Was this email forwarded to you? Sign up here. (Smart Brevity word count: 1,115 words / 4 minutes.)
- China's central bank set the official midpoint reference for the yuan at weaker than 7 for the 3rd consecutive session. (CNBC)
- Financier Jeffrey Epstein's death in a Manhattan jail has sparked an investigation and fresh interest in people who allegedly helped him recruit young women for sex trafficking. (WSJ)
- Jyske Bank, Denmark's third-largest bank, is offering a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed. (Business Insider)
- “It’s really, really getting bad out here,” said Bob Kuylen, a farmer for 35 years in North Dakota. “Trump is ruining our markets. No one is buying our product no more, and we have no markets no more.” (CNBC)
1 big thing: More hidden fees may be on the way
The U.S.-China trade war looks set to continue and likely escalate, bringing more tariffs to imports of Chinese goods, with the latest round adding a 10% charge to consumer products like clothing, toys and electronics.
- Large retailers like Walmart and Target have said they will have no choice but to pass the cost of tariffs on to customers, but it's very likely the cost of the tariffs and many other increased charges won't be fully disclosed on price tags.
What's happening: Research from Diego Aparicio and Roberto Rigobon of MIT finds that in recent years it has become almost impossible for companies to raise prices. Instead they resort to "shrinkflation" — reducing the size of products or their quality while charging the same price, per the Economist.
- "A 5.5% jump in the cost of a pint after years of 5% increases does not send beer drinkers searching for other pubs in the way that a 0.5% hike after years of no change might," the magazine explains. "Thus falling inflation can make prices 'stickier.' To compensate, firms instead find other ways to impose costs on buyers."
Be smart: Consumers have seen this phenomenon recently from companies like Postmates and DoorDash, who have padded revenues by hiding the true price of their service in various hidden fees or even dressed up as "tips."
- As GrubHub CEO Matt Maloney pointed out in a recent interview with Axios' Kia Kokalitcheva, when customers order via most delivery services, they find multiple charges like a "small plate fee" or "service fee" wrapped into the overall price that can add up to much more than the advertised delivery charge.
Flashback: The Obama White House issued a report on such fees in 2016, detailing the ways companies in the automotive, banking, concert and telecom sectors, to name just a few, hide their real prices from consumers.
- These hidden fees have become entrenched revenue generators for businesses like hotels, which reap big profits from hidden "resort fees," and airlines that charge for services previously included in the airfare, like baggage or seat assignments.
The bottom line: A major outcome of President Trump's trade war with China may be that consumers get stuck with higher prices and lower quality goods that still don't move the needle on inflation because companies aren't marking up the price of the items themselves.
2. Worry grows about China's falling currency and rising dollar debt
The Chinese government had put plans in place to reduce the high levels of debt in the country's economy this year, but the negative economic effects of the trade war have put those plans on the back burner and companies are again levering up, in large part with dollar-denominated debt.
- Having shown that they are unafraid to let the yuan weaken past 7 to 1 with the dollar, Chinese authorities are raising concerns about many companies' indebtedness.
Why it matters: As the yuan weakens, debts held in dollars get more expensive. That could pose a major problem for China should the economy continue to slow. It would also mean problems for the rest of the world, as China is the planet's No. 1 trading nation.
Watch this space: Dollar-denominated debt held by Chinese firms is now more than $1.5 trillion, 20% higher than it was in 2015, data from the Institute of International Finance shows.
- The distribution of dollar debt has fallen to around 50% of total corporate debt from 70% in 2015, but banks and other financial institutions are now more exposed to currency risk because of their increased borrowing in dollars.
3. Planet Fitness' stock looks fatigued
After a rocket rise over the past 5 years during which it jumped from $17.81 a share in August 2015 to more than $75 a share in April, Planet Fitness' stock has been unimpressive in recent months. It sold off after the company beat earnings expectations Tuesday but missed on expected growth.
Concern is beginning to grow about the sustainability of the company's business model, which relies on consistently bringing in members who don't actually use the gym and churning out increasing revenue from franchisees, WSJ's Spencer Jakab writes.
- "Planet Fitness makes much of its money by keeping 7% of membership fees paid to franchisees, who control over 95% of its gyms. It raised its take from 5% back in 2017. No small part of its growth in the past couple of years has reflected this increase in what it charges."
- "While franchisees keep showing up, though, there are limits to how high the parent company can take the fee without choking off growth."
4. Argentina's Cristina Kirchner is making investors nervous again
Former Argentine President Cristina Fernández de Kirchner got that much closer to returning to the country's presidential estate on Sunday, sinking the country's currency by as much as 5%.
Driving the news: Kirchner is running for vice president on a ticket with Alberto Fernández, and the pair received 47% of the vote in Argentina's primary election, far more than expected. That bested current President Mauricio Macri and his running mate, Miguel Ángel Pichetto, who had 33%, and 6 other tandems.
- If the country votes the same way in October's first round of elections, Fernández and Kirchner will win with no need for a run-off election.
Why it matters: Investors fear that outcome could put Argentina's billions of dollars of outstanding debt in jeopardy of default and prompt a renegotiation of the country's $57 billion loan deal with the IMF.
Where it stands: Under Macri, Argentina has fallen into recession and the economy is in what analysts are calling a "Macrisis."
- Inflation is being choked off slowly by the central bank's unconventional monetary policies, and it is expected to grow at just 34% this year, but that may be too little too late.
- The country's GDP shrank 6% year-over-year in the first quarter.
- Its steadily increasing poverty rate hit 32% in 2018.
- The unemployment rate rose above 10% for the first time in at least a decade in Q1.
- Argentina's peso fell 5% against the dollar after Sunday's election results, Reuters reported. It most recently traded at higher than 48 per dollar, about triple the rate when Macri took over as president and its weakest level ever.