CNBC Daily Open: Beware the real shrinkflation

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

• The euro zone slipped into recession in the first quarter of the year, after Germany and Ireland revised down their first-quarter gross domestic product. The euro zone’s GDP shrank 0.1% in the first quarter of this year and the last quarter of 2022.

• Still there are signs things are slowing down for the U.S. There were 261,000 new jobless claims for the week ended June 3, surpassing the 235,000 estimated and the highest weekly rate since Oct. 30, 2021. The data reinforces the May jobs report, which showed the unemployment rate ticking up 0.3 percentage points to 3.7%.

• Nonetheless, investors remained optimistic. All three major stock indexes in the U.S. traded higher Thursday, with the S&P 500 hitting its highest closing level this year. But European markets were mixed and tepid. The pan-European Stoxx 600 closed flat.

• PRO GameStop’s shares sank 17.9% after the company fired its CEO and appointed Ryan Cohen — known as the “meme king” in online retail trading circles — as its executive chairman. Here’s what analysts think about the sudden move.

Everyone hates it when companies jack up prices while reducing the size of their products — a phenomenon called “shrinkflation.” What’s scarier is the shrinkflation that’s happening in economies.

The euro zone entered a technical recession — defined as two quarters of negative economic growth — in the first quarter of the year. Meanwhile, inflation in the bloc’s still high, with annual headline inflation of 6.1% in May. To be sure, that’s lower than expected and a drop from April’s 7% reading. But it’s still “too high” and “set to remain so for too long,” said European Central Bank President Christine Lagarde. Translation: More interest rate hikes — and more economic pain — will come.

That trend’s playing out across the world. The central banks of Canada and Australia hiked interest rates this week, shocking economists who had expected the banks to hold rates, as they both had in their prior meetings. Notably for Australia, the hike came even as the country reported slowing economic growth amid slumping exports. But with April’s inflation jumping more than expected to 6.8%, the central bank seems compelled to slow the economy further. Indeed, the head of the Reserve Bank of Australia, Philip Lowe, acknowledged that the economic outlook is “going to be painful for a while yet.”

I raise those examples to show how important next week’s U.S. consumer price index report will be to the Federal Reserve. Investors are betting there’s a 72% chance the Fed will keep rates unchanged at its next meeting, according to the CME FedWatch Tool. Even if it does, that doesn’t mean the U.S. central bank is done with its hiking cycle, especially if inflation data comes in hotter than expected.

Yesterday’s gains in markets is certainly welcome, but investors should beware shrinkflation hitting the U.S. economy as well.