By Aishwarya Venugopal

(Reuters) - Lower input costs and inventories, as well as extended price hikes are pushing a quicker-than-expected recovery in margins at U.S. consumer-facing firms including PepsiCo (NASDAQ:PEP), Kraft Heinz (NASDAQ:KHC), and Target , their recent earnings reports indicated.

Investors have zeroed in on gross margins, that faltered in the past several quarters, as high inflation and interest rates persist. Margins now seem brighter for these retailers and consumer-goods makers, who in the past few weeks sounded more optimistic about the metric than they did last quarter.

This is true especially for companies that make or sell essentials such as groceries and household staples, and even for restaurants and cafes, as strong wage gains in a tight labor market underpin consumer spending.

Still, people are being cautious about big-ticket, discretionary spending, and a bump from the lifting of COVID curbs in China has been slower than expected. Some analysts said a full recovery in margins is a few quarters away.

According to Refinitiv data as of May 12, quarterly margins for consumer discretionary components of the S&P 500 index is expected to increase year-over-year for every quarter this year.

"In this environment of uncertainty ... (consumer staples) margins are going to be solid because most of the input costs going into staples are falling precipitously and that's the positive," said Art Hogan, chief market strategist at B Riley Wealth.

"They have (raised prices enough) ... and they have held that price, so they are only going to see improvement in margins."

Full-year sales and earnings outlook for Target Corp (NYSE:TGT), which saw margins improve in the first quarter, implies a margin range of 4.7% to 5.0%, up from 3.5% in 2022, according to D.A. Davidson analyst Michael Baker.

Kraft Heinz Chief Financial Officer Andre Maciel said earlier this month that commodity costs were falling slightly faster than expected.

The maker of Philadelphia Cream Cheese and Jell-O said its gross margins in the quarter ended March improved by about 130 basis points. The company joined a list of consumer staples firms including Kellogg (NYSE:K) Co and PepsiCo Inc in raising its annual forecast for 2023.

PepsiCo reported March-quarter margins, or the ratio of gross profit to revenue for the company, that were higher than a year earlier and said its average selling price increased 16% in the quarter.

Prices at rival Coca-Cola (NYSE:KO) Co rose by 11%, and though quarterly margins fell from the same period a year earlier, they improved from the prior quarter.

Margins at McDonald's Corp (NYSE:MCD) and Starbucks Corp (NASDAQ:SBUX) improved as well.

'STUBBORN INFLATION'

But retail giant Walmart (NYSE:WMT) Inc, which gets about half of its revenue from low-margin groceries, took a more cautious stance on margin recovery on Thursday even as it raised its annual sales and profit targets.

"Stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year," Walmart CEO Doug McMillon said.

While its U.S. margins fell 41 basis points in the first quarter, it was an improvement on the 112-basis point decline in the fourth quarter.

Walmart said total inventory in the quarter ended April fell 7% versus flat in the fourth quarter. This is in line with other retailers who are stocking more of what consumers are buying in a weak economy.

Target said on Wednesday that inventory in the first quarter was 16% lower and it had doled out fewer clearance discounts.

"Even today against a very challenging backdrop we're starting to assemble the building blocks for a recovery in our operating margin rate back towards its longer-term potential," Target CFO said.

By Rachel Savage

JOHANNESBURG (Reuters) - Ghana's debt restructuring is targeting $10.5 billion of external debt service relief from 2023 to 2026, the International Monetary Fund said late on Wednesday in its Debt Sustainability Analysis.

Ghana's debt is currently unsustainable, but the country aims to restore it to a "moderate" risk of debt distress by 2028, the fund added.

The IMF's executive board approved a $3 billion, three-year rescue loan on Wednesday, paving a potential path out of the worst economic crisis in a generation for the embattled West African country.

Ghana is overhauling its debt after its already strained finances buckled under the economic fallout from COVID-19 and Russia's invasion of Ukraine. It is seeking external debt relief under the Group of 20's Common Framework platform and completed a domestic debt exchange earlier this year.

Ghana has a $15 billion financing gap in its balance of payments from 2023 to 2026, the IMF said, with the World Bank set to provide $1.6 billion in budget and balance-of-payments support.

The country has a medium "debt carrying capacity", which means the IMF requires Ghana to target bringing its public debt-to-GDP ratio from 88.1% at the end of 2022 to 55% by 2028.

"Domestic policy slippages represent a significant downside risk to the projections, further compounded by risks associated to the end-2024 general elections," the IMF report said.

Other risks for Ghana include social unrest if economic conditions do not improve for the population, not regaining market access to issue debt and the domestic debt exchange posing dangers to domestic financial sector stability, the fund said.

By Winni Zhou and Rae Wee

SHANGHAI/SINGAPORE (Reuters) - China's heavily managed yuan has dropped to multi-month lows and breached the closely watched 7-per-dollar level, and analysts who are predicting more weakness point to the U.S. Federal Reserve's policy as being the bigger driver than economic weakness at home.

The yuan, also referred to as the renminbi, hit 7.0234 per dollar on Thursday, levels last seen in December before euphoria over China's reopening after the COVID-19 pandemic lifted it for a few weeks.

As doubts grow about the strength of its economic recovery, foreign money has left China's markets and the currency has fallen 4% against the dollar since late January.

Analysts at Nomura and Societe Generale (OTC:SCGLY) say the yuan could soon head for 7.3, which as last plumbed in November. Kiyong Seong, lead Asia macro strategist at Societe Generale, says a wider monetary policy divergence between China and the U.S. coupled with lacklustre Chinese growth would result in a weaker yuan.

"An important part of the climb in dollar-yuan over the past month has to do with the dollar, so this is not just a renminbi story," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

Reflecting that, the trade-weighted CFETS basket against which the People's Bank of China (PBOC) manages the currency, has dropped to 99 from 100 in February.

Meanwhile, as the Fed weighs whether to pause its tightening after taking rates up 5 percentage points since March 2022, China appears set to keep monetary conditions loose amid growing signs its recovery is losing steam.

In the forwards market, the wide yield difference has the yuan trading stronger, thus disincentivising exporters to convert their earnings. Six-month yuan is trading at 6.89.

A Shanghai-based exporter, who didn't want to be quoted by name, said he was keeping his dollars for now, rather than swapping them for yuan.

"I know I shouldn't be too greedy, but the yuan will weaken to 7.3. I will wait," he said.

The PBOC has so far given little hint it is uncomfortable with the currency's recent moves or stepped in to defend it. But the RBC's Tan said authorities will be keen not to let the selling accelerate.

"So even if it's weaker, they prefer that it'd be orderly. And frankly, it has been generally orderly so far," said Tan.

The PBOC did not immediately respond to Reuters request for comments.

THE CHEAP CURRENCY

Becky Liu, head of China macro strategy at Standard Chartered Bank, expects the yuan will continue to depreciate.

"The interest rate gap remains wide, so many hedge funds continue to use yuan as a funding currency," Liu said.

    "Apart from the carry trade, the other is seasonality as the dividend payment season will start soon. So in the short term, we don't think the yuan has huge upside room, instead we think it will face some pressure."

Analysts at Nomura estimate mainland China firms listed and paying dividends in Hong Kong will make roughly $8 billion of dividend payments in each of June and July 2023.

The usual tailwinds for the yuan from capital inflows are also are flagging as exporters hold back flows and foreign investors hesitate to buy into the market until they are convinced of more solid economic momentum and regulatory support.

While foreign net buying of Chinese stocks has been around 193 billion yuan ($27.92 billion) so far in 2023, they have sold 226.5 billion yuan worth of bonds in the first four month of this year, according to Reuters calculations based on official data.

A look at commercial banks' foreign exchange operations shows they are selling more dollars on net. They sold $9.8 billion to their clients in the four months of this year, according to State Administration of Foreign Exchange.   

Yet, foreign exchange deposits grew $28 billion so far this year to $881.9 billion at the end of April, PBOC data shows.

($1 = 6.9121 Chinese yuan renminbi)

WELLINGTON (Reuters) - Six Pacific countries are at a high risk of debt distress in part due to government spending to respond to the COVID-19 crisis, the World Bank said in a report on Thursday.

The report, titled Raising Pasifika, said fiscal consolidation was needed in Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Samoa, Tonga and Tuvalu because these countries lack domestic debt markets and access to international capital markets.

Among other countries in the region, Vanuatu is rated at medium risk, while Palau and Nauru’s debt is sustainable, the report noted.

"While public debt levels as a share of GDP remain modest across most of the region, the PIC9’s economic geography and volatile revenue bases mean debt distress risks remain elevated," it said.

Debt has surged in the region since 2019 as the tourism-dependent economies were hit by COVID border closures, trade was hurt by logistical challenges and weather events caused damage. The World Bank last month said that Fiji must also take urgent action to reduce its debt burden.

Stephen Ndegwa, World Bank Country Director for Papua New Guinea & the Pacific Islands, said reducing debt, strengthening revenue and improving the quality of government spending are critical areas for Pacific countries to address.

The report said continued access to grants in line with pre-pandemic trends is also essential to find capital investment projects for sustainable development and climate resilience.

The World Bank report recommends that, together with more efficient spending, improvements to tax collection must be a priority for Pacific governments to ensure individuals and businesses are contributing their fair share to the region’s economies.

It also said that Pacific countries should allocate more to social assistance and protection measures.

“These investments would help reduce poverty and inequality, while also supporting communities in tough times, including in the aftermath of climate-related disasters or major economic shocks, such as the region saw from the COVID-19 pandemic and the recent natural disasters in Tonga and Vanuatu,” it said.

Investing.com -- U.S. President Joe Biden trims an overseas trip this week as lawmakers come out of a key meeting with guarded hopes for debt ceiling deal. Meanwhile, retail chain Target prepares to unveil its latest results, and fresh data is expected to provide new insight into the state of the U.S. housing market.

1. Debt ceiling deal "possible"

President Biden and House Speaker Kevin McCarthy carried a cautiously positive message out of their latest crunch meeting over raising the debt ceiling.

Following the talks on Tuesday, which included other top Congressional leaders, Biden said that the lawmakers were on "a path" towards reaching an agreement to increase the more than $31 trillion federal borrowing limit. The White House later added that Biden will shorten a planned trip overseas this week to participate in further negotiations in person.

For his part, McCarthy noted that "it is possible to get a deal by the end of the week."

However, the deadline to avoid an unprecedented default continues to edge closer, with the U.S. widely expected to run out of money to pay debtholders early next month. Such an occurrence, officials have warned, could prove to be catastrophic for the U.S. and have knock-on effects for the global economy.

2. Futures hold steady amid debt limit optimism

U.S. stock futures inched higher on Wednesday as investors gauged the guarded optimism from lawmakers in Washington over the debt limit negotiations.

At 04:57 ET (08:57 GMT), the Dow futures contract was up 94 points or 0.28%, S&P 500 futures traded 11 points or 0.27% higher, and Nasdaq 100 futures edged up 20 points or 0.15%.

Wall Street stocks dropped in the prior session, with the outlook for the negotiations still mired in uncertainty. The meeting between Biden, McCarthy, and Congressional leaders ended after U.S. markets closed on Tuesday.

The blue-chip Dow Jones Industrial Average and broad-based S&P 500 both slipped. The Nasdaq Composite also dipped, although strength in technology stocks helped mitigate these losses.

Government bond yields for both 2-year and 10-year notes moved higher, while bills maturing next month (when a U.S. default is projected to happen) saw their yields retreat from their highest mark since before the 2008 financial crisis. Prices fall as yields rise.

3. Target on deck

Target (NYSE:TGT) will become the latest U.S. retail chain to report its latest earnings this week, with investors keen to see how much price-conscious consumers are snapping up the company's food products.

Groceries have previously made up just over a fifth of Minnesota-based Target's total sales as shoppers chose to buy other items like bed sheets and beauty products. But with inflation at elevated levels, customers are widely expected to have relegated their spending to essential goods like food.

Target will report how well this demand for groceries held up when it releases its latest earnings before the start of U.S. trading on Wednesday.

Elsewhere, DIY group Home Depot (NYSE:HD) slashed its guidance on Tuesday after unfavorable weather contributed to weaker-than-expected sales. Shares in the firm fell.

On Thursday, low-cost retail giant Walmart (NYSE:WMT) will step into the limelight when it posts fresh results.

4. U.S. housing data ahead

On the economic data front, investors will have a chance on Wednesday to examine the health of the U.S. real estate market with the release of the housing starts and building permits figures for April.

Single-family housing starts, which typically accounts for a large portion of new homebuilding, jumped in March, while permits for these projects also surged to a five-month high.

Economists have suggested that a recent cooling in mortgage rates could be providing a boost to demand from homebuyers. These rates have fallen from their peaks reached last October and November as expectations grow that the Federal Reserve will pump the brakes on its long-standing monetary policy tightening campaign as soon as next month.

However, housing activity still looks to be some way off from a total revival. A decline in multi-family homebuilding dragged overall housing starts down by 0.8% to 1.420 million units in March, while total building permits also dropped.

5. U.S. crude stockpiles move higher

Oil prices hovered around the flatline on Wednesday after an unexpected rise in U.S. crude stockpiles exacerbated concerns over demand in the world's largest consumer.

U.S. crude inventories increased by around 3.6 million barrels in the week ended May 12, according to data from the industry body American Petroleum Institute, instead of an anticipated drawdown.

However, these losses have been limited as releases from the Strategic Petroleum Reserve have to be factored into the inventory build, while the drop in gasoline and distillates inventories pointed to improving demand ahead of the summer season.

At 05:11 ET, U.S. crude futures traded 0.04% lower at $70.83 per barrel, while the Brent contract inched up 0.04% to $74.94 a barrel.