates are "conservative," the authors write, because concentration increased sharply after 2018.
  • The U.S. economy is at least 50% more concentrated today than in 2005, they write.

Crucial: The authors are not arguing that monopoly power causes inflation, but that it's "an amplifying factor" that allows companies to pass on more of the costs of "supply shortages, energy price shocks, and labor market tightness."

The other side: Many economists — notably Larry Summers — argue that inflation has more to do with supply chains, record pandemic-driven demand and increasing wages for workers.

What to watch: A more detailed version of this Boston Fed paper is forthcoming.

Go deeper.

4. It's expensive to be the U.S.

Data: Congressional Budget Office; Chart: Axios Visuals

Fresh projections from the Congressional Budget Office show that higher interest rates could put pressure not seen in years on lawmakers' spending plans, Axios' Courtenay Brown writes.

Why it matters: As interest rates go up amid the Fed's aggressive campaign to tamp down inflation, the cost of federal interest payments is expected to rise substantially — giving more fuel to those who want to pull back on spending.

What they're saying: "Those are outlays that will soak up revenues, in a sense," CBO director Phillip Swagel said at a press conference yesterday.

  • "There are dollars going to that and not going to other uses, whether it be national security or education."

By the numbers: The CBO estimates the 10-year Treasury yield will average 2.9% in 2023, almost a full percentage point higher than its last forecast a year ago.

  • Interest costs will top $1 trillion by 2032, per the CBO's projections. That would be a record-shattering 3.3% of GDP — more than double its share this year.
  • The expected rise in rates accounts for about 70% of that growth in debt service costs over the next decade. The rest comes from annual deficits that are expected to add to debt levels (check out the chart above).

The caveat: Over the past decade, the CBO consistently forecast higher interest rates that never materialized, so what’s penciled in now may not ever come to pass.

What to watch: "Even as we see interest rates going higher, we don't have recession in our forecast," says Swagel. "We don't have interest rates spiking in the way that might indicate the sort of sharp fiscal crunch. So this is a looming challenge, but we wouldn't say it's an immediate one."

Go deeper.

5. Crypto buys attention in Davos

Photo of Crypto hangout in Davos
Freie Evangelische Gemeinde Davos, the church converted to a temporary crypto hangout. Photo: Ina Fried/Axios

One constant at the World Economic Forum in Davos is that the whole town becomes draped in prominent advertising from companies and countries keen to get the attention of the world's most powerful individuals, if only for a few precious seconds, Axios' Felix Salmon writes from Davos.

  • Invariably, the ads reflect constituencies that feel excluded from the official program. This year, that would be crypto.

The big picture: Crypto companies were clearly this year's high bidders when it came to trying to snap up Promenade storefronts and oversized banners.

  • Those firms are also almost entirely absent from the forum's official agenda.
  • In fact, crypto companies rented a church, removed all the pews and made it the unofficial hangout for all the crypto people who came for the networking but who don't have credentials.

The bottom line: The ubiquity of crypto signs outside the conference center only reinforces the degree to which the sector is desperate to be embraced by a largely oblivious Davos elite.