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Inflation remains sticky in Europe, with core prices cooling less than expected

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A salesman preparing a bag of sweets for a customer in the Sicilian confectionery shop Mazzone on February 02, 2024 in Catania, Italy. 

Fabrizio Villa | Getty Images News | Getty Images

Inflation in the 20-nation euro zone eased to 2.6% in February, flash figures showed on Friday, but both the headline and core figures were higher than expected.

Economists polled by Reuters had forecast a headline reading of 2.5%.

Core inflation, stripping out volatile components of energy, food, alcohol and tobacco, was 3.1% — above the 2.9% expected.

The European Union statistics agency said food, alcohol and tobacco had the highest inflation rate in February at 4%, followed by services at 3.9%.

Energy prices, which had swollen last year as a result of Russia’s invasion of Ukraine, continued to reduce, with the rate of deflation moving from -6.1% to -3.7%.

The headline print previously came in at 2.8% in January, with further easing expected after price rises cooled in Germany, France and Spain.

Investors are hunting for clues on when the European Central Bank will start to bring down interest rates, with market pricing pointing to a June cut. Yet many ECB officials still stress that they need spring wage negotiations to conclude before they have a clearer picture of domestic inflationary pressures.

The February figures will be a mixed bag for policymakers, as core inflation is holding above 3% even as the headline rate moves toward the ECB’s 2% target. Price rises have nonethless cooled significantly from their peak of 10.6% in October 2022.

The ECB must also contend with economic stagnation in the euro zone, after the bloc narrowly avoided a recession last year, posting flat gross domestic product growth in the fourth quarter.

European stock gains moderated following the inflation print, trading 0.2% higher down from 0.5% earlier in the morning. The euro was flat against the U.S. dollar and the British pound.

Key Fed inflation measure rose 0.4% in January as expected, up 2.8% from a year ago

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Inflation rose in line with expectations in January, according to an important gauge the Federal Reserve uses as it deliberates cutting interest rates.

The personal consumption expenditures price index excluding food and energy costs increased 0.4% for the month and 2.8% from a year ago, as expected according to the Dow Jones consensus estimates. The monthly gain was just 0.1% in December and 2.9% from the year prior.

Headline PCE, including the volatile food and energy categories, increased 0.3% monthly and 2.4% on a 12-month basis, compared with respective estimates for 0.3% and 2.4%, according to the numbers released Thursday by the Commerce Department’s Bureau of Economic Analysis. The respective December numbers were 0.1% and 2.6%.

The moves came amid an unexpected jump in personal income, which rose 1%, well above the forecast for 0.3%. Spending decreased 0.1% versus the estimate for a 0.2% gain.

January’s price rises reflected an ongoing shift to services over goods as the economy normalizes from the Covid pandemic disruptions.

Services prices increased 0.6% on the month while goods fell 0.2%; on a 12-month basis, services rose 3.9% and goods were down 0.5%. Within those categories, food prices accelerated 0.5%, offset by a 1.4% slide in energy. On a year-over-year basis, food was up 1.4% while energy fell 4.9%.

Both the headline and core measures remain ahead of the Fed’s goal for 2% annual inflation, even though the core reading on an annual basis was the lowest since February 2021. While the Fed officially uses the headline measure, policymakers tend to pay more attention to core as a better indication of where long-term trends are heading.

CHICAGO, ILLINOIS – FEBRUARY 13: Customers shop at a grocery store on February 13, 2024 in Chicago, Illinois. Grocery prices are up 0.4% from December and 1.2% over the last year, the slowest annual increase since June 2021. (Photo by Scott Olson/Getty Images)

Scott Olson | Getty Images News | Getty Images

“Overall, [the report] is meeting the expectations, and some of the worst fears in the market weren’t met,” said Stephen Gallagher, chief U.S. economist at Societe Generale. “The key is we’re not seeing the broad nature of increases that we had been more fearful of.”

Wall Street reacted little to the news, with stock market futures up slightly and Treasury yields slightly lower. Futures markets where traders bet on the direction of interest rates also indicated little movement, with pricing tilted toward the Fed’s first rate cut coming in June.

Thursday’s BEA report also showed that consumers are continuing to dip into savings as prices stay elevated. The personal savings rate was 3.8% on the month, slightly higher than December but off a full percentage point from where it was as recently as June 2023.

In other economic news, a Labor Department report showed that companies are still reluctant to lay off workers.

Initial jobless claims totaled 215,000 for the week ended Feb. 24, up 13,000 from the previous period and more than the 210,000 Dow Jones estimate but still largely in keeping with recent trends. However, continuing claims, which run a week behind, rose to just above 1.9 million, a gain of 45,000 and higher than the FactSet estimate for 1.88 million.

The reports come as central bank officials mull the future of monetary policy following 11 interest rate increases totaling 5.25 percentage points. Running from March 2022 to July 2023, the hikes came as the Fed battled inflation that peaked at a more than 40-year high in mid-2022.

Officials have said in recent days that they expect to begin reversing the increases at some point this year. However, the timing and extent of the policy easing is uncertain as recent data has indicated that inflation could be more stubborn than expected.

“Hot January inflation data adds to uncertainty and pushes back rate cut expectations,” said David Alcaly, lead macroeconomic strategist at Lazard. “But odds remain that this is a speed bump and that, while there may be additional short-term swings in market narrative, it will ultimately matter more how deep any rate cutting cycle goes over time than when it begins.”

January’s consumer price index data raised fears of persistently high inflation, though many economists saw the rise as impacted by seasonal factors and shelter increases unlikely to persist.

While the CPI is used as an input to the PCE, Fed officials focus more on the latter as it adjusts for substitutions consumers make for goods and services as prices fall. Where the CPI is viewed as a simpler price measure, the PCE is viewed as more representative of what people are actually buying.

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A little-noticed inflation report in the past could get a lot of market attention on Thursday

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For Black workers, progress in the workplace but still a high hill to climb

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Ali and Jamila Wright, co-owners of Brooklyn Tea.

Courtesy: Brooklyn Tea

Looking at the state of Black employment in America tells a mixed story: Much progress has been made in the age of the Covid-19 pandemic and beyond, but much is left to be done.

In the nearly four years that have passed since the pandemic upended the U.S. economy, the advancement for Black people has been unmistakable: a surge in earnings that outdid the gains for both white and Hispanic people, an unemployment rate that has fallen more than a percentage point from where it stood in January 2020 and a general sense that the collective consciousness has been raised regarding inequality in the workplace.

Yet, there are still racial discrepancies in terms of earnings. Black workers are still notably underrepresented in some professions, particularly high-end tech, and efforts to address some of these issues have fallen out of favor amid criticism that they have gone too far and are inefficient.

On balance, though, there’s a feeling of optimism that real progress has been made.

“This recovery really stretched the limits of what policymakers thought was possible for Black workers,” said Jessica Fulton, interim president at the Joint Center for Political and Economic Studies, a Washington, D.C.-based think tank that focuses on issues for people and communities of color. “We were in a situation where folks accepted that Black unemployment was going to always be high and there was nothing that they could do about it. So I think this is an opportunity to continue to push the limits of what’s possible.”

When looking at the data, the numbers are encouraging.

The Black unemployment rate in January was 5.3%, up a touch from December but still near the all-time low of 4.8% hit in April 2023. Black employment in the month totaled nearly 20.9 million people, up 6.3% from February 2020, the month before the pandemic hit, according to the U.S. Bureau of Labor Statistics.

From a pay standpoint, the numbers are even more encouraging. For Black workers, weekly before-tax earnings as of the end of 2023 have risen 24.8% since the first quarter of 2020. That’s more than the 18.1% increase for white people and the 22.6% rise for Hispanics during the period. Of the groups the BLS measures, only Asians, at 25.1% had seen bigger pay gains.

Still, the unemployment rate is lower for white people, by a wide margin at 3.4% in January.

“High unemployment for Black workers is a solvable problem,” Fulton said. “There are challenges we need to address. We need to figure out how to address discrimination, we need to figure out how do we address unequal access to high-quality workforce development. We need to figure out how to address labor loopholes.”

Focus on tech

One of the areas where the greatest discrepancies exist for underrepresented groups is technology, where Black people and others hold few positions and even fewer are in management roles.

The situation is well-documented. While Black people make up about 12% of the U.S. labor force, they hold just 8% of all tech jobs and a mere 3% of executive positions, according to a McKinsey & Company study released in 2023.

There are several groups working to address the disparity, with varying levels of success.

Those involved tell similar stories. Black workers are interested in tech and believe there are opportunities. Companies don’t understand the real-world benefits of a diverse workplace. Opportunities are limited amid a backlash against the diversity, equity and inclusion push.

“Diversity is not just a warm and fuzzy feeling. You are proven by numbers to get a better return on investment,” said Autumn Cox, a software engineer at a major tech company in the Northwest that she asked not to be named because the company hadn’t given permission for this article.

Cox, who is Black, holds a prominent position in tech, where she has worked for well over a decade while both climbing the corporate ladder and trying to assist those in her cohort achieve success as well.

Autumn Cox.

Courtesy: Autumn Cox

Along with her work responsibilities, she’s involved with several organizations looking to help others achieve in tech. They include Rewriting the Code, a global network founded in 2017 that focuses on women, and MilSpouse Coders, which assists military spouses and where Cox serves as education board chair.

Companies that build diversity the right way prosper, she said. Those that don’t have suffered on a tangible level in the form of products that are inadequate and data bases that don’t reflect real-world dynamics.

“The lack of diversity has left very big, wonderful tech companies with egg on their face, because they’ve had premature products,” Cox said. “One of the best ways to fight data bias is with diversity, and it’s diversity in all different backgrounds. If you look at the boards of most big AI companies, do you see diversity there?”

Indeed, instances of bias along racial lines is still seen as a significant problem, particularly in tech.

Some 24% of tech workers said they experienced racial discrimination at work in 2022, up from 18% the prior year, according to a survey by tech career marketplace Dice. While some companies have changed their corporate culture, many others remain behind.

“There are some good stories out there,” said Sue Harnett, founder of Rewriting the Code. “Goldman Sachs and Bank of America do an outstanding job, not only trying to recruit, but actually bringing them on board and converting them from being interns to full-time employees.”

Rewriting the Code collaborates with workers and companies to address diversity issues. Specifically, the organization focuses on college women and follows them through the first six years or so on their career path.

On the downside, Harnett still sees too many token measures that don’t go far enough.

For instance, she said some companies focus on Historically Black Colleges and Universities, which only goes so far in being able to find a capable and diverse workforce.

“I cringe when I talk with a company and ask them about their diversity recruiting strategy and their answer is they work with HBCUs,” she said. “That can be part of the strategy, but it shouldn’t be the only strategy.”

Harnett is sympathetic, though, with how tough the job can be.

“The amount of money that you have to put in to try and find this talent can be overwhelming, but I think there are solutions out there, so I’m personally optimistic,” she said. “I wish we made more progress by now. But the companies are ones that will drive this.”

The small business view

Sometimes the answers are found closer to home.

Ali and Jamila Wright are co-owners of Brooklyn Tea, a small business based in the New York City borough that has expanded to Atlanta and is looking for more growth opportunities.

From a hiring strategy, they focus almost solely on underrepresented groups who have a variety of employment needs. For instance, they hire actors in between shows or other workers in other professions who have been laid off and need a bridge until they find other employment.

Ali and Jamila Wright, co-owners of Brooklyn Tea.

Courtesy: Brooklyn Tea

“All of our employees are people of color,” Ali Wright said. “We have people of color, we have people that are binary or nonbinary. So being that we are diverse ourselves, it just makes it easier to hire people that we know are systematically disadvantaged.”

Brooklyn Tea has been a beneficiary of a relatively booming small business environment, particularly for Black and Latino entrepreneurs.

Black-owned businesses as a share of Black households surged from 5% to 11% from 2019 to 2022, the fastest pace in 30 years, according to the Small Business Administration. The surge has come as the number and dollar value of loans to Black-owned businesses has more than doubled and as the share of the SBA’s loan portfolio to minority-owned businesses has jumped to more than 32% from 23% since 2020.

However, race remains a tenuous dynamic in the U.S., and there’s always the possibility that progress can be rolled back, particularly considering a growingly hostile attitude toward DEI initiatives. Critics say the approach has resulted in a misallocation of resources, particularly following controversies at Ivy League schools.

“From 2020 until 2022, that’s when we all felt the most potential and the most hope, even in the midst of a pandemic,” Jamila Wright said. “We were receiving so much funding and just collaboration from corporate entities, and that attack on DEI has impacted some of the businesses, including ours.”

But the controversies have mainly triggered a reexamination of how to achieve diversity, not a backdown on initiatives in general.

For instance, a Conference Board survey in December found no human resources executives were planning to scale back diversity efforts. Still, Jamila Wright said she is cautious about the future.

“I think history has taught us that nothing, when it comes to race in America, blows over quickly,” she said. “So it’s just us trying to figure out how to be savvy in situations where we shouldn’t have to be savvy. That has been something that we have to become equipped to do.”

Bonawyn Eison: Removing barriers will lead to reform

Jamie Dimon is 'cautious about everything' as he sees risks to a soft landing

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JPMorgan Chase CEO Jamie Dimon thinks there’s a better-than-even chance that the U.S. is heading for a recession, though he doesn’t see systemic issues looming.

Speaking Monday from the JPMorgan High Yield and Leveraged Finance Conference in Miami, the head of the largest U.S. bank by assets said markets probably aren’t pricing in a strong enough probability that interest rates could stay higher for longer.

Dimon noted “there are things out there which are kind of concerning,” and he disagreed with the high level of probability being assigned to the economy missing a recession.

“The market is kind of pricing in a soft landing. That may very well happen,” he told CNBC’s Leslie Picker. “But the [market’s] odds are 70 to 80 percent. I’ll give you half that, that’s all.”

The comments come as the market indeed has had to reprice its expectations for monetary policy. Where futures traders earlier in the year had been assigning a high probability to an aggressive series of interest rate cuts starting in March, they now see the easing not starting until June or July, with three cuts now priced in — half of the prior expectations.

Along with the elevated rates, markets have had to contend with the Federal Reserve rolling off its bond holdings, a process known as quantitative tightening. While the central bank is expected to start tapering the program soon, it remains another factor in tight monetary policy.

“It’s always a mistake to look at just the year,” Dimon said. “All these factors we talked about: QT, fiscal spending deficits, the geopolitics, those things may play out over multiple years. But they will play out and they will have an effect and in my mind I’m just kind of cautious about everything.”

However, Dimon said he doesn’t expect a replay of some of the other serious downturns the U.S. economy has faced, such as the 2008 financial crisis that saw Wall Street plunge as banks were hit with fallout from the subprime mortgage industry collapse.

Higher interest rates along with a recession could hit areas such as commercial real estate and regional banks hard, but with limited macroeconomic impacts, Dimon said.

“If we have a recession, yes, it’ll get worse. If we don’t have recession, I think most people will be able to muddle through this,” he said. “Part of this is just a normalization process. [Rates] were so low for so long. If rates go up, and we have recession, there will be real estate problems, and some banks will have a much bigger real estate problem than others.”

As far as regional banks go, he labeled issues that hit institutions such as Silicon Valley Bank and New York Community Bank as “idiosyncratic” and said private credit could take hit but not at a systemic level.

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Goldman Sachs and Abu Dhabi's Mubadala ink $1 billion partnership to invest in Asia Pacific

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An Emirati woman paddles a canoe past skyscrapers in Abu Dhabi, United Arab Emirates, on Wednesday, Oct. 2, 2019.

Christopher Pike | Bloomberg | Getty Images

DUBAI, United Arab Emirates — Goldman Sachs and Abu Dhabi sovereign wealth fund Mubadala on Monday signed a $1 billion private credit partnership to co-invest in the Asia-Pacific region, with a particular focus on India, the institutions said in a joint statement.

The separately managed account, termed the “Partnership,” will be managed by Private Credit at Goldman Sachs Alternatives, with a staff based on the ground in various markets across the region. It will invest the long-term capital in “high quality companies … across the private credit spectrum” across a number of Asia-Pacific markets.

The news follows Goldman’s 2023 expansion in the Middle East with the opening of its office in Abu Dhabi Global Market, the financial center of the United Arab Emirates capital.

It also comes as the UAE and other Gulf states increase their economic footprint in India, which is set to be the fastest-growing G20 economy for the 2023-24 fiscal year. The UAE in October 2023 announced a target to invest $75 billion in India over a period of time, while Saudi Arabia set an investment target in the country of $100 billion.

India, in particular, stands out as a key market with significant opportunities in private credit, and where Goldman Sachs has strong exposure and capabilities,” said Fabrizio Bocciardi, Mubadala’s head of credit investments, in a press release.

“The opportunity in private credit in Asia Pacific is expansive,” Greg Olafson, global head of private credit at Goldman Sachs Alternatives, said. “With strong economic growth in the region and favorable conditions for private lenders to support the growth of leading companies by providing flexible, long-term capital, we believe we are at the early stages of a defining era for private credit in Asia Pacific.”

He said the partnership with Mubadala will enable the bank to expand its “long-established investment focus on the region.”

Omar Eraiqat, Mubadala’s deputy CEO of diversified investments, said that the Goldman Sachs partnership “compliments our aspirations to grow our private credit exposure in APAC, a region that is central to Mubadala’s strategic growth initiatives.”

Mubadala Investment Company manages a global portfolio of $276 billion spanning six continents and a range of sectors and asset classes, according to the firm, with a focus on diversification of the UAE economy.

Economic boost from Taylor Swift's Eras Tour could be overstated, Nomura warns

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Taylor Swift performs onstage at Lumen Field in Seattle on July 22, 2023.

Mat Hayward/tas23 | Getty Images Entertainment | Getty Images

The devil’s in the details, but local economies have a friend in Taylor Swift.

The American pop star has spent nearly a year crossing the U.S. and the globe with her high-flying Eras Tour. The economic effect of the “Karma” singer’s show has caught the attention of everyone from the Federal Reserve to Wall Street.

Her tour undoubtedly helped the local economies she visited, according to a new report out from Japanese investment bank Nomura. But the firm questions how much of an imprint it made on national data.

“Her boost to consumption has certainly enchanted US economic analysts, but we believe the total macroeconomic effect is probably overstated,” Nomura global economist Si Ying Toh wrote to clients last week.

Between the first and third quarter of 2023, Swift’s venture alone lifted nominal U.S. retail sales by 0.03%, and real gross domestic product, a measure of economic output, by 0.02%, Nomura estimates show.

For all of 2023, the 14-time Grammy winner’s tour accounted for 0.5% of nominal consumption growth, according to the firm’s calculations.

Though those data points can be considered marginal, Toh said the economic boost — which some have dubbed the “Swift-lift” — is “undeniable” for the 20 cities U.S. she visited.

Stops on The Eras Tour saw a bump of 2.1 percentage points to lodging inflation during the month of Swift’s visit, according to STR data cited by Toh. Data from hotel booking platform Trivago shows a similar rise, she added.

Looking at Chicago specifically, Toh estimated that lodging prices rose 3.1 percentage points due to Swift’s three shows there. The city, which is the third-most populated in the U.S., saw a bump of 8.1 percentage points in occupancy and a 59% increase in hotel revenue per available room during Swift’s stint.

From that, the consumer price index for the Illinois city increased 0.5 percentage points from the singer’s visit alone. CPI is the measure of a basket of goods and services used to calculate changes in costs over time.

It’s less likely for these local improvements to materialize in national-level statistics from larger economies such as the U.S., U.K. or Japan, Toh said. Still, these events are worth watching as potential economic catalysts in countries around the globe, she said.

Internationally, small economies such as Singapore and Sweden could see the biggest macro boosts from her tour, according to Toh.

“Exogenous shocks play a key role in economic modeling, whether in the form of an extreme weather event, a pandemic or … a pop concert,” Toh wrote to clients. “In recent years, concert tours have grown to become not just major social phenomena but also potentially a significant driver of economic activity.”

Swift’s tour is set to conclude near the end of 2024. The film version, which already captured more than $200 million globally through a movie theater run, begins streaming on Disney+ on March 15.

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Germany’s housebuilding sector is in a 'confidence crisis' as the economy struggles

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A construction site with new apartments in newly built apartment buildings.

Patrick Pleul | Picture Alliance | Getty Images

Germany’s housebuilding sector has gone from bad to worse in recent months.

Economic data is painting a concerning picture, and industry leaders appear uneasy.

“The housebuilding sector is, I would say, a little bit in a confidence crisis,” Dominik von Achten, chairman of German building materials company Heidelberg Materials, told CNBC’s “Squawk Box Europe” on Thursday.

“There are too many things that have gone in the wrong direction,” he said, adding that the company’s volumes were down significantly in Germany.

In January both the current sentiment and expectations for the German residential construction sector fell to all-time lows, according to data from the Ifo Institute for Economic Research. The business climate reading fell to a negative 59 points, while expectations dropped to negative 68.9 points in the month.

“The outlook for the coming months is bleak,” Klaus Wohlrabe, head of surveys at Ifo, said in a press release at the time.

Meanwhile, January’s construction PMI survey for Germany by the Hamburg Commercial Bank also fell to the lowest ever reading at 36.3 — after December’s reading had also been the lowest on record. PMI readings below 50 indicate contraction, and the lower to zero the figure is, the bigger the contraction.

“Of the broad construction categories monitored by the survey, housing activity remained the worst performer, exhibiting a rate of decline that was among the fastest on record,” the PMI report stated.

The issue has also been weighing on Germany’s overall economy.

German Economy and Climate Minister Robert Habeck on Wednesday said the government was slashing its 2024 gross domestic product growth expectations to 0.2% from a previous estimate of 1.3%. Habeck pointed to higher interest rates as a key challenge for the economy, explaining that those had led to reduced investments, especially in the construction sector.

Light at the end of the tunnel?

Ifo’s data showed that the amount of companies reporting order cancellations and a lack of orders had eased slightly in January, compared to December. But even so, 52.5% of companies said not enough orders were being placed, which Wohlrabe said was weighing on the sector.

“It’s too early to talk of a trend reversal in residential construction, since the tough conditions have hardly changed at all,” he said. “High interest rates and construction costs aren’t making things any easier for builders.”

Heidelberg Materials’ von Achten however suggested there could be at least some relief on the horizon, saying that there could be good news on the interest rate front.

Germany has been benefitting from a 'peace dividend' for years, defense minister says

“I’m positive inflation really comes down now in Germany, maybe the ECB [European Central Bank] is actually earlier in their decrease of interest rates than we all think, lets wait and see, and if that comes then obviously the confidence will also come back,” he said.

Even if interest rate cuts are a slow process, von Achten says as soon as “people see the turning point” confidence should return.

Speaking to the German Parliament about the economic outlook on Thursday, Habeck said the government was expecting inflation to continue falling and return to the 2% target level in 2025.

The European Central Bank said at its most recent meeting in January that discussing rate cuts was “premature,” even as progress was being made on inflation. While the exact timeline for rate cuts remains unclear, markets are widely pricing in the first decrease to take place in June, according to LSEG data.   

Fed's Waller wants more evidence inflation is cooling before cutting interest rates

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Christopher Waller, governor of the US Federal Reserve, during a Fed Listens event in Washington, D.C., on Friday, Sept. 23, 2022.

Al Drago | Bloomberg | Getty Images

Federal Reserve Governor Christopher Waller said Thursday he will need to see more evidence that inflation is cooling before he is willing to support interest rate cuts.

In a policy speech delivered in Minneapolis that concludes with the question, “What’s the rush?” on cutting rates, the central bank official said higher-than-expected inflation readings for January raised questions on where prices are heading and how the Fed should respond.

“Last week’s high reading on CPI inflation may just be a bump in the road, but it also may be a warning that the considerable progress on inflation over the past year may be stalling,” Waller said in prepared remarks.

While he said he still expects the Federal Open Market Committee to begin lowering rates at some point this year, Waller said he sees “predominately upside risks” to his expectation that inflation will fall to the Fed’s 2% goal.

He added that there are few signs inflation will fall below 2% anytime soon based on strong 3.3% annualized growth in gross domestic product and employment, with few signs of a potential recession in sight. Waller is a permanent voting member on the FOMC.

“That makes the decision to be patient on beginning to ease policy simpler than it might be,” Waller said. “I am going to need to see at least another couple more months of inflation data before I can judge whether January was a speed bump or a pothole.”

The remarks are consistent with a general sentiment at the central bank that while further rate hikes are unlikely, the timing and pace of cuts is uncertain.

The inflation data Waller referenced showed the consumer price index rose 0.3% in January and was up 3.1% from the same period a year ago, both higher than expected. Excluding food and energy, core CPI ran at a 3.9% annual pace, having risen 0.4% on the month.

Reading through the data, Waller said it’s likely that core personal consumption expenditures prices, the Fed’s preferred inflation gauge, will reflect a 2.8% 12-month gain when released later this month.

Such elevated readings make the case stronger for waiting, he said, noting that he will be watching data on consumer spending, employment and wages and compensation for further clues on inflation. Retail sales fell an unexpected 0.8% in January while payroll growth surged by 353,000 for the month, well above expectations.

“I still expect it will be appropriate sometime this year to begin easing monetary policy, but the start of policy easing and number of rate cuts will depend on the incoming data,” Waller said. “The upshot is that I believe the Committee can wait a little longer to ease monetary policy.”

Markets just a few weeks ago had been pricing in a high probability of a rate cut when the Fed next meets on March 19-20, according to fed funds futures bets gauged by the CME Group. However, that has been pared back to the June meeting, with the probability rising to about 1-in-3 that the FOMC may even wait until July.

Earlier in the day, Fed Vice Chair Philip Jefferson was noncommittal on the pace of cuts, saying only he expects easing “later this year” without providing a timetable.

Governor Lisa Cook also spoke and noted the progress the Fed has made in its efforts to bring down inflation without tanking the economy.

However, while she also expects to cut this year, Cook said she “would like to have greater confidence” that inflation is on a sustainable path back to 2% before moving.

Turkey ends hiking cycle after 8 months, holding key rate at 45%

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Turkish flag over a DenizBank building. Turkey is expected to head to the polls on Sunday.

Ismail Ferdous | Bloomberg | Getty Images

Turkey’s central bank held its key interest rate on Thursday, keeping it at 45% despite soaring inflation after eight consecutive months of hikes.

The move was widely expected as the bank indicated in January that its 250-basis-point hikes would be its last for the year, despite inflation now at roughly 65%.

Consumer prices in the country of 85 million last month jumped 6.7% from December — its biggest monthly jump since August — according to the Turkish central bank’s figures. They rose 64.8% year-on-year in January.

Turkey’s key interest rate climbed by a cumulative 3,650 basis points since May 2023. The latest decision to hold rates, rather than cut them, signals consistency from the newly appointed Turkish central bank governor Fatih Karahan with the strategy of his predecessor, Hafize Erkan. Karahan took office in early February.

Analysts viewed the accompanying press statement from the central bank as hawkish and indicating no easing of rates in the near future.

“The Committee assesses that the current level of the policy rate will be maintained until there is a significant and sustained decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range,” the bank’s statement said. “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation outlook is anticipated.”

Economists expect a hold on the current interest rate for much of 2024, and see inflation roughly halving by the end of the year — meaning monetary easing could still be on the cards.

“An extended interest rate pause is likely in our view over the coming months. With inflation likely to end the year at 30-35% (broadly in line with the CBRT’s forecast of 36%), there is still a possibility that the central bank starts an easing cycle before the end of the year, which many analysts are expecting,” Liam Peach, senior emerging markets economist at London-based Capital Economics, wrote in a note Thursday.

“But our baseline view remains that interest rates will stay on hold throughout this year and that rate cuts won’t arrive until early next year.”

Germany slashes 2024 growth forecast to just 0.2% as economy in 'tricky waters,' minister says

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Robert Habeck, German Minister for Economy and Climate Protection and Vice Chancellor, is pictured during the weekly meeting of the cabinet on February 21, 2024 in Berlin, Germany.

Florian Gaertner | Photothek | Getty Images

Germany’s gross domestic product is now expected to grow by just 0.2% this year, as the country wades in “tricky waters,” German Economy Minister Robert Habeck said Wednesday.

The revised GDP growth forecast is down from a previous estimate of 1.3%. Habeck said the government now anticipates German GDP to grow by 1% in 2025.

Speaking during a news briefing, the minister attributed the revised forecast to an unstable global economic environment and to the low growth of world trade, alongside higher interest rates.

Those issues have negatively impacted investments, especially in the construction industry, he said.

German housebuilding is amongst the sectors that have been most affected by this, with developers canceling projects and order numbers declining, according to recent data. Analysts fear the sector may face further difficulties this year.

“The economy is in tricky waters,” Habeck said in a statement released online, according to a CNBC translation. “We are coming out of the crisis more slowly than we had hoped.”

This is despite energy costs and inflation falling and consumer spending power increasing again, he said. Habeck nevertheless maintained that Germany has proven resilient in the face of losing access to Russian seaborne crude and oil product supplies, as a result of the war in Ukraine.

Budget crisis

The country narrowly avoided a recession in the second half of 2023, despite its GDP declining by 0.3% in the final quarter as well as for the full-year 2023. The third-quarter GDP for 2023 was revised to reflect stagnation, however. It means the country dodged a technical recession, which is characterized by two consecutive quarters of negative growth.

Habeck pointed to Germany’s recent budget crisis which left a 60-billion-euro ($65 billion) hole in the government’s financial plans over the coming years as an additional economic challenge.

Last year, the country’s constitutional court ruled that it was unlawful for the government to re-allocate emergency debt that was taken on but not used during the Covid-19 pandemic to their current budget plans. This caused significant disruption to financial planning and forced the government to make cuts and savings.

The biggest challenge for Germany is a lack of skilled workers, which will only intensify in the years ahead, Habeck said in remarks published Wednesday. He also said there were various structural issues which need to be addressed to “defend” the competitiveness of Germany as an industrial hub.

Habeck also addressed the outlook for inflation, saying it is expected to fall to 2.8% throughout 2024, before returning to the 2% target range again in 2025. The harmonised consumer price index for January 2024 came in at 3.1% on an annual basis.

Bank of England rate cuts likely later but larger, Goldman Sachs says

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Blurred buses pass the Bank of England in the City of London on 7th February 2024 in London, United Kingdom. 

Mike Kemp | In Pictures | Getty Images

The Bank of England is likely to hold interest rates higher for longer before slashing them more sharply than expected in the second half of the year, new forecasts from Goldman Sachs show.

In a research note released Tuesday, the Wall Street bank pushed back its expectations for rate cuts by one month, from May to June, citing several key inflation indicators “on the firmer side.”

But it said the central bank was then likely to cut rates more quickly than previously anticipated as inflation shows signs of cooling.

Goldman now sees five consecutive 25 basis point interest rate cuts this year, lowering rates from their current 5.25% to 4%. It then sees the Bank settling at a terminal rate of 3% in June 2025.

That compares to more moderate market expectations of three cuts by December 2024.

“We continue to think that the BoE will ultimately loosen policy significantly faster than the market expects,” the note said.

Bank of England Governor Andrew Bailey said Tuesday that bets by investors on interest rate cuts this year were “not unreasonable,” but resisted giving a timeline.

“The market is essentially embodying in the curve that we will reduce interest rates during the course of this year,” Bailey told U.K. lawmakers at the Treasury Select Committee.

“We are not making a prediction of when or by how much [we will cut rates],” he continued. “But I think you can tell from that, that profile of the forecast … that it’s not unreasonable for the market to think about.”

The Bank’s Chief Economist Huw Pill also said last week that the first rate cut is still “several” months away.

Cooling underway

Goldman analysts put their delay down to the persistent strength of the British labor market and continued wage growth. However, it noted than those pressures were likely to subside in the second half of the year, with lower inflation suggesting a “cooling is underway.”

U.K. inflation held steady at 4% year-on-year in January, though price pressures in the services industry remained hot. Meanwhile, the month-on-month headline consumer price index fell to -0.6% after recording a surprise uptick in December.

Goldman said there was a 25% chance the BOE would delay rate cuts beyond June if wage growth and services inflation remained sticky. However, it also said there was an equal chance of the Bank cutting rates by a more aggressive 50 basis points if the economy slips into a “proper” recession.

Bank of England rate cuts would help our business, ProsperCap says

The U.K. economy slipped into a technical recession in the final quarter of last year, with gross domestic product shrinking 0.3%, preliminary figures showed Thursday.

Bailey said Tuesday, however, that the economy had already shown signs of an upturn.

“There was a lot of emphasis again on this point about the recession, and not as much emphasis on … the fact that there is a strong story, particularly on the labor market, actually also on household incomes,” he said.

Still, he noted that the Bank did not need to see inflation fall to its 2% target before it begins cutting rates.

U.K. government bond yields fell as Bailey spoke, suggesting increased investor expectations of rate cuts.

Israel's GDP contracts nearly 20% in fourth quarter amid Gaza war

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An Israeli national flag above produce for sale at Carmel Market in Tel Aviv, Israel, on Nov. 7, 2023.

Bloomberg | Bloomberg | Getty Images

Israel’s gross domestic product shrank nearly 20% in the fourth quarter of 2023, according to official figures.

The contraction was significantly larger than expected, as analysts predicted a contraction of around 10%. It reflects the toll of the country’s war against Hamas in Gaza, now entering its fifth month.

The economic data out Monday “pointed primarily to a contraction in private sector consumption and a deep contraction in investment, especially in real estate,” analysts at Goldman Sachs wrote in a research note.

“The deep GDP contraction occurred despite a strong surge in public sector consumption as well as a positive net trade contribution, with the decline in imports outpacing the decline in exports.”

Official figures showed a 26.9% quarter-on-quarter annualized drop in private consumption, and fixed investment plummeting nearly 68% as residential construction ground to a halt amid a shortage of both Israel workers due to military mobilization and Palestinian workers as the latter group has been mostly barred from entering Israel since Oct. 7.

Before then, more than 150,000 Palestinian workers from the occupied West Bank entered Israel daily for work in a range of sectors, predominantly in construction and agriculture.

Israel’s GDP contraction “was much worse than had been expected and highlights the extent of the hit from the Hamas attacks and the war in Gaza,” Liam Peach, senior emerging markets economist at London-based Capital Economics, said in an analysis note.

“While a recovery looks set to take hold in Q1, GDP growth over 2024 as a whole now looks likely to post one of its weakest rates on record.”

Israel’s high-tech economy is particularly affected by the fact that it has mobilized 300,000 of its men and women as military reservists to deploy in both Gaza and on its northern border with Hezbollah in Lebanon.

The mobilization was triggered by the terror attack of Oct. 7 led by Palestinian militant group Hamas that killed about 1,200 people in Israel. Israel’s subsequent offensive against the Gaza strip and relentless bombing campaign has killed more than 28,000 people in the blockaded territory, according to Gaza’s Hamas-run health ministry.

British retail rebound provides some hope for recession-hit economy

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A general view of a kiosk near Charing Cross station in London, England, on January 20, 2024. (Photo by Alberto Pezzali/NurPhoto via Getty Images)

Nurphoto | Nurphoto | Getty Images

LONDON — Stronger-than-expected January retail sales provided a glimmer of light for the struggling British economy on Friday — and suggest that the country’s recession will be short-lived, according to some economists.

Sales rebounded by 3.4% from December, according to the Office for National Statistics, the strongest monthly gain since April 2021. Economists polled by Reuters had expected a more modest growth of 1.5%.

Sales volumes increased in all areas except closing, as food shops saw the biggest boost. Consumers “spent more for less in January,” the ONS said, with the total they paid rising by 3.9%.

The latest figures follow the news of Thursday that the British economy entered a technical recession in the final quarter of 2023. Gross domestic product declined by 0.3%, following a 0.1% contraction in the third quarter.

Sales over the key holiday trading period were far weaker than expected, with December seeing the biggest monthly fal since January 2021.

British retail sales meanwhile remain 1.3% below their pre-pandemic level from February 2020, according to the ONS.

The “strong pick up in sales suggests the worst is now behind the retail sector and falling inflation and rising wages in 2024 will provide a strong platform for recovery,” Joe Maher, assistant economist at Capital Economics, said in a note.

The hike also points to a fading drag on consumer spending from higher interest rates, as well as the economy exiting recession territory, Maher said —but there is “still a long way back for retailers” to their pre-pandemic highs.

Kris Hamer, director of insight at the British Retail Consortium, said two months of higher sales volumes over the last three months were “promising” after 19 months of decline.

“Nonetheless, shoppers remained cautious as they entered the third year of the high cost of living,” Hamer said, adding that a rise in business rates and new border control costs would weigh on the retail sector.

Despite the poor growth figures, the retail report — along with steady inflation figures and a healthy December jobs report — ended the week on a “half positive note,” said Kallum Pickering, senior economist at Berenberg.

Anecdotal evidence from retailers suggests consumers held back in December, but came out in force to benefit from January sales, he said.

“However, we need to be cautious. Monthly data are volatile. The January jump merely offsets the big 3.3% [month-on-month drop in December – and hence returns real sales to the November level,” Pickering said in a note.

The fresh figures are consistent with “haphazard stagnation” in the retail sector and with broader economic activity in the last 18 months, though Berenberg economists expect retail momentum to pick up over the coming months due to higher real wages and consumer confidence, he added.

January wholesale prices rise more than expected, another sign of persistent inflation

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Customers shop at a Costco Wholesale store in Miami on Dec. 15, 2023.

Joe Raedle | Getty Images News | Getty Images

Wholesale prices rose more than expected in January, further complicating the inflation picture, according to a U.S. Department of Labor report Friday.

The producer price index, a measure of prices received by producers of domestic goods and services, rose 0.3% for the month, the biggest move since August. Economists surveyed by Dow Jones had been looking for an increase of just 0.1%. PPI fell 0.2% in December.

Excluding food and energy, core PPI increased 0.5%, also against expectations for a 0.1% gain. PPI excluding food, energy and trade services jumped 0.6%, its biggest one-month advance since January 2023.

The report comes just days after the consumer price index showed inflation holding stubbornly higher despite Federal Reserve expectations for moderation through the year. The CPI was up 3.1% from a year ago, down from its December level but still well ahead of the Fed’s goal for 2% inflation.

On a core basis, which the Fed focuses on more as a longer-term gauge of inflation, the CPI was up 3.9%. CPI differs from PPI in that it measures the prices consumers actually pay in the marketplace.

Markets fell sharply after Tuesday’s CPI reading, and there were fears that a hot PPI number also could cause another jolt. Expectations have been rising high that the Fed would use the easing inflation numbers as incentive to cut interest rates aggressively this year, but traders have had to pare back those expectations in recent days as inflation has shown unexpected persistence.

Stock market futures moved lower after the PPI report and Treasury yields surged.

Just a few weeks ago, markets had been pricing in the first Fed rate cut in March. That since has been pared back to June as policymakers have expressed caution about giving up the inflation fight too quickly while noting that an otherwise stable economy buys them time before having to move.

A 0.6% increase in final demand service helped propel the wholesale index higher, which in itself was boosted by a 2.2% rise in hospital outpatient care. Goods prices actually decreased 0.2% on the back of a 1.7% decline in final demand energy as gasoline slid 3.6%.

On a 12-month basis, headline PPI increased just 0.9%, slightly lower than the 1% level in December. However, excluding food, energy and trade services, the index rose 2.6%.

Along with the troublesome inflation readings, the Commerce Department reported this week that retail sales in January slid by 0.8%, far more than anticipated.

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Retail sales tumbled 0.8% in January, much more than expected

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Consumer spending fell sharply in January, presenting a potential early danger sign for the economy, the Commerce Department reported Thursday.

Advance retail sales declined 0.8% for the month following a downwardly revised 0.4% gain in December, according to the Census Bureau. A decrease had been expected: Economists surveyed by Dow Jones were looking for a drop of 0.3%, in part to make up for seasonal distortions that probably boosted December’s number.

However, the pullback was considerably more than anticipated. Even excluding autos, sales dropped 0.6%, well below the estimate for a 0.2% gain.

The sales report is adjusted for seasonal factors but not for inflation, so the release showed spending lagging the pace of price increases. On a year-over-year basis, sales were up just 0.6%.

Headline inflation rose 0.3% in January and 0.4% when excluding food and energy prices, the Labor Department reported Tuesday. On a year-over-year basis, the two readings were 3.1% and 3.9%, respectively.

Sales at building materials and garden stores were especially weak, sliding 4.1%. Miscellaneous store sales fell 3% and motor vehicle parts and retailers saw a 1.7% decrease. Gas station sales also declined 1.7% as prices at the pump dropped during the month. On the upside, restaurants and bars reported an increase of 0.7%.

The control group of retail sales, which excludes items such as food service, autos, gas and building materials, fell 0.4%. The number feeds directly into the Commerce Department’s calculations for gross domestic product.

The Fed's going to remain on hold longer than many of us expected: John Hancock's Emily Roland

Consumer strength has been at the center of a U.S. growth picture that has proven far more durable than most policymakers and economists had expected. Spending accelerated by 2.8% in the fourth quarter of 2023, finishing out a year in which gross domestic product rose 2.5% despite widespread predictions for a recession.

However, worries linger that stubbornly high inflation could take its toll and jeopardize prospects going forward.

“It’s a weak report, but not a fundamental shift in consumer spending,” said Robert Frick, corporate economist for Navy Federal Credit Union. “December was high due to holiday shopping, and January saw drops in those spending categories, plus frigid weather plus an unfavorable seasonal adjustment. Consumer spending likely won’t be great this year, but with real wage gains and increasing employment it should be plenty to help keep the economy expanding.”

A separate economic report Thursday showed continuing labor market strength, another critical bedrock for the economic picture.

Initial claims for unemployment insurance totaled 212,000 for the week ended Feb. 10, a decline of 8,000 from the previous week’s upwardly revised total and below the estimate for 220,000, the Labor Department reported.

Continuing claims, which run a week behind, totaled just shy of 1.9 million, up 30,000 on the week and higher than the 1.88 million estimate.

There also was some good news on the manufacturing front, as regional surveys in the Federal Reserve’s Philadelphia and New York districts both came in better than expected for February.

The Philadelphia survey showed a reading of 5.2, up 16 points and better than the -8 estimate, while the Empire State survey for New York was at -2.4. Although the New York survey still indicated contraction, it was a much better reading than January’s -43.7 and the -15 estimate. The surveys measure the share of companies reporting growth, so a positive reading indicates expansion.

Markets largely took the reports in stride, with stock futures pointing to a higher open on Wall Street.

Investors are closely watching the numbers for clues about which way the Fed will go in terms of monetary policy and interest rates.

Federal Reserve officials have said they are satisfied enough with the prospects for both inflation falling and growth holding steady that the rate-hiking cycle begun in March 2022 is likely over. But they are watching the data closely, with most saying that they will need more evidence that inflation is on a sustainable path back to the central bank’s 2% goal before starting to cut.

Futures market pricing is indicating the first rate reduction will happen in June, with the Fed moving a total of four times, or a full percentage point, by the end of 2024.

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Brexit Britain has 'significantly underperformed' other advanced economies, Goldman Sachs says

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Pro-EU demonstrators protest outside Parliament against Brexit on the fourth anniversary of Britain’s official departure from the European Union in London, United Kingdom on January 31, 2024.

Future Publishing | Getty Images

LONDON — Post-Brexit Britain has “significantly underperformed” other advanced economies since the 2016 EU referendum, according to new analysis from Goldman Sachs, which aims to quantify the economic cost of the Leave vote.

In a note last week entitled “The Structural and Cyclical Costs of Brexit,” the Wall Street bank estimates that the U.K. economy grew 5% less over the past eight years than other comparable countries.

The true hit to the British economy could be anywhere from 4% to 8% of real gross domestic product (GDP), however, the bank said, acknowledging the difficulties of extracting the impact of Brexit from other simultaneous economic events including the Covid-19 pandemic and the 2022 energy crisis. Real GDP is a growth metric that has been adjusted for inflation.

Goldman Sachs attributed the economic shortfall to three key factors: reduced trade; weaker business investment; and labor shortages as a result of lower immigration from the EU.

The U.K. voted 52% to 48% to leave the EU on June 23, 2016, but officially exited the union on Jan. 31, 2020.

Over that period until today, U.K. goods trade has underperformed other advanced economies by around 15% since the Leave vote, according to the bank’s estimates, while business investment has fallen “notably short” of pre-referendum levels.

Meantime, immigration from the EU has fallen — a key pledge of the Vote Leave campaign — only to be replaced by a less economically active cohort of non-EU migrants, primarily students, the research said.

“Taken together, the evidence points to a significant long-run output cost of Brexit,” the report’s authors said.

The bank noted the reduction in trade was in line with expectations and the underperformance in investment was “more pronounced” that anticipated. However, it said the shifts in immigration patterns posed the most important cyclical repercussions for the U.K. economy — and inflation in particular.

“The post-Brexit change in immigration flows has reduced the elasticity of labor supply in the U.K., contributing to the post-pandemic surge in inflation and pointing to more cyclical labor market and inflation pressures going forward,” the report said.

U.K. real GDP per capita has barely risen above pre-Covid levels and currently stands 4% above the mid-2016 level, it said. That compares to 8% for the euro zone area and 15% for the U.S.

Meantime, the U.K. has recorded higher inflation over the period, with U.K. consumer prices rising 31% since mid-2016 compared with 27% in the U.S. and 24% in the euro zone, it added.

While the report noted that new non-EU trade agreements could potentially mitigate the costs of Brexit, estimates suggest that the benefit is likely to be small.

The British government estimates that its free trade agreement with Australia will boost U.K. GDP by 0.08% per year, while the economic impact of a new trade deal with Switzerland is unclear.

Meantime, the timelines for prospective new trade deals with major partners such as the U.S. and India have not yet been announced.

Consumer prices rose 0.3% in January, more than expected, as the annual rate moved to 3.1%

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Inflation rose more than expected in January as stubbornly high shelter prices weighed on consumers, the Labor Department reported Tuesday.

The consumer price index, a broad-based measure of the prices shoppers face for goods and services across the economy, increased 0.3% for the month, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.

Economists surveyed by Dow Jones had been looking for a monthly increase of 0.2% and an annual gain of 2.9%.

Excluding volatile food and energy prices, so-called core CPI accelerated 0.4% in January and was up 3.9% from a year ago. The forecast had been for 0.3% and 3.7% respectively.

Shelter prices, which comprise about one-third of the CPI weighting, accounted for much of the increase. The index for that category rose 0.6% on the month, contributing more than two-thirds of the headline increase, the BLS said. On a 12-month basis, shelter increased 6%.

Food prices moved higher as well, up 0.4% on the month. Energy helped offset some of the increase, down 0.9% due largely to a 3.3% slide in gasoline prices.

Stock market futures slid sharply following the release. Futures tied to the Dow Jones Industrial Average were off more than 250 points and Treasury yields surged higher.

Even with the rise in prices, inflation-adjusted earnings increased 0.3% for the month. However, adjusted for the decline in the average workweek, real weekly earnings fell 0.3%. Real average hourly earnings rose 1.4% from a year ago.

The release comes as Federal Reserve officials look to set the proper balance for monetary policy in 2024. Though financial markets have been looking for aggressive interest rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let the data be their guide rather than preset expectations.

Fed officials expect inflation to recede back to their 2% annual target in large part because they think shelter prices will decelerate through the year. January’s increase could be problematic for a central bank looking to take its foot off the brake for monetary policy at its tightest in more than two decades.

“The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower allowing the Fed to begin easing rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Across the board numbers were hotter than expected making certain that the Fed will need more data before initiating a rate cutting cycle.”

Generally, the inflation data had been encouraging, even if annual rates remain well above the Fed’s 2% target. Moreover, core inflation, which officials believe is a better guide of long-run trends, has been even more stubborn as housing costs have held higher than anticipated.

In recent days, policymakers including Chair Jerome Powell have said the broader strength of the U.S. economy gives the Fed more time to process data is it doesn’t have to worry about high rates crushing growth.

Market pricing prior to the CPI release indicated a tilt towards the first rate cut coming in May, with a likely total of five quarter-percentage point moves lower before the end of 2024, according to CME Group data. However, several Fed officials have said they think two or three cuts are more likely.

Outside of the jump in shelter costs, the rest of the inflation picture was a mixed bag.

Used vehicle prices declined 3.4%, apparel costs fell 0.7% and medical commodities declined 0.6%. Electricity costs rose 1.2%. At the grocery store, ham prices fell 3.1% and eggs jumped 3.4%.

This is breaking news. Please check back here for updates.

China's biggest problem is a 'lack of confidence,' Standard Chartered CEO says

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DUBAI, United Arab Emirates — China is facing a confidence deficit as its economy undergoes massive transition and concern grows over its ongoing property crisis, a top banking CEO said while onstage at Dubai’s World Governments Summit.

“China’s biggest problem to me is a lack of confidence. External investors lack confidence in China and domestic savers lack confidence,” Bill Winters, CEO of emerging markets-focused bank Standard Chartered, told CNBC’s Dan Murphy Monday during a panel discussion.

“But I think China is going through a major transition from old economy to new economy,” Winters added. “If you visit the new economy, which many of you have — I have — it’s booming, absolutely booming, well into double-digit growth rates and in everything EV-related, the whole supply chain, everything sustainable finance and sustainability related, etc.”

Investors are closely watching China, whose stock market gyrations, deflation problem and property woes are casting a shadow over the global growth outlook. According to an International Monetary Fund report completed in late December 2023, demand for new housing in China is set to drop by around 50% over the next decade.

Decreased demand for new housing will make it harder to absorb excess inventory, “prolonging the adjustment into the medium term and weighing on growth,” the report said. Property and related industries account for about 25% of China’s gross domestic product.

IMF chief: China must show determination to take on economic reforms

IMF Managing Director Kristalina Georgieva, speaking to CNBC in Dubai on Sunday, stressed what she saw as the need for reforms from Beijing in order to stem its economic challenges.

The international lender has discussed with China “longer-term structural issues that the country needs to address,” Georgieva said. “Our analysis shows that without deep structural reforms, growth in China can fall below 4%. And that will be very difficult for the country.”

“We want to see the economy genuinely moving more towards domestic consumption, and less reliance on exports … but for that, [they need] confidence of the consumer,” she said, echoing Winters’ sentiments on domestic confidence. “And that means fix the real estate, get the pension system in place, as well as these longer-term improvements in the fundamentals of the Chinese economy, would be necessary.”

Standard Charters’ Winters, meanwhile, is ultimately optimistic about the world’s second-largest economy, pointing out that every society that’s undergone major economic transition inevitably experiences some level of tumult and growing pains.

“They’re trying to manage this transition without disrupting the financial system, which in the West, we’ve never managed to do,” the CEO said. “Every big industrial transition has had a major depression associated with it, or global financial crisis. They’re trying to avoid that which means it gets dragged out. I think they’ll get through the back end just fine.”

— CNBC’s Evelyn Cheng contributed to this report.

Russia’s economy ‘in for very tough times’ despite improved growth outlook, IMF managing director says

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Kristalina Georgieva, managing director of the International Monetary Fund, at a press conference at the IMF Headquarters on April 14, 2023.

Kevin Dietsch | Getty Images News | Getty Images

The head of the International Monetary Fund warned the Russian economy is still facing significant headwinds despite receiving a recent growth upgrade by the Washington-based institution.

Russia’s economy has proven to be surprisingly resilient amid waves of Western sanctions in the nearly two years since it launched its full-scale invasion of Ukraine.

In late January, the International Monetary Fund more than doubled its forecast for the pace of the country’s economic growth this year, raising it from 1.1% in October to 2.6%.

Despite this, IMF Managing Director Kristalina Georgieva sees more trouble ahead for the country of roughly 145 million.

Speaking to CNBC’s Dan Murphy at the World Governments Summit in Dubai, Georgieva described what she believed was fueling Russia’s growth and why the forecast figure does not tell the full story.

“What it tells us is that this is a war economy in which the state — which let’s remember, had a very sizeable buffer, built over many years of fiscal discipline — is investing in this war economy. If you look at Russia, today, production goes up, [for the] military, [and] consumption goes down. And that is pretty much what the Soviet Union used to look like. High level of production, low level of consumption.”

Russian defense spending has skyrocketed since the war began. Last November, Russian President Vladimir Putin approved a state budget that increased military spending to roughly 30% of fiscal expenditure, amounting to a nearly 70% rise from 2023 to 2024.

Defense and security spending is expected to comprise some 40% of Russia’s total budget spending this year, according to analysis by Reuters.

At the same time, however, more than 800,000 people have left Russia, according to estimates by exiled academics compiled last October. Many among those who fled are highly skilled workers in fields like IT and sciences.

“I actually think that the Russian economy is in for very tough times because of the outflow of people, and because of the reduced access to technology that comes with the sanctions,” Georgieva said.

“So although this number looks like a good number, there is a bigger story behind that, and it’s not a very good story.”

Germany’s economy is on shaky ground and glimmers of hope are few and far between

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Federal Chancellor Olaf Scholz (SPD, r-l), Robert Habeck (Alliance 90/The Greens), Federal Minister for Economic Affairs and Climate Protection, and Christian Lindner (FDP), Federal Minister of Finance, follow the debate at the start of the budget week.

Michael Kappeler | Picture Alliance | Getty Images

Good news has been sparse for the German economy. And the latest economic data has not done much to change this.

A few key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the “sick man of Europe” resurface.

“The data confirm that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.

Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.

Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.

But this growth “is not much reason for comfort,” Franziska Palmas, senior Europe economist at Capital Economics told CNBC, explaining that it is thanks to several large-scale orders, which tend to be volatile. “Orders excluding large-scale orders actually fell to a post-pandemic low,” she added.

For 2023 overall in comparison to the previous year, factory orders were down 5.9%.

While this “hard” data from December does not yet suggest recovery is in sight, the most recent Purchasing Managers’ Index report indicates that the worst may be over soon in the manufacturing sector, Schmieding said.

“Although at 45.5 still below the 50 line that divides growth from contraction, it edged up to an 11-month high,” he noted.

Even so, economic growth is unlikely to be imminent, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, told CNBC.

“We are still nowhere near the kind of activity in the German industry that we saw pre-pandemic,” he explained. “We still expect a modest contraction in Q1, but it’s likely to be less severe than 23Q4,” van Harn said. He is then anticipating growth to pick up slightly, but sees full-year growth as being flat.

Others are even more pessimistic about the German economy.

“We stick to our forecast that the German economy will shrink by 0.3% in 2024 as a whole,” Commerzbank Chief Economist Jörg Krämer told CNBC.

This would be broadly in line with how Germany’s economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.

This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.

“Companies simply have too much to digest — global rate hikes, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explained, addressing reasons for the downturn.

Some of these headwinds may also play a key role when it comes to weakening export figures, Rabobank’s van Harn pointed out. Factors like cheap energy from Russia, strong demand from China and surging global trade buoyed Germany’s exports for decades, “but are now faltering,” he said.

Looking beyond the purely economical, national and international politics could also be a risk for the country’s economy, the experts say.

Germany sets sights on 2024 budget

Germany’s coalition government has been under pressure after going through a budget crisis following a decision from the constitutional court that the re-allocation of unused debt taken on during the pandemic to current budget plans is unlawful.

This left a 60-billion-euro hole in the coalition’s budget plans, and as the funds were allocated for years to come, the crisis is likely to rear its head again at the end of the year when 2025 budget planning begins.

Voter satisfaction with the government is also low, with the opposition CDU party currently leading in the polls and being followed in second place by Germany’s far-right party, the AfD. Support for the latter has however declined in recent weeks amid protests against the far-right sweeping the country, with hundreds of thousands of Germans taking to the streets.

Elsewhere, the U.S. election could make things more difficult as well, Schmieding suggested.

“Trade war threats by Trump could be a significant negative for Germany,” he said – however this of course depends on the outcome of the election, and may not unfold in full force until 2025, he noted.

Inflation in December was even lower than first reported, the government says

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People shop in a supermarket in the Manhattan borough of New York city on January 27, 2024.

Charly Triballeau | AFP | Getty Images

The prices consumers pay in the marketplace rose at an even slower pace than originally reported, according to closely watched revisions the government released Friday.

Updates to the consumer price index showed that the broad basket of goods and services measured increased 0.2% on the month, less than the originally reported 0.3%, the Labor Department’s Bureau of Labor Statistics said.

While the change is only modest, it helped confirm that inflation was moderating as 2023 ended, giving more leeway to the Federal Reserve to start cutting interest rates later this year.

The revisions are done as a matter of course for the BLS, but garnered extra attention this year after the market reacted sharply to last year’s changes. Indications that inflation in 2022 rose more than anticipated drove Treasury yields higher and sparked worry from investors that the Fed might keep monetary policy more restrictive.

Fed Governor Christopher Waller, in particular, had called attention to the 2022 revisions, sparking market attention for the latest round.

Excluding food and energy, the so-called core CPI increased 0.3% for the month, the same as originally reported. Fed policymakers tend to focus more on core measures as they provide a better indication of long-run movements in inflation.

Also, the headline November reading was revised higher, up 0.2% versus the initial 0.1% estimate.

In aggregate, the revisions indicate that headline CPI accelerated at a 2.7% annualized rate in the fourth quarter, down 0.1 percentage point from the initially stated figures, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics. Further out, the second-half revisions put CPI higher — by 0.003 percentage point, according to Goldman Sachs calculations.

The revisions amounted to “a damp squib,” said Paul Ashworth, chief North America economist at Capital Economics, though they could exert some influence on the Fed.

“Since some Fed officials were apparently worried about a repeat of last year — when the revision pushed up the monthly changes in core prices in the final few months of last year — the lack of any meaningful change this year, at the margin at least, supports an earlier May rate cut,” Ashworth added.

The Fed prioritizes the personal consumption expenditures price index as its main inflation gauge. CPI readings feed into the Commerce Department’s PCE calculation. The difference between the two gauges is essentially that the CPI reflects what items cost while the PCE adjusts for what consumers actually buy, accounting for changes in behavior when prices rise and fall.

Futures market pricing was little changed after the data release.

Traders still largely expect the Fed to hold its benchmark overnight borrowing rate steady when it next meets in March, then cut in May, to be followed by four more quarter percentage point reductions by the end of the year, according to CME Group projections.

Reuters contributed to this report.

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El-Erian, Krugman and other economists have very different opinions on China’s struggling economy

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Many Chinese developers have halted or delayed construction on presold homes due to cash flow problems. Pictured here is a property construction site in Jiangsu province, China, on Oct. 17, 2022.

Future Publishing | Future Publishing | Getty Images

China’s economy is sputtering.

Its property market is crumbling, deflationary pressures are spreading across the nation, and its stock market has weathered a turbulent ride so far this year, with the country’s CSI 300 index erasing some 40% of its value from its 2021 peaks.

Adding salt to the wound, January PMI numbers released by China’s National Bureau of Statistics showed manufacturing activity contracted for the fourth month in a row, driven by slumping demand. 

The slew of downbeat data has consequently triggered a wave of skepticism toward the world’s second-largest economy. Allianz for one, reversed its buoyant view of China, now forecasting Beijing’s economy to grow by an average 3.9% between 2025 to 2029. That’s down from a 5% forecast before the Covid-19 pandemic broke out.

Ex-International Monetary Fund official Eswar Prasad also told Nikkei Asia that “the likelihood of the prediction that China’s GDP will one day overtake that of the U.S. is declining.” 

Meanwhile, top economist and Allianz advisor Mohamed El-Erian highlighted China’s dismal stock market performance against those in the U.S. and Europe in a chart on X, saying it shows the stark divergence between all three equity markets.

China itself, however, isn’t willing to confess its economy is in tatters. Chinese leader Xi Jinping said on New Year’s Eve that the nation’s economy had grown “more resilient and dynamic this year.”

Feeding on such optimism, it’s fair to say there’s been some signs of hope for the beleaguered economy, but perhaps not enough to sway the bears. For instance, factory activity in China expanded for a third-straight month in January, while the nation’s luxury sector appears to be snapping back. 

Such data has prompted bullish chatter among investors, suggesting consensus on China clearly lacks uniform.

Era of stagnation 

Nobel laureate Paul Krugman has been among some of the most bearish voices toward China, saying the country is entering an era of stagnation and disappointment. 

China was supposed to boom after it lifted its stringent “zero-Covid” measures, Krugman wrote in a recent New York Times op-ed. But it did the exact opposite. 

China is in the middle of a secular stagnation, says Clocktower Group's Marko Papic

From bad leadership to high youth unemployment, the country is facing headwinds from all corners, Krugman argued. And the country’s economic stumble isn’t isolated, Krugman warns, potentially becoming everyone’s problem.  

Property crisis

Glimmers of hope

China would be very happy if we were more isolationist and dysfunctional politically: Michael Froman

At the same time, Clocktower Group partner and chief strategist Marko Papic took an optimistic short-term view toward Chinese equities. In a Feb. 7 CNBC interview, Papic said he forecasts China stocks to jump at least 10% in the coming days as officials signal support efforts to bolster its flailing stock market.

A “10% to 15% rally in Chinese equities is likely in coming trading days,” Papic said.

JPMorgan Private Bank also outlined bull case scenarios for China in a recent post. “Despite the stock market’s slipping sentiment and persistent problems with the property market, certain segments of the Chinese economy have also proved their resilience,” it said.

The bank said China’s crucial role as a global manufacturer is unlikely to abate, adding that cyclical demand for its exports could remain intact.

Looking ahead, China has hurdles to overcome. Whether it has the firepower to do so, however, remains to be seen.

‘A slow fiscal death’ awaits some countries in this 'decade of debt,' says economist Art Laffer

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A mosaic collection of world currencies.

FrankvandenBergh | E+ | Getty Images

The world is looking at a debt crisis that will span the next 10 years and it’s not going to end well, economist Arthur Laffer has warned, with global borrowings hitting a record of $307.4 trillion last September. 

Both high-income countries as well as emerging markets have seen a substantial rise in their debt piles, which has grown by a $100 trillion from a decade ago, fueled in part by a high interest rate environment. 

“I predict that the next 10 years will be the Decade of Debt. Debt globally is coming to a head. It will not end well,” Laffer, who is President at investment and wealth advisory Laffer Tengler Investments, told CNBC.

As a share of the global gross domestic product, debt has risen to 336%. This compares to an average debt-to-GDP ratio of 110% in 2012 for advanced economies, and 35% for emerging economies. It was 334% in the fourth quarter of 2022, according to the most recent global debt monitor report by the Institute of International Finance.

To meet debt payments, it is estimated that around 100 countries will have to cut spending on critical social infrastructure including health, education and social protection.

Countries that manage to improve their fiscal situation could benefit by attracting labor, capital and investment from abroad, while those that do not could lose talent, revenue — and more, Laffer said.

“I would expect that some of the bigger countries that don’t address their debt issues will die a slow fiscal death,” Laffer said, adding that some emerging economies “could quite conceivably go bankrupt.”

Mature markets such as the U.S., U.K., Japan and France were responsible for over 80% of the debt build-up in the first half of last year. While in the case of emerging markets, China, India and Brazil saw the most pronounced increases. 

The economist warned that repaying the debt will become more of an issue as population in the developed countries continues to age and workers become more scarce.

“There are two main ways to cover this issue:  raise taxes or grow your economy faster than debt is piling up,” he said.

Laffer’s comments come on the heels of the U.S. Federal Reserve’s decision to leave rates unchanged in January, and shooting down hopes of a rate cut in March. 

Credit card delinquencies surged in 2023, indicating 'financial stress,' New York Fed says

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Credit card delinquencies surged more than 50% in 2023 as total consumer debt swelled to $17.5 trillion, the New York Federal Reserve reported Tuesday.

Debt that has transitioned into “serious delinquency,” or 90 days or more past due, increased across multiple categories during the year, but none more so than credit cards.

With a total of $1.13 trillion in debt, credit card debt that moved into serious delinquency amounted to 6.4% in the fourth quarter, a 59% jump from just over 4% at the end of 2022, the New York Fed reported. The quarterly increase at an annualized pace was around 8.5%, New York Fed researchers said.

Delinquencies also rose in mortgages, auto loans and the “other” category. Student loan delinquencies moved lower as did home equity lines of credit. Overall, 1.42% of debt was 90 days or more past due, up from just over 1% at the end of 2022.

“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”

While delinquency levels are rising, the New York Fed researchers said total debt is moving higher about in line with the pace before the Covid-19 pandemic began in March 2020.

Household debt rose by $212 billion in the quarter, a 1.2% increase quarterly and about 3.6% from a year ago. Credit card debt, however, jumped 14.5% from the same period in 2022. Auto debt climbed to $1.61 trillion, up $12 billion on a quarterly basis and $55 billion annually, or 3.5%.

Borrowers have been hit by higher interest rates. In a tightening cycle that ran from March 2022 to July 2023, the Federal Reserve hiked its short-term borrowing rate by 5.25 percentage points, taking the fed funds rate to its highest level in about 23 years. The benchmark rate feeds into most adjustable-rate consumer debt products.

Since the central bank began its tightening, the typical rate on credit cards leaped from about 14.5% to 21.5%, according to Fed data. Credit card debt as a share of income is still below pre-pandemic levels.

Fed researchers said rising rates probably have played a role in delinquency rates. In the case of autos, for instance, they said payments have changed little even as prices have come down, owing to the elevated rate structure.

Student loan debt, an area of interest for Washington lawmakers, has increased little during the pandemic period, currently totaling just more than $1.6 trillion. That was little change from the third quarter and it was up just 0.4% from a year ago. President Joe Biden has forgiven some $136.6 billion in student loan debt since taking office. The share of debt in serious delinquency edged lower to 0.8%.

Mortgage debt rose 2.8% in 2023, while the delinquency rate increased to 0.82%, up a quarter percentage point from the previous year.

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Red Sea tensions risk significantly higher inflation, OECD warns

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Elevated shipping costs as a result of ongoing tensions in the Red Sea could impede the global fight against inflation, the Organisation for Economic Co-operation and Development said Monday.

The Paris-based group estimates that the recent 100% rise in seaborne freight rates could increase import price inflation across its 38 member countries by nearly 5 percentage points if they persist.

That could add 0.4 percentage points to overall price rises after a year, the OECD said in its latest economic outlook.

In late 2023, major shipping firms began diverting their vessels away from Egypt’s Suez Canal, the quickest trade route between Europe and Asia, due to a spate of attacks by Iran-backed Houthi militants based in Yemen. Tensions remain high, with the navies of countries including the United States involved in the conflict.

A cargo ship travels on the Suez Canal in Ismailia Province, Egypt, Jan. 13, 2024. 

Ahmed Gomaa | Xinhua News Agency | Getty Images

Ships are taking the longer Cape of Good Hope route around the southern coast of Africa, which increases journey times by between 30% and 50%, taking capacity out of the global market.

However, the OECD also notes that the shipping industry had excess capacity last year, a result of new container ships being ordered, which should moderate cost pressures.

Clare Lombardelli, chief economist at the OECD, told CNBC on Monday that a sustained increase in inflation as a result of the latest crisis is a risk, but not the group’s base case.

“It’s something we’re watching closely … we have seen an increase in shipping prices, if that were to continue for for an extended period, then that would feed through into consumer price inflation. But at the moment, we don’t anticipate that to be the case,” Lombardelli said.

According to Tiemen Meester, chief operating officer at Dubai-based logistics firm DP World, European imports are presenting the biggest challenge and have seen significant delays to cargo that was already en route.

“Unfortunately, there’s higher cost in the inefficiencies in the network, so ultimately, the rates are going up. But it’s actually nowhere near to where they were at their peaks during Covid … How that costs will find its way to the consumer, we’ll have to see,” Meester told CNBC, describing it as a “short-term problem.”

“I think kind of where we are now is a steady state, because the networks have adjusted and cargo is flowing, bookings are taking, it just takes more time,” he added.

Red Sea crisis: DP World Group COO says biggest challenge is European imports

The OECD’s Lombardelli said that overall there has been positive data among its members in recent months showing inflation coming down consistently. This will help rebuild real incomes and support consumption, she said.

The OECD’s 38 members include the United States, United Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan and South Korea.

Its latest outlook hiked its economic growth forecast for the U.S. by 0.6 percentage points from its previous November estimate, to 2.1% for this year. Its euro zone outlook was lowered by 0.3 percentage points, to 0.6%, while its U.K. outlook was flat at 0.7%.

“We’ve seen positive news in the U.S., we’re seeing inflation coming down now, but we’re not seeing a big cost in terms of the labor market there,” Lombardelli told CNBC.

“Growth is looking stronger, and inflation is coming down. So you’ll see a rebuilding of real incomes there in the U.S., and that will support consumption growth.”

Europe has been hit harder by an energy price shock, the impact of inflation on real incomes and consumption, and its greater dependence on bank-based financing amid tighter montary policy, she said.

In the medium-term, the OECD expects a greater drag on growth from its aging workforce.

The OECD nonetheless sees the European Central Bank as being in a position to cut interest rates in the second half of the year if current trends continue, Lombardelli said.

Turkey's new central bank governor, formerly at Amazon and New York Fed, seen as a 'credible choice'

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Newly appointed Governor of Turkish Central Bank, Fatih Karahan is seen in Ankara, Turkey on February 04, 2024. 

Emin Sansar | Anadolu | Getty Images

Turkey’s newly appointed central bank governor Fatih Karahan has his work cut out for him, named to the job by presidential decree over the weekend after the sudden resignation of his predecessor, Hafize Gaye Erkan.

Previously the central bank’s deputy governor, Karahan’s resume features years spent in prominent American institutions and companies. He received both a masters degree and doctorate in economics at the University of Pennsylvania, spent nearly a decade as an economist at the Federal Reserve Bank of New York, worked as a part-time lecturer at Columbia University and New York University, and served as a senior economist for Amazon.

It is hoped that the 42-year-old economist’s experience will serve him well as he heads the institution working to tackle the eye-watering inflation and cost-of-living crisis that has hit Turkey’s population of 85 million. The country’s currency, the lira, is down 38% against the dollar year-to-date and has lost more than 80% of its value against the greenback over the last five years. 

Turkey’s consumer price index print came out Monday showing a roughly 65% increase year-on-year for the month of January. Its central bank has made eight consecutive interest rate hikes since May 2023 — for a cumulative 3,650 basis points — in an effort to rein in soaring inflation. The latest rate hike, on Jan. 25, raised Turkey’s key interest rate by 250 basis points to 45%, though its leaders signaled at the time that the hiking cycle was at its end.

While painful for the country, investors and economists say the rate hikes have been necessary and that continuity in monetary policy priorities will engender confidence in the new central bank chief.

In his statement posted to the Turkish Central Bank’s website on Sunday, Karahan stressed “price stability” as his team’s main priority, vowing to “ensure disinflation” and “maintain the necessary monetary tightness until inflation falls to levels consistent with our target.”

“All eyes now focus on new central bank governor Fatih Karahan,” Liam Peach, senior emerging markets economist at London-based Capital Economics, wrote in a note Monday. “As things stand, continuity in monetary policy looks set to continue.”

Wolfango Piccoli, co-president at advisory firm Teneo, agreed.

“Like Erkan, Karahan is not a monetary economist, but is nevertheless regarded as a credible choice,” Piccoli wrote in an analysis for the firm.

“Unlike recent gubernatorial changes, Erkan’s departure will not result in a dramatic shift in policy stance,” he said, adding that the central bank could still “adopt a more hawkish tone in terms of forward guidance to support Karahan in his new role.”

Unorthodox policy

Piccoli noted that Turkey’s monetary policy still ultimately remains at the mercy of Turkish President Recep Tayyip Erdogan, who spooked investors for years by stifling the central bank’s independence and preventing it from raising interest rates despite runaway inflation that at one point topped 85%.

The more conventional policy approach that began under Hafize Erkan and Turkish Finance Minister Mehmet Simsek, also appointed last year, followed several years of unorthodox policy. Erdogan has previously decried interest rates as “the mother of all evil” even as consumer prices soared and the lira plunged.

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

“Regardless of Karahan’s stature and the backing provided by Treasury and Finance Minister Mehmet Simsek, Erdogan remains the ultimate decision-maker,” Piccoli said.

“As long as the president stays supportive of the (gradual) turn to orthodoxy that he endorsed after the 2023 elections, the identity of the governor is almost irrelevant as the TCMB has weak (if any) institutional independence.”

Karahan “will still have to operate within the boundaries of a central bank that is neither independent nor staffed by adequate professionals,” Piccoli added. CNBC has reached out to the Turkish central bank for comment.

Investor confidence in Turkey improved over the roughly eight-month tenure of Hafize Erkan, who became Turkey’s first-ever female central bank governor in June of 2023. She tendered her resignation on Friday in a surprise announcement, saying that the decision was due to a “reputation assassination” campaign and the need to protect her family.

Erkan, like Karahan, also has a resume featuring elite American institutions; she has a PhD in financial engineering from Princeton and degrees from both Harvard and Stanford’s business schools, and later worked at Goldman Sachs and First Republic Bank, the latter for which she served as co-CEO. She also served on the board of directors for Tiffany & Co., and was appointed director of Marsh McLennan, a professional services company and Fortune 500 firm.

Turkey's inflation sees biggest monthly jump since August, nears 65% year-on-year

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A tram passes shoppers as it travels along Istiklal Street in the Beyoglu district of Istanbul, Turkey, on Tuesday, Dec. 19, 2023.

Bloomberg | Bloomberg | Getty Images

In January, Turkish inflation logged its biggest monthly jump since August with a 6.7% rise from December, while year-on-year inflation hit nearly 65%, according to the Turkish Central Bank’s figures released Monday.

The consumer price index (CPI) for the country of 85 million people increased by 64.86% annually, up slightly from the 64.77% of December. Sectors with the largest monthly price rises were health at 17.7%, hotels, cafes and restaurants at 12%, and miscellaneous goods and services at just over 10%. Clothing and footwear was the only sector showing a monthly price decrease, with -1.61%.

Food, beverages and tobacco, as well as transportation, all increased between roughly 5% and 7% month-on-month, while housing was up 7.4% since December.

The monthly rises, economists say, stem from a significant increase to the minimum wage that Turkey’s government mandated for 2024. The minimum wage for the year has increased to 17,002 Turkish lira ($556.50) per month, a 100% hike from January 2023.

Turkey’s central bank has been on a prolonged mission to bring down inflation, implementing eight consecutive interest rate hikes since May 2023, for a cumulative 3,650 basis points. The bank’s latest hike, on Jan. 25, raised the key interest rate by 250 basis points to 45%.

The more conventional approach follows several years of unorthodox policy during which Ankara refused to tighten rates despite ballooning inflation. The lira is down 38% against the dollar year to date and has lost more than 80% of its value against the greenback over the last five years. 

The latest inflation print comes just days after Turkey’s Central Bank Governor Hafize Gaye Erkan announced her resignation, saying on Friday that the decision was due to a “reputation assassination” campaign and the need to protect her family.

Erkan became the bank’s central governor by presidential decree in June of 2023, and led — along with Turkish Finance Minister Mehmet Simek — the turnaround in Turkey’s monetary policy and subsequent series of interest rate rises.

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

She was replaced on Saturday by the central bank’s deputy governor, Fatih Karahan, who spent nearly a decade as an economist at the Federal Reserve Bank of New York.

January’s inflation figures “highlight the continued strength of services inflation and may put pressure on new central bank governor Karaham to restart the central bank’s tightening cycle,” Liam Peach, senior emerging markets economist at London-based Capital Economics, wrote in a research note.

“The fact that inflation didn’t rise significantly more than expected in January is positive given the uncertainty about the impact of the minimum wage hike,” Peach wrote. “But the figures present a small setback to the disinflation process and highlight the continued strength of services inflation. For now, the central bank’s end-year inflation forecast of 36% remains intact.”  

The unemployment rate of Black men rose in January, underscoring continued inequality in labor market

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Black men lost ground in the workforce last month, marking a continuation of the disparities that have permeated the U.S. labor market.

Black males who were at least 20 years old saw an unemployment rate of 5.3% in January, up from 4.6% in December, according to seasonally adjusted data from the Labor Department. These workers had the highest unemployment rate when breaking down Black, Hispanic and white workers by gender.

By comparison, white men saw a jobless rate of just 3.3% in January, holding steady from December. The overall unemployment rate was unchanged from December at 3.7%.

Meanwhile, the Black community as a whole was the only tracked racial group to see unemployment increase from December. This underscores the impact of job losses among Black men, especially considering the fact that the rate for Black women was unchanged between December and January at 4.8%.

Though the uptick in the unemployment rate for Black men is something to monitor, it can be more indicative of an anomaly in December’s low data, said Elise Gould, senior economist at the Economic Policy Institute. January’s 5.3% rate comes basically in line with the average 2023 month, while December’s 4.6% was the lowest level seen in the year.

The tight labor market experienced during the pandemic helped close the gap in work-related opportunities among Black and white men, she said. Indeed, the difference in unemployment rates between Black and white men shrunk to 2 percentage points in January from 4.1 percentage points the same month in 2019.

Growth in the total number of employed Black men and the ratio of those with jobs to the total population compared with the start of 2023 also paints a picture of improvement, she added.

But Gould said the continued inequity in employment and pay highlights the need for further social progress, while bolstering the argument that a strong labor market alone won’t bring equality.

The average white worker aged 16 or older had a median weekly pay that was nearly 20% higher than their Black counterparts, according to federal data as of the last quarter of 2023. That disparity grew to almost 25% when looking at male workers alone.

“A better economy absolutely can help historically disadvantaged groups more because they’re the ones that are often left out and are slow to recover in weaker times,” Gould said. “Full employment is definitely sort of a requirement for many historically marginalized groups to be able to see positive impact in the labor market, but it’s not the only thing.”

She pointed to unions as one example of a positive force for Black workers, noting that the wage transparency among members can help close any racial pay gaps.

‘A canary in the coal mine’

When combining genders, the unemployment rates of white and Asian workers ticked lower in January to levels last seen in late fall. The rate of unemployed Hispanics held steady from December at 5%, while the share of jobless Black workers inched higher to 5.3% from 5.2%.

Gould warned that month-to-month variations like what was seen in the unemployment rate of Black men can be fickle. Because of this, she said it’s important to evaluate longer-term trends before drawing conclusions.

Still, Gould said following employment patterns among Black workers and other marginalized groups can be important for spotting major economic trends. That’s true even when broader employment data like what was released on Friday signals a “hot” labor market, she added.

“It’s a canary in the coal mine,” she said. “When you’re thinking about where you’re going to see the signs of a recession, you’re not seeing it in the data today, but it’s always something to keep an eye on.”

— CNBC’s Gabriel Cortes contributed reporting.

U.S. economy added 353,000 jobs in January, much better than expected

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Job growth posted a surprisingly strong increase in January, demonstrating again that the U.S. labor market is solid and poised to support broader economic growth.

Nonfarm payrolls expanded by 353,000 for the month, much better than the Dow Jones estimate for 185,000, the Labor Department’s Bureau of Labor Statistics reported Friday. The unemployment rate held at 3.7%, against the estimate for 3.8%.

Wage growth also showed strength, as average hourly earnings increased 0.6%, double the monthly estimate. On a year-over-year basis, wages jumped 4.5%, well above the 4.1% forecast. The wage gains came amid a decline in average hours worked, down to 34.1, or 0.2 hour lower for the month.

Job growth was widespread on the month, led by professional and business services with 74,000. Other significant contributors included health care (70,000), retail trade (45,000), government (36,000), social assistance (30,000) and manufacturing (23,000).

“This just reaffirms that the jobs market is entering 2024 on solid ground,” said Daniel Zhao, lead economist at Glassdoor. “The fact that job growth was so widespread across industries is a healthy sign. Coming into today’s report, we were concerned about how concentrated jobs were in really just three sectors — health care, education and government. While it is great to see those sectors drive job gains, there was no guarantee that would be enough to support a health labor market.”

The report also indicated that December’s job gains were much better than originally reported. The month posted a gain of 333,000, which was an upward revision of 117,000 from the initial estimate. November also was revised up, to 182,000, or 9,000 higher than the last estimate.

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While the report demonstrated the resilience of the U.S. economy, it also could raise questions about how soon the Federal Reserve will be able to lower interest rates.

“Make no mistake, this was a blowout jobs report and will vindicate the recent posturing by the Fed which effectively ruled out an interest rate cut in March,” said George Mateyo, chief investment officer at Key Private Bank. “Moreover, strong job gains combined with faster than expected wage gains may suggest an additional delay in rate cuts for 2024 and should cause some market participants to recalibrate their thinking.”

Futures markets shifted after the report, with traders now pricing in a better than 80% chance that the Fed does not cut interest rates at its March meeting, according to the CME Group.

Stocks were mixed following the report. The Dow Jones Industrial Average dropped at the open but the S&P 500 and Nasdaq both were positive. Treasury yields surged.

The January payrolls count comes with economists and policymakers closely watching employment figures for direction on the larger economy. Some high-profile layoffs recently have raised questions about the durability of what has been a powerful trend in hiring.

A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons edged higher to 7.2%. The household survey, which measures the number of people actually holding jobs, differed sharply from the establishment survey, showing a decline of 31,000 on the month. The labor force participation rate was unchanged at 62.5%.

Broader layoff numbers, such as the Labor Department’s weekly report on initial jobless claims, show companies hesitant to part with workers in such a tight labor market. Gross domestic product growth also has defied expectations.

The fourth quarter saw GDP increase at a strong 3.3% annualized pace, closing out a year in which the economy defied widespread predictions for a recession. Growth in 2023 came even as the Fed further raised interest rates in its quest to bring down inflation.

The Atlanta Fed’s GDPNow tracker is pointing toward a 4.2% gain in the first quarter of 2024, albeit with limited data of where things are heading for the first three months of the year.

The economic, employment and inflation dynamics make for a complicated picture as the Fed seeks to ease monetary policy. Earlier this week, the Fed again held benchmark short-term borrowing costs steady and indicated that rate cuts could be ahead but not until inflation shows further signs of cooling.

No one predicted a jobs report like this, says National Urban League’s Marc Morial

Chair Jerome Powell indicated in his post-meeting news conference that the central bank does not have a “growth mandate” and said central bankers remain concerned about the impact that high inflation is having on consumers, particularly those on the lower end of the income scale.

Outside of the wage numbers, recent data is showing that inflation is moving in the right direction.

Core inflation as measured by personal consumption expenditures prices was just 2.9% in December on a year-over-year basis, while six- and three-month gauges both indicated the Fed is at or around its 2% goal.

Still, the Atlanta Fed’s measure of “sticky” inflation, which focuses on items such as housing, medical care services and insurance costs, was at 4.6% on a 12-month basis in December.

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January hiring was the lowest for the month on record as layoffs surged

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A UPS driver makes a delivery on January 30, 2024 in Miami Beach, Florida. 

Joe Raedle | Getty Images

Companies announced the highest level of job cuts in January since early 2023, a potential trouble spot for a labor market that will be in sharp focus this year, according to a report Thursday from Challenger, Gray & Christmas.

The job outplacement firm said planned layoffs totaled 82,307 for the month, a jump of 136% from December though still down 20% from the same period a year ago.

It was the second-highest layoff total and the lowest planned hiring level for the month of January in data going back to 2009.

Technology and finance were the hardest-hit sectors, with high-flying Silicon Valley leaders such as Microsoft, Alphabet and PayPal announcing workforce cuts to start the year. Amazon also said it would be cutting as did UPS in the biggest month for layoffs since March 2023.

“Waves of layoff announcements hit US-based companies in January after a quiet fourth quarter,” said Andrew Challenger, senior vice president of the firm. The cuts were “driven by broader economic trends and a strategic shift towards increased automation and AI adoption in various sectors, though in most cases, companies point to cost-cutting as the main driver for layoffs,”

Financial sector layoffs totaled 23,238, the worst month for the sector since September 2018. Tech layoffs totaled 15,806, the highest since May 2023. Food producers announced 6,656, the highest since November 2012.

“High costs and advancing automation technology are reshaping the food production industry. Additionally, climate change and immigration policies are influencing labor dynamics and operational challenges in this sector,” Challenger said.

The report follows news Wednesday from ADP that private payrolls increased by just 107,000 for the month. On Friday, the Labor Department will be releasing its nonfarm payrolls count, which is expected to show growth of 185,000.

Initial jobless claims totaled 224,000 for the week ended Jan. 27, up 9,000 from the previous week. Continuing claims, which run a week behind, jumped by 70,000, the Labor Department reported Thursday.

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Euro zone inflation eases as expected, but core figures disappoint

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Patrons at sidewalk tables of Janis bar in Cais do Sodre in Lisbon, Portugal.

Horacio Villalobos | Corbis News | Getty Images

Euro zone headline inflation eased slightly in January, flash figures published by the European Union’s statistics agency showed on Thursday, while core figures declined less than expected.

Annual headline price rises came in at 2.8%, in line with a forecast of economists polled by Reuters. Inflation stood at 2.9% in December, up from 2.4% in November, largely due to the wind-down of energy price support measures.

Core inflation dipped to 3.3% in January from 3.4% in December. A Reuters forecast indicated a fall to 3.2% for last month.

By sector, services inflation — an important gauge for policymakers due to its link to domestic wage pressures — held steady at 4%. Disinflationary effects from the energy market continued to reduce, from -6.7% to -6.3%.

Economic growth has been stagnating in the bloc.

Preliminary figures out earlier this week showed inflation in Germany easing slightly more than had been forecast, reaching 3.1%. The euro zone’s biggest economy has become one of its main drags on growth, with the German GDP contracting by 0.3% in the fourth quarter.

European Central Bank officials are monitoring a host of data to see if and when they can begin bringing interest rates down from their current record highs. Price rises have cooled significantly from a peak of 10.6% in October 2022, with the central bank’s 2% target coming into sight.

While markets continue to price in cuts starting in April, some policymakers have pushed back with suggestions that declines are likelier to take place in the summer or even later. The ECB stresses it remains data-dependent.

At last week’s monetary policy meeting, when interest rates were left unchanged, ECB President Christine Lagarde said that the “disinflation process is at work” despite the December uptick.

Kamil Kovar, senior economist at Moody’s Analytics, said the figures presented a “mixed bag.”

“The decline to 2.8% was welcome news, especially relative to ECB projections that were for an increase in the inflation rate. But it was driven by a downside surprise in energy, which is all the more shocking given the end of government interventions,” Kovar said in emailed comments.

“However, core inflation only inched lower, with services especially coming in quite hot. While some of this hot reading is explained by regular annual re-pricing and a change in weights, it nevertheless makes a March rate cut a pipe dream, and raises [the] bar for a cut in April. A cut in June remains our baseline forecast.”

Private payroll growth slowed to just 107,000 in January, below expectations, ADP reports

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Private payroll growth declined sharply in January, a possible sign that the U.S. labor market is heading for a slowdown this year, ADP reported Wednesday.

Companies added 107,000 workers in the first month of 2024, off from the downwardly revised 158,000 in December and below the Dow Jones estimate for 150,000, according to the payrolls processing firm.

Only one sector — information services (-9,000) — reported a decline, but hiring was slow across virtually all sectors.

Leisure and hospitality posted the biggest increase, with an addition of 28,000 workers, while trade, transportation and utilities added 23,000, and construction rose by 22,000. Services-providing companies were responsible for 77,000 jobs, with goods producers adding the rest.

The release comes two days ahead of the Labor Department’s nonfarm payrolls report, which is expected to show growth of 185,000, against the 216,000 increase in December. While the ADP data can provide a barometer for private sector hiring, the two reports often differ, with ADP often undershooting the Labor Department’s numbers.

On wage gains, ADP reported a 5.2% annual rise, a number that has run above the government’s measure of average hourly earnings.

“Wages adjusted for inflation have improved over the past six months, and the economy looks like it’s headed toward a soft landing in the U.S. and globally,” said ADP’s chief economist, Nela Richardson.

Midsize establishments, with between 50 and 499 employees, led job creation, adding 61,000. Small business added just 25,000.

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IMF warns British government against more tax cuts

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British Finance Minister Jeremy Hunt said earlier this month the U.K. would not enter a recession this year.

Hannah Mckay | Reuters

LONDON — The U.K. government should not introduce further tax cuts this year, the International Monetary Fund said Tuesday, as its chief economist argued the national budget needed the money for public services and growth-friendly investments.

“What we are seeing in the U.K. and a number of other countries is a need to put in place medium-term fiscal plans that will accommodate a significant increase in spending pressures,” Pierre-Olivier Gourinchas said during a press briefing.

In the U.K., he said, this included spending on the National Health Service, social care, education and the climate transition, as well as measures to boost growth, while preventing debt levels from increasing.

“In that context, we would advise against further discretionary tax cuts, as envisioned or discussed now,” he said.

An IMF spokesperson separately said the U.K. had higher spending needs across public services and investments than were currently reflected in the government’s budget plans. The IMF has recommended the U.K. strengthens taxes on carbon emissions and property, eliminates loopholes in wealth and income taxation, and reforms rules which set pension levels.

British Finance Minister Jeremy Hunt will announce his latest budget in early March, in what may be the last major fiscal announcement before a General Election is held. The timing of the vote is uncertain, but it must be called by the Conservative government at some point this year.

The Conservatives face an uphill battle, with the opposition Labour party ahead in most polls.

Hunt announced several tax cuts in his fall budget, and made several suggestions he wants to introduce more in the spring.

U.K. public sector net borrowing has fallen sharply, and in December 2023 was around half that of the prior year due to higher VAT (a sales levy) and income tax receipts and lower spending.

The IMF on Tuesday forecast 0.6% growth for the U.K. economy this year, up slightly from an estimated 0.5% figure for 2023. It revised its forecast for 2025 lower by 0.4 percentage points, to 1.6%, when it said disinflation will ease financial conditionals and allow real incomes to recover.

The downgrade, it said, “reflects reduced scope for growth to catch up in light of recent upward statistical revisions to the level of output through the pandemic period.”

Gourinchas told CNBC on Tuesday that despite a weak growth outlook for the year, the U.K. had seen positive news on inflation, which is forecast to average 2.8%.

“We’re at that point, we think, that the Bank of England will be in a position like the Federal Reserve and [European Central Bank] to ease policy rates as inflation is finally brought towards target,” he said.

IMF upgrades global growth forecast, citing U.S. resilience and policy support in China

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Buildings in Pudong’s Lujiazui Financial District in Shanghai, China, on Monday, Jan. 29, 2024. 

Bloomberg | Bloomberg | Getty Images

The International Monetary Fund on Tuesday nudged its global growth forecast higher, citing the unexpected strength of the U.S. economy and fiscal support measures in China.

It now sees global growth in 2024 at 3.1%, up 0.2 percentage points from its prior October projection, followed by 3.2% expansion in 2025.

Large emerging market economies including Brazil, India and Russia have also performed better than previously thought.

The IMF believes there is now a reduced likelihood of a so-called “hard landing,” an economic contraction following a period of strong growth, despite new risks from commodity price spikes and supply chain issues due to geopolitical volatility in the Middle East.

It forecasts growth this year of 2.1% in the U.S., 0.9% in both the euro zone and Japan, and 0.6% in the United Kingdom.

“What we’ve seen is a very resilient global economy in the second half of last year, and that’s going to carry over into 2024,” the IMF’s chief economist, Pierre-Olivier Gourinchas, told CNBC’s Karen Tso on Tuesday.

“This is a combination of strong demand in some of these countries, private consumption, government spending. But also, and this is quite important in the current context, a supply component as well … So very strong labor markets, supply chain frictions that have been easing, and the decline in energy and commodity prices.”

The latest official figures showed the U.S. economy tearing past economists’ expectations in the fourth quarter, with growth of 3.3%.

China has faced a host of issues over the last year, including a disappointing rebound in post-pandemic spending, concerns over deflation and an ongoing property sector crisis. The government has rolled out a host of stimulus measures in response, contributing to the IMF’s upgrade.

However, the IMF’s forecasts remain below the global growth average between 2000 and 2019 of 3.8%. Higher interest rates, the withdrawal of some fiscal support programs and low productivity growth continue to weigh, the institution said.

IMF chief: China needs reforms to halt 'significant' growth declines

But restrictive monetary policy has led to inflation falling faster than expected in most regions, which Gourinchas called the “other piece of good news” in Tuesday’s report. The IMF sees global inflation at 5.8% in 2024 and 4.4% in 2025. In advanced economies, that falls to 2.6% this year and 2% next year.

“The battle against inflation is being won, and we have a higher likelihood of a soft landing. So that sets the stage for central banks, the Federal Reserve, the European Central Bank, the Bank of England, and others, to start easing their policy rates, once we know for sure that we are on that path,” Gourinchas said.

“The projection right now is that central banks are going to be waiting to get a little bit more data, they are going meeting by meeting, they are data dependent, confirming that we are on that path. That’s the baseline. And then if we are, then by the second half of the year we’ll see rate cuts,” he continued.

While central banks must not ease too early, there is also a risk coming into sight of policy remaining too tight for too long which would slow growth and bring inflation below 2% in advanced economies, Gourinchas added.

Euro zone economy narrowly skirts recession, stagnates in fourth quarter

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Cargo trains stand on the railway tracks at a transshipment station in Frankfurt am Main, western Germany, as in background can be seen the city’s skyline, on January 23, 2024.

Kirill Kudryavtsev | Afp | Getty Images

The euro zone economy stabilized in the fourth quarter of 2023, flash figures published by the European Union’s statistics agency showed on Tuesday.

The bloc narrowly avoided the shallow recession that was forecast in a Reuters poll of economists, following a 0.1% fall in GDP in the third quarter.

The euro zone’s seasonally-adjusted GDP was flat compared with the previous quarter and expanded by 0.1% versus the previous year. In a preliminary estimate, the euro area was seen posting 0.5% growth over the whole of 2023.

Its biggest economy, Germany, posted a 0.3% contraction in the final quarter of the year, according to figures also out on Tuesday. The country narrowly skirted a technical recession due to an upwards revision to its reading for the third quarter, when the economy stagnated.

The French economy was steady in the fourth quarter, while Spain outperformed forecasts to expand by 0.6%.

The European Commission’s euro zone sentiment indicator meanwhile showed a decline in consumer confidence — though the outlook for businesses in services and industrials was slightly brighter.

The euro zone economy is in a “phase of prolonged weakness” that is being driven by Germany, while southern European economies lead the way in growth, Bert Colijn, senior economist at ING, said in a note.

“Germany is struggling with weak global demand for goods and heavy industry is suffering from higher energy prices,” he said.

The euro zone’s divergence from the U.S. is growing, he added, partly explained by a larger decline in inflation-adjusted wages, energy prices hitting industrials, and lower levels of fiscal support.

The euro continued to log narrow losses against the U.S. dollar following the fresh Tuesday data, also posting tight gains against the British pound. The U.S. economy smashed expectations for the end of the year, expanding by 3.3% in the fourth quarter. U.K. figures are due out in the middle of February.

The European Central Bank has hauled interest rates to a record high over the last year and a half, creating tighter financial conditions across the region which have helped cool inflation from a peak of 10.6% in October 2022 to 2.9% in December. The latest euro zone inflation flash figures are due Thursday.

Fed's favorite inflation gauge rose 0.2% in December and was up 2.9% from a year ago

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People walk by sale signs in the Financial District on the first day back for the New York Stock Exchange (NYSE) since the Christmas holiday on December 26, 2023 in New York City.

Spencer Platt | Getty Images

An important inflation gauge released Friday showed that the rate of price increases cooled as 2023 came to a close.

The Commerce Department’s personal consumption expenditures price index for December, an important gauge for the Federal Reserve, increased 0.2% on the month and was up 2.9% on a yearly basis, excluding food and energy. Economists surveyed by Dow Jones had been looking for respective increases of 0.2% and 3%.

On a monthly basis, core inflation increased from 0.1% in November. However, the annual rate declined from 3.2%.

Including volatile food and energy costs, headline inflation also rose 0.2% for the month and held steady at 2.6% annually.

The release adds to evidence that inflation, while still elevated, is continuing to make progress lower, possibly giving the Fed a green light to start cutting interest rates later this year. The central bank targets 2% as a healthy annual inflation rate.

Markets took little notice of the data, with stock futures indicating little change at the open and Treasury yields mostly lower.

As inflation drifted closer to the Fed’s target, consumer spending increased 0.7%, stronger than the 0.5% estimate. Personal income growth edged lower to 0.3%, in line with the forecast.

Within the inflation numbers, prices for goods declined by 0.2% while services prices rose by 0.3%, reversing a trend when inflation began to spike. As the pandemic forced people to stay home more, demand for goods spiked, adding to supply chain problems and exacerbating price increases.

Food prices increased 0.1% on the month while energy goods and services rose 0.3%. Prices for longer-lasting durable goods such as appliances, computers and vehicles decreased 0.4%.

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Turkey hikes interest rate again to 45% after inflation nears 65%

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Residents waiting at a bus stop under a large Turkish flag in Istanbul, Turkey, on Sunday, April 30, 2023.

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Turkey’s central bank on Thursday hiked its key interest rate by another 250 basis points to 45%.

The hike to the benchmark one-week repo rate was in line with economists’ expectations.

It comes amid an ongoing battle against double-digit inflation for Turkey’s monetary policymakers, with the rate hike the latest step in that effort.

Inflation in Turkey increased to 64.8% year-on-year in December, up from 62% in November, and the country’s currency, the lira, hit a new record low against the U.S. dollar earlier in January, breaking 30 to the greenback for the first time.

Analysts predict this will be the last hike for some time, especially with local elections approaching in March.

“Encouragingly, the communications were relatively hawkish and suggest that policymakers recognise the need to keep interest rates high for a prolonged period if they are to have success in bringing inflation back down to single digits,” Liam Peach, senior emerging markets economist at London-based firm Capital Economics wrote in a note. “Our baseline view remains that the central bank will keep rates unchanged throughout this year.”

The Central Bank of the Republic of Turkey itself signaled that this was likely the end of the tightening cycle, saying of its decision: “The monetary tightness required to establish the disinflation course is achieved … The current level of the policy rate will be maintained until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range.”

The central bank’s move is the latest in a series of interest rate increases — now eight consecutive hikes since the May 2023 elections — that have been painful for Turks, as the country grapples with a dramatically weakened currency and skyrocketing living costs.

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

The last several years of high inflation are in large part the result of stubbornly loose monetary policy by the Ankara government. The lira is down 38% against the dollar year to date and has lost more than 80% of its value against the greenback over the last five years. 

A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under the supervision of Turkish Central Bank governor Hafize Erkan. The country’s benchmark interest rate has since been lifted from 8.5% to 45%. 

Still, some observers still don’t believe it’s enough to effectively bring down inflation.

Capital Economics expects Turkey’s inflation to drop “towards 30-35% by year-end” from 65% now, while Bartosz Sawicki, a market analyst at Conotoxia Fintech, sees it hitting close to 75% in May before starting to fall.

“The cumulative tightening of 3650 basis points may not be enough to decisively tame Turkey’s long-standing inflation problem,” Sawicki said, which he described as being caused by “a vicious mix of loose monetary policy, deep negative real interest rates and persistent lira weakness.”

Broadly, analysts expect the central bank to hold rates for the rest of the year — and no rate cuts anytime soon.

“Inflation and inflation expectations will need to have fallen a long way before the central bank starts to cut interest rates,” Peach wrote.

ECB's Lagarde responds to scathing staff survey: 'I'm very proud and honored to lead the institution'

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European Central Bank President Christine Lagarde looks on as she attends the European Parliament’s Committee on Economic and Monetary Affairs, at the European Parliament, in Brussels, Belgium September 25, 2023. 

Yves Herman | Reuters

President Christine Lagarde on Thursday said she was “proud and honored” to leead the European Central Bank, after her leadership was slammed in a union-run survey of staff.

She was responding to a question about the findings, published by ECB union IPSO earlier this week, in which more than half of respondents rated her performance so far as “very poor” or “poor.”

The survey’s qualitative responses suggested some staff believed she had created a negative atmosphere at the central bank, and that she spends “too much time on topics unrelated to monetary policy,” IPSO said.

Appearing unfazed, former politician and lawyer Lagarde said that the ECB conducted its own surveys in a “way that we can trust.” These showed a majority of respondents say they are happy to work at the institution, would recommend working there to a friend, and felt a mission associated to their work.

The surveys are conducted by around 60% of employees, and also cover wages, respect in the workplace and workplace satisfaction, she said.

“We pay great attention to these technically sound responses and we act upon them, and we will continue to do so. What keeps me going is those answers,” Lagarde told reporters in a briefing following the ECB’s January monetary policy meeting.

“And I’m extremely proud of the staff of the ECB, and I’m very proud and honored to lead the institution, because we are driven by mission. Delivering price stability, but serving the Europeans, and we will continue doing that,” she continued.

IPSO’s survey was completed by around 1,100 people. The ECB has more than 5,000 employees and trainees.

The union said the responses “generally” described Lagarde as being “an autocratic leader” who does not necessarily act according to the values she proclaims.

She was rated significantly more poorly than her predecessors Jean-Claude Trichet and Mario Draghi, it said.

An ECB spokesperson called the survey “flawed” and said it included topics that were not specific to the presidency and outside of IPSO’s remit. They also said it could have been filled out multiple times by the same person.

—CNBC’s SiIvia Amaro contributed to this article.

The U.S. economy grew at a 3.3% pace in the fourth quarter, much better than expected

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The economy grew much more rapid pace than expected in the final three months of 2023, as the U.S. easily skirted a recession that many forecasters had thought was inevitable, the Commerce Department reported Thursday.

Gross domestic product, a measure of all the goods and services produced, increased at a 3.3% annualized rate in the fourth quarter of 2023, according to data adjusted seasonally and for inflation.

That compared to the Wall Street consensus estimate for a gain of 2% in the final three months of the year. The third quarter grew at a 4.9% pace.

The U.S. economy for all of 2023 accelerated at a 2.5% annualized pace, well ahead of the Wall Street outlook at the beginning of the year for few if any gains.

As had been the case through the year, a strong pace of consumer spending helped drive the expansion. Personal consumption expenditures increased 2.8% for the quarter, down just slightly from the previous period.

State and local government spending also contributed, up 3.7%, as did a 2.5% increase in federal government expenditures. Gross private domestic investment rose 2.1%, another significant factor for the robust quarter.

On the inflation front, the price index for personal consumption expenditures rose 2.7%, down from 5.9% a year ago, while the core figure excluding food and energy posted a 3.2% increase, compared to 5.1%. However, the inflation rates both were

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Thursday's GDP report expected to show the U.S. economy at a crossroads

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Consumers shop in Rosemead, California, on Dec. 12, 2023.

Frederic J. Brown | Afp | Getty Images

Economic growth likely slowed to its weakest pace in a year and a half to end 2023, possibly setting the stage for a more pronounced slowdown ahead, according to Wall Street economists.

The consensus outlook for the fourth quarter is that gross domestic product grew at a 2% seasonally adjusted annualized pace, sliding downward from the 4.9% in Q3 and the lowest reading since the 0.6% decline in the second quarter of 2022.

As the U.S. Department of Commerce’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.

The report likely will “represent a sharp deceleration” from the previous period, Bank of America economist Shruti Mishra said in a client note. “Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets.”

BofA has a below-consensus view that GDP — the sum of all goods and services produced during the period — will slow to a 1.5% pace, largely because parts of the economy not directly related to consumer spending, such as nonresidential business fixed investment and housing, will tail off.

In addition, the bank expects a slowdown in inventory restocking to shave close to a full percentage point off the headline number.

Looking forward, BofA forecasts the first quarter of 2024 to show growth of just 1%.

“Consumer spending is likely to slow from its current pace due to lagged effects from tighter financial conditions, higher energy prices, and cooling labor market,” Mishra said.

Elsewhere on Wall Street, expectations are mixed.

Goldman Sachs earlier this week lifted its Q4 estimate to 2.1%, an increase of 0.3 percentage points, taking its full-year GDP outlook to 2.8%. One significant factor Goldman sees is stronger-than-expected state and local government spending, which boosted Q3 growth by nearly a full percentage point and is predicted to show a 4.5% increase in the final three months of the year.

The bank’s economists also see growth holding up fairly well in 2024, ending the year at 2.1%.

Two other key elements will take the focus as investors digest the GDP report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation, specifically how the Federal Reserve might react to personal consumption prices that come out of Thursday’s report as well as a separate Commerce Department release Friday.

“We do expect the economy to slow … further in 2024 as the impact of monetary tightening continues to weigh on economic activities,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to hit a recession.”

RSM expects the GDP report to show a 2.4% gain on solid growth in consumer spending, though some economists say December’s larger-than-expected retail sales increase was fueled by seasonal distortions in the data that will be corrected in January.

Citigroup agrees with the consensus call of 2% growth in Q4 but sees tougher times ahead, mainly because of the lagged effect the Fed’s previous rate cuts will exert, as well as inflation that could turn out to be more durable than anticipated.

“Data released [Thursday] may in retrospect turn out to document the one quarter of true ‘Goldilocks’ conditions,” Citi economist Andrew Hollenhorst wrote. “But we do not share the market and Fed’s sanguine assessment of the macroeconomy over the remainder of the year.”

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No 'economic collapse': Top Citi strategist says healthier economic growth is coming

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Jim Dyson | Getty Images News | Getty Images

The global economy does not need a “collapse” in order to bring inflation back to target and return to sustainable growth, according to Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth.

Major economies have proven surprisingly resilient to sharp interest rate increases from central banks over the last two years. This has been particularly evident in the U.S., with a recession thus far avoided and the labor market remaining robust.

Talk has now turned to rate cuts as inflation remains on a downward trajectory toward central banks’ targets, while growth has slowed.

Wieting told CNBC’s “Squawk Box Europe” on Monday that he is optimistic the global economy does not need an “economic collapse” to rein in inflation.

“We had one massive shock — one pandemic, one collapse. We didn’t need two recessions to ultimately cure our inflation problem,” he said.

“It’s holding down parts of our economy now — manufacturing and trade declines are happening around the world — but these are likely to bottom within the year.”

U.S. headline inflation came in at an annual 3.4% year on year in December, remaining above the Federal Reserve’s 2% target but down considerably from a peak of 9.1% in June 2022.

Investors will be closely watching Friday’s personal consumption expenditure inflation figure, the Fed’s preferred metric, for further clues as to when the central bank will begin cutting rates.

Meanwhile, a preliminary estimate of fourth-quarter GDP is scheduled for Thursday, with the economy expected to have grown by 1.7%, its lowest rate since the 0.6% decline in the second quarter of 2022.

“This period of slower global growth and slowing employment growth in the United States we think can pass and lead to a healthier growth period if we take a look particularly at the next year and beyond, and that’s this year’s business for investors,” Wieting said.

He highlighted that while there is excess supply that needs to be worked out of the economy, this was not the result of a “true overheating” or prolonged “boom,” but instead of excess government fiscal stimulus related to the pandemic recovery that wasn’t going to be repeated.

“If you take a look at money supply in the United States, it declined 4% over the past year. Take a look at the 1970s, it was almost 10% growth for the entire decade, import prices surging 14% every single year — that’s sustained inflation,” Wieting said.

“This story with just all of this government spending coming and going — upheaval in supply and demand, consumer spending going up or down 30% between goods and services, during the pandemic period — that’s not the environment we’re in any longer.”

Correction: “Take a look at the 1970s, it was almost 10% growth for the entire decade, import prices surging 14% every single year — that’s sustained inflation,” Wieting said. An earlier version misstated the quote.

'It's really bad': China strategist warns of deflation and rock-bottom consumer confidence

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BEIJNG, CHINA – NOVEMBER 13: Illuminated skyscrapers stand at the central business district at sunset on November 13, 2023 in Beijing, China. (Photo by Gao Zehong/VCG via Getty Images)

Vcg | Visual China Group | Getty Images

Deflation may soon start biting into Chinese growth, as Beijing looks at another three to six months of a “very painful economy,” according to one analyst who covers the country.

“This is something investors need to be cautious of. The economy here is bad, it’s pretty … it’s really bad. I’ve been in China for 27 years, and this is probably the lowest confidence I’ve ever seen,” Shaun Rein, founder of the China Market Research Group, told CNBC’s “Squawk Box Europe” on Monday.

“So deflation is starting to wield its ugly head. Consumers are waiting for discounts. They’re very nervous.”

Linked to a decline in the prices of goods and services, deflation is generally associated with an economic slowdown — raising questions over the growth outlook for China, whose post-Covid-19 recovery has already fallen short of some expectations in 2023. In December, depressed prices for pork — which makes up around a fifth of China’s CPI basket — heralded the possible advent of deflation.

“Deflation is a serious issue, I know the Chinese government doesn’t want me saying it, but it’s an issue that we need to be worried about,” Rein stressed. “So I am kind of surprised that they kept the prime rates unchanged. You know, it would have been nice if they had lowered them to try to get some stimulus into the country.”

Earlier on Monday, the People’s Bank of China held its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively, in line with forecasts. These are the pegs for most household and corporate loans in China and are one of many levers that the PBOC usually pulls in an effort to stimulate the economy.

The decision comes amid infectious expectations among investment banks that China’s economy will expand at a more sluggish pace in 2024. Beijing has set an official growth target of 5% this year, with Premier Li Qiang telling the World Economic Forum in Davos, Switzerland, last week that the Chinese economy swelled by a marginally higher 5.2% in 2023.

At the time, Li highlighted that China did not achieve its economic development through “massive stimulus” and “did not seek short-term growth while accumulating long-term risks.” “Rather, we focused on strengthening the internal drivers,” Li said.

Despite this, the International Monetary Fund in November outlined a forecast for China’s growth to slow in 2024 to just 4.6%. In a more recent Jan. 15 report, Moody’s assessed that China’s real GDP growth would hit 4% this year and in 2025, from an average of 6% between 2014 and 2023.

Economic slowdown is widely seen as a potential threat to Xi Jinping, whose Chinese Community Party has cultivated national political legitimacy through rapid growth. China’s status as the world’s second-largest economy has also solidified its international footing, making it and heavyweight energy exporter Russia the epicenter of the BRICS emerging markets group.

Yet Rein says that Beijing may stomach a “slight rough time” as long as the economy retains 5% growth, as the administration focuses on social transformation.

“The Communist Party of China doesn’t necessarily want a restructuring of the economy, they want a reform of society, so it’s a much bigger picture … Which is why I don’t think the government is going to want a major stimulus, so the new normal is going to be 4-5% growth over the next 3-5 years,” he said.

“I think you’re gonna deal with another 3-6 months minimum of a very painful economy, as China restructures, or as China, you know, transforms its economy towards a more slower-growth, fairer society.”

Among the more tremulous sectors of the Chinese economy, Rein identified the country’s once-bloated real estate market, which accounts for roughly a third of China’s economic activity and has been tumbling sharply since Beijing’s broad-stroke crackdown on the debt levels of mainland property developers. Real estate giants Evergrande and Country Garden have become key casualties of the clampdown.

“[Buyers] think housing prices might continue to drop, so even if there’s pent-up demand for housing, a lot of home buyers are telling us, we’re not going to buy this month, we’re not going to buy this quarter, because we’re scared prices are going to drop another couple [of] percent in the coming months,” Rein said Monday.

Such a consumer behavior could compound some expectations that China could take more than 10 years to liquidate the current overhang in its housing inventory.

Two important events this week could determine the future of Fed rate policy

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 19, 2024. 

Brendan Mcdermid | Reuters

Markets have become less convinced that the Federal Reserve is ready to press the button on interest rate cuts, an issue that cuts at the heart of where the economy and stocks are headed.

Two big economic reports coming up this week could go a long way toward determining at least which way the central bank policymakers could lean — and how markets might react to a turn in monetary policy.

Investors will get their first look at the broad picture of fourth-quarter economic growth for 2023 when the Commerce Department releases its initial gross domestic product estimate on Thursday. Economists surveyed by Dow Jones are expecting the total of all goods and services produced in the U.S. economy to grow at a 1.7% pace for the final three months of 2023, which would be the slowest growth since the 0.6% decline in Q2 of 2022.

A day later, the Commerce Department will release the December reading on the personal consumption expenditures price index, a favorite Fed inflation gauge. The consensus expectation for core PCE prices, which exclude the volatile food and energy components, is 0.2% growth for the month and 3% for the full year.

Both data points should garner a lot of attention, particularly the inflation numbers, which have been trending towards the Fed’s 2% goal but aren’t there yet.

“That’s the thing that everybody should be watching to determine what the Fed’s rate path will end up being,” Chicago Fed President Austan Goolsbee said during an interview Friday on CNBC. “It’s not about secret meetings or decisions. It’s fundamentally about the data and what will enable us to become less restrictive if we have clear evidence that we’re on the path to get” inflation back to target.

Lowered rate-cut outlook

The releases come amid a market snapback about where the Fed is heading.

As of Friday afternoon, trading in the fed funds futures market equated to virtually no chance the rate-setting Federal Open Market Committee will cut at its Jan. 30-31 meeting, according to CME Group data as indicated through its FedWatch Tool. That’s nothing new, but the odds for a cut at the March meeting fell to 47.2%, a steep slide from 81% just a week ago.

Along with that, traders have taken one expected cut off the table, reducing the outlook for easing to five quarter percentage point decreases from six previously.

The change in sentiment followed data showing a stronger-than-expected 0.6% growth in consumer spending for December and initial jobless claims falling to their lowest weekly level since September 2022. On top of that, several of Goolsbee’s colleagues, including Governor Christopher Waller, New York Fed President John Williams and Atlanta Fed President Raphael Bostic, issued commentary indicating that at the very least they are in no hurry to cut even if the hikes are probably done.

The bar for the Fed to make massive rate cuts is high, says Franklin Templeton Sonal Desai

“I don’t like tying my hands, and we still have weeks of data,” Goolsbee said. “Let’s take the long view. If we continue to make surprising progress faster than was forecast on inflation, then we have to take that into account in determining the level of restrictiveness.”

Goolsbee noted that one particular area of focus for him will be housing inflation.

The December consumer price index report indicated that shelter inflation, which accounts for about one-third of the weighting in the CPI, rose 6.2% from a year ago, well ahead of a pace consistent with 2% inflation.

However, other measures tell a different story.

A new Labor Department reading known as the New Tenant Rent Index, tells a different story. The index, which measures prices for new leases that tenants sign, showed a 4.6% decline in the fourth quarter of 2023 from a year ago and more than double that quarterly.

Watching the data, and other factors

“In the very near term, we think the inflation data will cooperate with the Fed’s dovish plans,” Citigroup economist Andrew Hollenhorst said in a client note.

However, Citi foresees inflation as stubborn and likely to delay the first cut until at least June.

While it’s unclear how much difference the timing makes, or how important it is if the Fed only cuts four or five times compared to the more ambitious market expectations, market outcomes have seem linked to the expectations for monetary policy.

There are plenty of factors that change the outlook in both directions — a continued rally in the stock market might worry the Fed about more inflation in the pipeline, as could an acceleration in geopolitical tensions and stronger-than-expected economic growth.

“By keeping the potential alive for inflation to turn up, these economic and geopolitical developments could put upward pressure on both short-term rates and long-term yields,” Komal Sri-Kumar, president of Sri-Kumar Global Strategies, said Saturday in his weekly market note.

“Could the Federal Reserve be forced to raise the Federal Funds rate as its next move rather than cut it?” he added. “An intriguing thought. Don’t be surprised if there is more discussion along these lines in coming months.”

American Express CEO says spending is strong, delinquencies are down from 2019

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Stephen Squeri, chair and CEO of American Express, speaks during an Economic Club of New York event in New York on Nov. 10, 2022.

Stephanie Keith | Bloomberg | Getty Images

American Express CEO Stephen Squeri on Friday said the credit card company saw “good consumer spending” during the holidays and signs of strong overall health for U.S. spending.

In particular, delinquency rates were “lower than they were in 2019,” Squeri told CNBC’s Scott Wapner in an interview at the American Express PGA Tour event in La Quinta, California.

“Our customers are high-spending premium customers, and they are continuing to spend,” he said.

The signs of resilient consumer spending run somewhat counter to persistent inflation. December’s consumer price index increased 0.3%, hotter than the 0.2% expected by economists.

But Squeri said he’s not surprised, adding he’s of the opinion that the U.S. is in the middle of a “soft landing,” slowing spending and bringing inflation down — without spurring a recession.

JPMorgan Chase CEO Jamie Dimon said earlier this week that he remains cautious on the U.S. economy, along with Goldman Sachs CEO David Solomon, who said it’s hard to imagine the number of Federal Reserve rate cuts that the market seems to be calling for in 2024.

“I mean look, recessions do happen,” Squeri said Friday. “The nice part about recessions is there’s always a recovery. … We’ll get through whatever we need to get through, and part of that is because of our customer base, and our colleagues that are supporting our customers.”

American Express reports its fourth-quarter earnings Jan 26.

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Consumer sentiment surges while inflation outlook dips, University of Michigan survey shows

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An employer representative at a Veteran Employment and Resource Fair in Long Beach, California, US, on Tuesday, Jan. 9, 2024. The Department of Labor is scheduled to release initial jobless claims figures on January 11. 

Eric Thayer | Bloomberg | Getty Images

Consumers have grown more confident about the direction of the economy and inflation at onset of 2024, despite persistent worries about a looming slowdown, a survey released Friday showed.

The University of Michigan’s Consumer Survey of Consumers showed a reading of 78.8 for January, its highest level since July 2021 and up 21.4% from a year ago. That followed a big jump in December and comes despite public opinion surveys showing concern about the nation’s direction.

On a two-month basis, sentiment showed its largest increase since 1991, said Joanne Hsu, the survey’s director.

“Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” Hsu said. “Democrats and Republicans alike showed their most favorable readings since summer of 2021. Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 and is likely to provide some positive momentum for the economy.”

Along with the improved outlook on general conditions, survey respondents displayed more confidence that inflation is coming down.

The outlook for the inflation rate a year from now declined to 2.9%, down from 3.1% in December for the lowest reading since December 2020. The Federal Reserve has boosted short-term interest rates to their highest level in more than 22 years and inflation has followed suit lower, though it remains above the central bank’s 2% target.

At the same time, the survey’s index of current conditions also leaped higher, rising to 83.3, or 21.6% higher than a year ago.

Consumer sentiment has improved amid a drop in gasoline prices and solid stock market gains. The price at the pump for a gallon of regular gas is about 30 cents lower than it was a year ago, according to AAA, and the S&P 500 is near a record high.

The survey is “another sign that the economy is on track for a soft landing,” said Andrew Hunter, deputy chief economist at Capital Economics. However, he noted that such surveys don’t always feed through to consumer behavior.

Stocks rose slightly following the release while Treasury yields also were higher.

Market have been tethered to expectations for where the Fed will take interest rates this year. The prevailing outlook is for a series of up to six quarter percentage point cuts this year. But the timing of those cuts is unclear, with market pricing now pointing to a tossup as to whether the Fed eases in March or waits until May.

Grim retail sales suggest possible recession for Britain

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Shoppers walk past shops on Regent Street on the final weekday before Christmas in London on December 22, 2023. Britain’s economy unexpectedly shrank in the third quarter and flatlined in the previous three months, official data showed Friday, raising fears of a recession before an election due next year. (Photo by HENRY NICHOLLS / AFP) (Photo by HENRY NICHOLLS/AFP via Getty Images)

Henry Nicholls | Afp | Getty Images

U.K. retail sales dropped significantly more than expected in December, in a sign that the economy may have entered a shallow recession in the second half of 2023.

The Office for National Statistics said sales volumes fell by 3.2% during the key trading month, after a 1.4% rise in November. Economists polled by Reuters had expected a fall of just 0.5%.

December marked the largest monthly decline since January 2021, when strict pandemic lockdown measures dampened demand. The ONS said people appeared to have done their Christmas shopping earlier than in previous years.

Volumes were 0.9% lower in the three months to December 2023, compared with the previous quarter.

It comes after U.K. gross domestic product for the third quarter was revised down to a 0.1% contraction, from a prior reading of no growth.

“Today’s release would subtract around 0.15 percentage points from real GDP growth in December, which increases the chances the economy may have ended 2023 in the mildest of mild recessions,” said Alex Kerr, assistant economist at Capital Economics.

Trade body British Retail Consortium said that the figures “capped a difficult year for retailers” and showed Black Friday sales ate into Christmas spending.

Fed's Raphael Bostic expects rate cuts to happen in the third quarter

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Raphael Bostic at Jackson Hole, Wyoming

David A. Grogan | CNBC

Atlanta Federal Reserve President Raphael Bostic expects policymakers to start cutting rates in the third quarter of this year, saying Thursday that inflation is well on its way back to the central bank’s goal.

Bostic, a voting member this year on the rate-setting Federal Open Market Committee, asserted that the goal ahead is to calibrate policy to be not so restrictive as to choke off growth while still acting as a bulwark against persistently elevated prices.

However, he said a “golden path” scenario of tamping down inflation while promoting solid growth and healthy employment is getting closer than many Fed officials had expected.

“Because I’m data dependent, I have incorporated the unexpected progress on inflation and economic activity into my outlook, and thus moved up my projected time to begin normalizing the federal funds rate to the third quarter of this year from the fourth quarter,” Bostic said in prepared remarks for a speech to business leaders in Atlanta.

While the remarks help illuminate a timeline for rate cuts, they also serve as a reminder that Fed officials and market participants have different expectations about policy easing.

Current pricing in the fed funds futures market points to the first cut coming as soon as March, according to the CME Group’s FedWatch measure. The implied probability for a quarter percentage point reduction has decreased in recent days but still stood around 57% Thursday morning. Pricing further indicates a total of six cuts this year, or one at every FOMC meeting but one from March forward.

Bostic said he’s not dead set against cutting earlier than the third quarter, implying a move in July at the earliest, but said the bar will be high.

“If we continue to see a further accumulation of downside surprises in the data, it’s possible for me to get comfortable enough to advocate normalization sooner than the third quarter,” he said. “But the evidence would need to be convincing.”

A number of factors could change the calculus, such as geopolitical conflicts, the ongoing budget battle in Washington and looming presidential election, to name a few that Bostic cited.

Consequently, he advocated caution and said his approach will be “grateful and vigilant.”

“In such an unpredictable environment, it would be unwise to lock in an emphatic approach to monetary policy,” Bostic said. “That is why I believe we should allow events to continue to unfold before beginning the process of normalizing policy.”

Some of the data points he said he will be watching include overall economic growth, inflation readings such as the Commerce Department’s personal consumption expenditures price index and data on job growth and losses.

The Labor Department reported Thursday that initial jobless claims hit their lowest level since September 2022, a sign that the labor market remains tight.

Weekly jobless claims post lowest reading since September 2022

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A networking and hiring event for professionals of color in Minneapolis, MN. 

Michael Siluk | Getty Images

The labor market continued to show surprising resiliency in the early days of 2024, with initial jobless claims posting an unexpected drop last week.

Initial filings for unemployment insurance totaled 187,000 for the week ended Jan. 13, the lowest level since Sept. 24, 2022, the Labor Department reported Thursday. The total marked a 16,000 decline from the previous week and came in below the Dow Jones estimate of 208,000.

Labor strength has persisted despite attempts by the Federal Reserve to slow the economy, and the jobs market in particular, through a series of interest rate hikes. Central bank policymakers have linked the supply-demand mismatch between companies and the available labor pool as an ingredient that had sent inflation to its highest level in more than 40 years.

Along with the drop in weekly claims came an unexpected decline of 26,000 in continuing claims, which run a week behind. The total for continuing claims hit 1.806 million, below the FactSet estimate for 1.83 million.

“Employers may be adding fewer workers monthly, but they are holding onto the ones they have and paying higher wages given the competitive labor market,” said Robert Frick, corporate economist at Navy Federal Credit Union.

In other economic news Thursday, the Philadelphia Fed reported that its manufacturing index registered a reading of -10.6 for January, representing the difference between companies reporting growth against contraction. While the number marked an increase from the -12.8 posted in December, it was still below the Dow Jones estimate of -7.

The Philadelphia Fed gauge showed a decline in unfilled orders, delivery times and inventories. The employment index improved somewhat but was still negative at -1.8 while the prices paid and received measures both eased from December.

A third report Thursday showed some optimism for housing: Building permits totaled 1.495 million, a monthly increase of 1.9% and a bit above the 1.48 million estimate, according to the Commerce Department. However, housing starts totaled 1.46 million, a 4.3% monthly decline but better than the 1.43 million estimate.

The reports come a day after the Fed, in its periodic summary of economic conditions, reported mostly stagnant activity since late November.

According to the central bank’s Beige Book report, the economy broadly showed “little or no change in economic activity” during the period.

On employment, the report did note signs of a “cooling labor market,” with lower wage pressures. On housing, it said high interest rates were limiting activity, though the prospects of future easing from the Fed were raising hopes that the pace could accelerate.

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Retail sales rise 0.6% in December, topping expectations for holiday shopping

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Holiday shopping turned out even better than expected in December as shoppers picked up the pace to close out a strong 2023, the Commerce Department reported Wednesday.

Retail sales increased 0.6% for the month, buoyed by a pickup in clothing and accessory stores as well as online nonstore businesses. The results were better than the 0.4% Dow Jones estimate.

Excluding autos, sales rose 0.4%, which also topped the 0.2% estimate.

The report comes amid speculation about how much strength the U.S. economy possessed heading into the new year, when growth is expected to slow. However, a resilient consumer could signal more momentum and possibly give the Federal Reserve some caution about how to proceed on interest rates.

Stock market futures held negative following the release.

“The Fed was already hammering away on its ‘no rush to cut rates’ message, and today’s stronger-than-expected retail sales won’t give them any reason to change their tune,” said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley.

On a year-over-year basis, retail sales ended 2023 up 5.6%. The numbers are not adjusted for inflation, so sales show that consumers are more than keeping up with an annual inflation rate of 3.4% as measured by the consumer price index. The CPI increased 0.3% in December, also lower than the retail sales increase.

Another measure of retail sales strength that excludes sales from auto dealers, building materials stores, gas stations, office suppliers, mobile homes and tobacco stores rose 0.8% for the month. The Commerce Department uses this so-called control group when computing gross domestic product.

The report showed broad-based strength in sales for the month, though there were a few areas of weakness. Both clothing and accessory stores and online retailers saw 1.5% increases on the month.

“Consumers shunned brick and mortar stores in favor of online shopping,” said Jeffrey Roach, chief economist at LPL Financial. “The behavioral change that happened during the pandemic will likely persist and successful retailers will adjust to this new model.”

Health and personal-care store receipts declined 1.4% and gas stations saw a 1.3% drop as fuel prices eased. Furniture and home furnishing stores sales also fell 1%.

On a yearly basis, food services and drinking places saw the biggest gains, rising 11.1% though sales were flat in December. Both health and personal care and electronics and appliances saw 10.7% increases. Gas stations dropped 6.6%.

In other economic news Wednesday, import prices were unchanged in December, despite the Wall Street estimate for a 0.5% decline and following a 0.5% drop the previous month. Export prices, however, slid 0.9%, the same as in November.

The reports come with markets anxious over the direction of Fed policy. Current market pricing anticipates the central bank enacting six quarter-percentage point rate cuts in 2024, twice what Fed officials indicated in December. Stronger-than-expected economic growth and inflation could force the Fed into keeping policy more restrictive.

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Corporate debt defaults soared 80% in 2023 and could be high again this year, S&P says

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Javier Ghersi | Moment | Getty Images

Corporate debt defaults soared last year and could be a problem again in 2024 as cash-strapped companies deal with the burden of high interest rates, S&P Global Ratings reported Tuesday.

The number of companies that failed to make required payments on their debt totaled 153 for 2023, up from 85 the year before, an increase of 80%. It was the highest default rate outside of the Covid-related spike in 2020 in seven years.

Much of the total came from low-rated companies that had negative cash flows, high debt burdens and weak liquidity, S&P said. From a sector standpoint, consumer-facing companies — media and entertainment in particular — led the defaults.

S&P said there could be hard times ahead for corporate America, which, according to the Federal Reserve, is carrying a $13.7 trillion debt load. Company debt has jumped 18.3% since 2020 as companies took advantage of the Fed slashing interest rates in the early days of the Covid-19 pandemic.

“In 2024, we expect further credit deterioration globally, predominantly at the lower end of the rating scale (rated ‘B-‘ or below), where close to 40% of issuers are at risk of downgrades,” the firm wrote. “We expect financing costs to remain elevated despite the prospect of rate cuts. And while borrowers have reduced their 2024 maturities, a large share of speculative-grade debt is expected to mature in 2025 and 2026.”

Some economists worry that a “corporate debt cliff” could become a more serious problem as a large share of maturing debt that initially was financed at very low rates comes due in the next few years.

The burden, both in the U.S. and globally, could be exacerbated by “slower economic growth and higher financing costs” that could contribute to defaults, S&P said. Along with media and entertainment, the firm sees potential trouble spots in consumer products and retail because of a weaker economy “and the already elevated number of weakest links in those sectors.”

But the damage won’t be isolated in those areas, as S&P sees higher rates causing more widespread pain to sectors such as health care, which is suffering from elevated debt and staffing problems that are constraining revenue.

Fed rate cuts are expected to alleviate the burden somewhat, though rates are expected to remain elevated at least through 2024. While markets think the central bank could cut short-term rates as much as 1.5 percentage points this year, Fed officials have indicated a slower course of perhaps half that much, depending on how the inflation data unfolds.

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Fed's Christopher Waller advocates moving 'carefully' with rate cuts

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Federal Reserve Governor Christopher Waller acknowledged Tuesday that interest rate cuts are likely this year, but said the central bank can take its time relaxing monetary policy.

The comments, delivered during a speech in Washington, D.C., seemed to counter market anticipation for aggressing easing this year.

“As long as inflation doesn’t rebound and stay elevated, I believe the [Federal Open Market Committee] will be able to lower the target range for the federal funds rate this year,” Waller said in prepared remarks for an audience at the Brookings Institution.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added. “In many previous cycles … the cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”

Market pricing Tuesday morning indicated about a 71% chance the FOMC will begin cutting in March, according to the CME Group’s FedWatch measure. In fact, traders have further ramped up expectations for 2024 and added another cut this week, bringing the anticipated total to seven quarter-percentage point rate decreases by the end of the year.

Along with rate cuts, Waller said he anticipates the Fed this year can start slowing the pace of “quantitative tightening,” or the reduction of the central bank balance sheet by allowing proceeds from maturing bonds to roll off without reinvesting them. The Fed has been allowing up to $95 billion a month roll off and thus far has cut its holdings by about $1.2 trillion.

“I would say sometime this year will be a reasonable thing to start thinking about it,” he said. However, he noted that “tapering” would apply on to Treasurys and not mortgage-backed securities holdings, which he prefers to allow to decrease at the current pace.

Data ‘almost as good as it gets’

At their December meeting, Fed officials indicated three cuts were likely this year. The benchmark fed funds rate is currently in a targeted range between 5.25%-5.5%.

In making the pitch for rate cuts, Waller noted the progress made against inflation has not come at the cost of the labor market. As a governor, Waller is a permanent FOMC voter.

Stocks held in sharply negative territory after the release of Waller’s remarks, while Treasury yields moved higher.

While 12-month inflation is still running well above the Fed’s 2% goal, measures over shorter time frames such as six months are much closer to target. For instance, the core personal consumption expenditures price index, one of the Fed’s preferred measures, is showing annual inflation at 3.2%, the six-month measure is around 1.9%.

At the same time, unemployment has held below 4% and gross domestic product has grown at a rate defying Wall Street expectations for a recession.

“For a macroeconomist, this is almost as good as it gets. But will it last?” Waller said. “Time will tell whether inflation can be sustained on its recent path and allow us to conclude that we have achieved the FOMC’s price-stability goal. Time will tell if this can happen while the labor market still performs above expectations.”

While the Fed has wrestled with the quandary of not tightening and enough and allowing inflation to expand and tightening too much that it chokes off growth, Waller said those risks are becoming more balanced.

In fact, he said that as the level of job openings compared to the size of the labor force declines, the Fed is now running more of a risk of doing too much.

“So, from now on, the setting of policy needs to proceed with more caution to avoid over-tightening,” he said.

Waller said he thinks the Fed is “within striking distance” of achieving its 2% inflation goal, “but I will need more information” before declaring victory. One data point he said he will be especially focused on is upcoming revisions to the Labor Department’s consumer price index inflation measure.

Germany skirts recession at the end of 2023 but faces prolonged slump

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German Chancellor, Olaf Scholz arrives for the weekly federal government cabinet meeting on Oct. 11, 2023 in Berlin, Germany.

Michele Tantussi | Getty Images News | Getty Images

Europe’s largest economy contracted by 0.3% year-on-year in 2023, as high inflation and firm interest rates bit into growth, the Federal Statistical Office of Germany said Monday.

The estimate is in line with the expectations of analysts polled by Reuters. The decline in economic output eases to 0.1% when adjusted for calendar purposes.

“The overall economic development in Germany stalled in 2023 in the still crisis-ridden environment,” said Ruth Brand, president of the federal statistics office, according to a Google translation. 

“Despite the recent declines, prices remained high at all levels of the economy. Added to this were unfavorable financing conditions due to rising interest rates and lower demand from home and abroad,” Brand added.

German inflation ticked up by 3.8% year-on-year in December on a harmonized basis, the statistics office said on Jan. 4. The European Central Bank in December opted to hold rates unchanged for the second consecutive time, shifting its inflation outlook from “expected to remain too high for too long” to expectations that it will “decline gradually over the course of next year.”

Germany’s manufacturing sector, excluding construction, fell by a sharp 2%, led by lower production in the energy supply sector. Weak domestic demand last year and “subdued global economic dynamics” also stifled foreign trade, despite a drop in prices. Imports fell by 1.8%, declining more sharply than exports and leading to a positive trade balance.

Household consumption contracted by 0.8% on the year, adjusted for prices, while government expenses slimmed by 1.7%.

The fourth quarter recorded a similar 0.3% drop compared with the July-September period. The office said that the German economy stagnated in the third quarter, implying the country has narrowly avoided a technical recession that is defined by two successive quarters of consecutive GDP declines.

Early indicators do not signal a quick German economic recovery is in the cards, a German economy ministry report out Monday warned, according to Reuters.

Capital Economics also expects Germany’s troubles are not yet over and forecasts no growth for the country in 2024.

“The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year,” Chief Europe Economist Andrew Kenningham said in a note. “Admittedly, the recent fall in inflation should provide some relief for households, but residential and business investment are likely to contract, construction is heading for a steep downturn and the government is tightening fiscal policy sharply. We forecast zero GDP growth in 2024.”

Germany was haunted by its moniker as the “sick man” of Europe for the better part of last year, despite weathering the shocks of losing access to some sanctioned Russian energy supplies in the wake of Moscow’s invasion of Ukraine. Analysts had predicted Germany would be the only major European economy to shrink last year.

The German economy faced the throes of a deep budgetary crisis at the end of last year, after a constitutional court ruling over the national borrowing restrictions threatened a $17-billion-euro gap in the country’s 2024 spending plans.

Enshrined in Germany’s constitution, the national debt brake restricts the federal deficit to 0.35% of GDP outside of emergencies and became a major bone of contention in national politics last year. The German government agreed to suspend the limit on borrowing, after the constitutional court blocked attempts to repurpose any leftover emergency funds initially assigned to address the Covid-19 pandemic.

Weeks-long negotiations yielded a budget deal that retains debt restrictions into 2024, with the government expecting to save 17 billion euros ($18.6 billion) in its core budget by ending climate-damaging subsidies and implementing cost cutting, German Chancellor Olaf Scholz’s three-way coalition announced in mid December.

Wholesale prices unexpectedly fell 0.1% in December in positive inflation sign

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A customer shops for milk at a grocery store on December 12, 2023 in San Anselmo, California. 

Justin Sullivan | Getty Images News | Getty Images

Wholesale prices unexpectedly declined in December, providing a positive signal for inflation, the Labor Department reported Friday.

The producer price index fell 0.1% for the month and ended 2023 up 1% from a year ago, the Labor Department reported Friday. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1%. The index had surged 6.4% in 2022.

Excluding food and energy, core PPI was flat against the estimate for a 0.2% increase. Excluding food, energy and trade services, PPI also was up 0.2%, in line with the estimate. For the full year, the final demand measure less food, energy and trade services rose 2.5% for all of 2023 after being up 4.7% in 2022.

The PPI release comes a day after less encouraging news from the Labor Department, which reported Thursday that the prices consumers pay for goods and services rose 0.3% in December and were up 3.4% on the year. That was higher than Wall Street expectations and still a good deal away from the Fed’s 2% inflation target.

However, PPI is generally considered a better leading index as it measures pipeline prices that companies get for intermediate goods and services.

Markets reacted positively to the PPI release, with stock futures shaving losses and Treasury yields mostly lower.

Prices for final demand goods declined 0.4% in December, the third straight month of decreases, according to the release. Diesel fuel prices tumbled 12.4%, even though gasoline increased 2.1%.

On the services side, prices held at unchanged for the third straight month. Prices in fields associated with financial advice rose 3.3%, while margins for machinery and vehicle wholesaling dipped 5.5%.

PPI measures the prices that producers pay for goods and services, while CPI gauges what consumers pay in the marketplace. CPI also includes imports whereas PPI does not. PPI, however, covers a broader set of goods and services.

Markets are convinced that waning inflation signs will push the Fed to cut interest rates starting in March, even with inflation above target.

Traders in the fed funds futures market are pricing in about a 70% probability that the first quarter percentage point cut will come at the March 19-20 meeting of the Federal Open Market Committee, according to the CME Group’s FedWatch tracker. From there, markets expect another five rate cuts, taking the benchmark fed funds rate down to a target range of 3.75%-4%.

However, various Fed officials in recent days have made statements that seem to counter the market’s aggressive view. Moreover, JPMorgan Chase CEO Jamie Dimon on Friday warned that heavy government deficit spending along with a bevy of other factors could cause inflation to be stickier and rates to be higher than the market expects.

U.S. deficit tops half a trillion dollars in the first quarter of fiscal year

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The U.S. Treasury building in Washington, D.C., on Aug. 15, 2023.

Nathan Howard | Bloomberg | Getty Images

The U.S. government ran up another half a trillion dollars in red ink in the first quarter of its fiscal year, the Treasury Department reported Thursday.

For the period from October 2023 through December 2023, the budget deficit totaled just shy of $510 billion, following a shortfall of $129.4 billion in just December alone, which was 52% higher than a year ago. The jump in the deficit pushed total government debt past $34 trillion for the first time.

Compared to last year, which saw a final deficit of $1.7 trillion, 2024 is running even hotter.

In the first quarter of fiscal 2023, for example, the difference between spending and receipts totaled $421.4 billion. On an unadjusted basis, that’s an increase of $89 billion between fiscal 2024 and last year. Adjusted for calendar factors, the Treasury Department said the change between the two years is actually $97 billion. December’s shortfall was higher by more than $34 billion compared to the previous year, driven by higher Social Security payments and interest costs.

If the current pace continues, 2024 would end with a deficit of just more than $2 trillion.

The deficit has continued to pile up despite the Biden administration’s assurances that the Inflation Reduction Act, in addition to reducing prices, would shave “hundreds of billions” off the deficit.

While the rate of inflation has come down, Labor Department data Thursday showed the consumer price index increased another 0.3% in December, pushing the 12-month rate up to 3.4%, higher than the Wall Street consensus and above the Federal Reserve’s 2% goal.

With interest rates elevated as the Fed fights inflation, financing costs for the government in 2023 totaled nearly $660 billion. Debt as a percentage of gross domestic product rose to 120% in the third quarter of 2023.

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Shipping boss says ongoing Red Sea disruption could have 'significant consequences' for global growth

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Ongoing disruption to trade flows through the Red Sea could hit global economic growth, the head of one of the world’s largest container shipping firms said Thursday.

Maersk CEO Vincent Clerc said it remained unclear whether passage through the waterway would be re-established in “days, weeks or months,” in comments first provided to the Financial Times and confirmed to CNBC.

“It could potentially have quite significant consequences on global growth,” Clerc said.

The company announced Friday its vessels would be diverted from the Red Sea — which provides access to Egypt’s Suez Canal, the quickest route between Europe and Asia — for the “foreseeable future.”

Vessels are instead traveling around the southern coast of Africa, which can add between two to four weeks to a Europe-Asia voyage, Clerc previously told CNBC.

Maersk further said this week that some inland transportations were facing delays due to a wave of strikes in Germany.

The seaborne diversions by Maersk and a host of other firms are due to a series of attacks on ships by Houthi militants from Yemen. The group’s leaders say they are responding to Israel’s bombing of Gaza.

Clashes have continued into the new year despite the launch of a U.S.-led military taskforce which has seen major powers send warships to the area.

Houthi militants this week launched the largest attack of the campaign so far.

Red Sea shipping disruption 'worse than Ever Given' but 'not as bad as Covid': Analyst

Companies including Sweden’s Ikea have warned of potential product delays as a result, while freight rates are moving higher.

In a further sign of volatility in the region, an oil tanker was hijacked near the Gulf of Oman on Thursday.

The World Bank meanwhile said Tuesday that global growth is set to mark its worst half decade for 30 years.

Ayhan Kose, the group’s deputy chief economist, told CNBC that the world economy faced a host of risks, including escalations of conflict in the Middle East or the war in Ukraine.

— Additional reporting by Ruxandra Iordache

Consumer prices rose 0.3% in December, higher than expected, pushing the annual rate to 3.4%

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Prices that consumers pay for a variety of goods and services rose more than expected in December, according to a Labor Department measure Thursday that shows inflation still holding a grip on the U.S. economy.

The consumer price index increased 0.3% for the month, higher than the 0.2% estimate at a time when most economists and policymakers see inflationary pressures easing. On a 12-month basis, the CPI closed 2023 up 3.4%. Economists surveyed by Dow Jones had been looking for respective readings of 0.2% and 3.2%.

Excluding volatile food and energy prices, so-called core CPI increased 0.3% for the month and 3.9% from a year ago, compared to respective estimates of 0.3% and 3.8%.

Much of the increase came do to rising shelter costs. The category rose 0.5% for the month and accounted for more than half the core CPI increase. On annual basis, shelter costs increased 6.2%, or about two-thirds of the rise in inflation.

Fed officials largely expect shelter costs to decline through the year as renewed leases reflect lower rents.

Food prices increased 0.2% in December, the same as in November, while energy posted a 0.4% gain after sliding 2.3% in November. Gasoline rose 0.2%.

In other key price indexes, motor vehicle insurance bounced 1.5% higher, medical care accelerated by 0.6% and used vehicle prices, a key contributor in the initial inflation surge, increased another 0.5% after being up 1.6% in November.

This is breaking news. Please check back here for updates.

Turkish lira hits fresh record low against the U.S. dollar

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Vanishing Turkish Currency: 1 Turkish Lira with the Portrait of Kemal AtatürkTurkish

Manuel Augusto Moreno | Moment | Getty Images

The Turkish lira hit a fresh record low against the U.S. dollar on Thursday, trading at 30.005 to the greenback just before noon local time.

It marks the first time that the lira has broken 30 against the dollar, which was up 0.17% against the Turkish currency from the previous day’s session.

The beleaguered lira has fallen some 37% against the U.S. benchmark over the past year, as monetary policymakers try to combat double-digit inflation by steadily raising interest rates.

The more conventional approach follows several years of unorthodox policy during which Ankara refused to tighten rates despite ballooning inflation, while Turkish President Recep Tayyip Erdogan routinely called interest rate rises “the mother of all evil.”

Inflation in the country of roughly 84 million rose to 64.8% on an annual basis in December, up from 62% in November. It’s still an improvement on the prior year, after Turkish inflation hit a peak of 85.5% in October 2022.

The lira’s weakening comes as Turkey’s top finance officials gather at J.P. Morgan’s Wall Street headquarters in New York for investor presentations focused on the country’s monetary policy, banking, assets, and financial markets.

Dubbed “Investor Day,” the inaugural event will feature question-and-answer sessions and will include presentations from new Turkish central bank governor Hafize Gaye Erkan, who was appointed in June 2023, on a range of topics, such as the country’s disinflation path. Turkish Finance Minister Mehmet Simsek will deliver presentations virtually on the outlooks for Turkish financing and fiscal policy.

Turkish outlet Daily Sabah reports the event will be attended by more than 200 senior executives from major finance institutions, including Vanguard, BlackRock, Goldman Sachs, Morgan Stanley, and J.P. Morgan.

The Turkish lira has lost more that 80% of its value against the dollar over the last five years, increasing import and foreign debt costs and dramatically weakening the purchasing power of ordinary Turkish people.

A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under Erkan’s supervision. The country’s benchmark interest rate has since been lifted from 8.5% to 42.5%.

Thursday's inflation report could challenge the market outlook for big Fed rate cuts

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Consumers shop at a retail chain store in Rosemead, California, on Dec. 12, 2023.

Frederic J. Brown | AFP | Getty Images

Economists expect that inflation nudged higher in December, a trend that could call into question the market’s eager anticipation that the Federal Reserve will slash interest rates this year.

The consumer price index, a widely followed measure of the costs folks pay for a wide range of goods and services, is projected to have risen 0.2% in the final month of 2023, or 3.2% for the full year, according to Dow Jones.

At a time when the Fed is fighting inflation through tight monetary policy including elevated rates, news that prices are holding at high levels could be enough to disrupt already-fragile markets.

“The Fed did its policy pivot, and the data’s got to support that pivot,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “The market seems to have gotten excited that the Fed’s going to have to do more than what the Fed thinks in terms of rate cuts now. … The market got ahead of itself.”

There is certainly a wide gap between what the Fed has indicated in terms of rate cuts and what the market is expecting.

After months of insisting that easier monetary policy is still a ways off, central bank policymakers in December penciled in three quarter-percentage-point rate cuts by the end of 2024, effectively a policy pivot for this inflation-fighting era. Minutes from that meeting released last week did not indicate any discussion about a timetable for the reductions.

Markets hold a different view.

Looking for easing

Traders in the fed funds futures market are pointing to a strong chance of an initial rate cut in March, to be followed by five more reductions through the year that would take the benchmark overnight borrowing rate down to a range of 3.75% to 4%, according to the CME Group’s FedWatch gauge.

If inflation data such as Thursday morning’s CPI release and Friday’s producer price index don’t show stronger inflation progress, that is liable to cause more volatility in a year when stocks have already gotten off to a rocky start.

“We’re going to see it across all markets, because it’s going to be that dynamic between what the Fed’s doing and what the market expects them to do,” McIntyre said of a likely volatile time ahead. “Ultimately, they’ve got to come together. It probably means that right now, the market needs to give back some of the rate cuts that they priced in.”

A smattering of public statements since the December meeting of the Federal Open Market Committee provided little indication that officials are ready to let down their guard.

Fed Governor Michelle Bowman said this week that while she expects rate hikes could be done, she doesn’t see the case yet for cuts. Likewise, Dallas Fed President Lorie Logan, in more pointed remarks directed at inflation, said Saturday that the easing in financial conditions, such as 2023’s powerful stock market rally and a late-year slide in Treasury yields, raise the specter that inflation could see a resurgence.

“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” Logan said. “In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.”

The search for balance

Logan, however, did concede that it could be time to think about slowing the pace of the Fed’s balance sheet reduction. The process, nicknamed “quantitative tightening,” involves allowing proceeds from maturing bonds to roll off without reinvesting them, and has cut the central bank’s holdings by more than $1.2 trillion since June 2022.

The Fed’s central mission now is calibrating policy in a way that it doesn’t ease too much and allow inflation to return or hold policy too tight so that it causes a long-anticipated recession.

“Policy is too restrictive given where inflation is and likely where it’s going,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “The Fed is clearly positioning itself to put a floor under the economy as we head into the second half of the year with rate cuts, and create the conditions for reacceleration of the economy later this year or next year.”

Still, Brusuelas thinks the market is too aggressive in pricing in six rate cuts. Instead, he expects maybe four moves as part of a gradual normalization process involving both rates and the rollback of the balance sheet reduction.

As for the inflation reports, Brusuelas said the results likely will be nuanced, with some gradual moves in the headline numbers and likely more focus on internal data, such as shelter costs and the prices for used vehicles. Also, core inflation, which excludes volatile food and energy prices, is expected to increase 0.3% on the month, equating to a 3.8% rate compared to a year ago, which would be the first sub-4% reading since May 2021.

“We’re going to have a vigorous market debate on whether we’re going back to 2% on a durable basis,” Brusuelas said. “They’ll need to see that improvement in order to set the predicate for modifying QT.”

Former Fed Vice Chair Richard Clarida said policymakers are more likely to take a cautious approach. He also expects just three cuts this year.

“The progress on inflation for the last six months is definitely there. … There’s always good news and bad news,” Clarida said Wednesday on CNBC’s “Squawk on the Street.” “Markets maybe are a little relaxed about where inflation is sticky and stubborn. But the data is definitely going in the direction that’s favorable for the economy and the Fed.”

Expect Fed to ease policy three times this year: PIMCO's Richard Clarida

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Consumer spending rises in December to end solid holiday season, CNBC/NRF Retail Monitor shows

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People carry shopping bags as they visit a department store during the holiday season in New York City.

Eduardo Munoz | Reuters

Retailers chalked up solid gains in the final month to wrap up the holiday season, according to the CNBC/NRF Retail Monitor for December.

However, the data also shows the true state of consumer spending is now clouded by a new factor: deflation.

The Retail Monitor, which excludes autos and gas, rose 0.4% in December, down from a gain of 0.8% in November, when the holiday shopping season traditionally kicks off. It’s just below the long-run average of 0.6%.

The core retail gauge, which also takes out restaurants, climbed a more modest 0.2% after gaining 0.7% in the prior month. For the year, the Retail Monitor increased by 3.1% and the core was up 2.4%.

Some give back from the strong November was inevitable, and economists expect the economy to cool from the outsized growth in the third quarter. One question is whether December marks the beginning of a long-predicted normalization in consumer spending.

Spending was clearly hampered by the slowdown in the housing industry. Three of the biggest negative categories were housing related:

  • Electronics and appliances (-3.2%)
  • Building and garden supplies (-1.5%)
  • Furniture and home furnishings (-0.9%).

Furniture sales have been negative in four of the past five months.

Traditional holiday-related retail categories did better, including a 0.9% gain in general merchandise stores and a 2.6% increase in nonstore retailers, which incorporates internet sales. Restaurants and bars posted a 1.5% rise, it’s best showing since July.

Deflation

Deflation is another factor. Goods prices, less food and energy, have fallen for six straight months. They are down 3.7% at an annualized rate from June through November.

The Retail Monitor found sales of clothing and accessories down 0.4% but the November CPI showed prices fell a much larger 1.3%. The December CPI, set to be released Thursday, should show more clearly how prices affected sales.

Wall Street is monitoring how retailers are managing profit margins amid deflation and whether they can be as profitable with falling prices as they were with rising prices. At issue is whether retailers can control costs and if input prices are falling faster or slower than selling prices.

Wall Street has been bullish on retail, with the SPDR S&P Retail ETF (XRT) up 21% since late October despite some giveback beginning in the trading days after Christmas. Retail earnings will be released beginning in late February, but some companies — such as Lululemon, Crocs and Five Below — have guided higher on better holiday sales.

Good, not great Christmas

For the two critical months of the holiday season, November and December, the Retail Monitor rose 3.7% and core retail gained 3.3% making it a good, not great Christmas. But last October and January surprised with stronger gains than either November or December, suggesting the full holiday shopping season could be longer than it has been traditionally.

The new Retail Monitor is a joint product of CNBC and the National Retail Federation based on data from Affinity, a leading consumer purchase insights company. The data is sourced from more than 9 billion annual credit and debit card transactions collected and anonymized by Affinity and accounting for more than $500 billion in sales. The cards are issued by more than 1,400 financial institutions.

The data differs from the Census Bureau’s retail sales report as it is the result of actual consumer purchases, while the Census relies on survey data. The government data is frequently revised as additional survey data become available. The CNBC/NRF Retail Monitor is not revised as it’s calculated from actual transactions during the month. It is, however, seasonally adjusted, using the same program employed by the Census.

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Saudi Arabia nearly doubles estimate for the value of its mineral resources

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Saudi Arabia nearly doubled the estimate for the value of its mineral resources and is seeing lucrative deals signed during its Future Minerals Forum held in Riyadh this week, ministers told CNBC.

Estimates for the kingdom’s untapped mineral reserves have jumped from $1.3 trillion in a 2016 forecast to $2.5 trillion, according to Saudi Mineral Resources and Industry Minister Bandar Al Khorayef. The resources include gold, copper, phosphate and rare earth elements, offering new sources of subterranean wealth on top of Saudi Arabia’s mammoth oil reserves.

“We are very excited about this news … it’s really a result of what we have been doing in the last four years,” Al Khorayef told CNBC’s Dan Murphy Wednesday.

The Saudi government announced $20 billion in deals would be signed at the annual minerals forum, and the mining minister hailed recent reforms to the kingdom’s laws and business practices as being pivotal to that windfall.

“Revamping our investment law has helped a lot of investment to come in the light, the number of licenses that we have issued in the last only two years is in the neighborhood of about 4,500,” Al Khorayef said.

“Plus the amount of spending that we have been doing in our geological survey program; these two things alone allow us to access information and data on different reserves. And the beauty about the number … is really it’s the combination of new findings, especially with the rare earth metals, plus also more deposits of what we already know, in phosphate, gold, and copper, and zinc, and so on. So it’s a combination of all of this.”

The minister noted that the figures were “only based on 30% of the Arabian shields exploration … which will continue hopefully to reach 100%.” The Arabian-Nubian shield is an expansive block of rock crust spanning the Western Arabian peninsula and Northeast Africa that is believed to have been the site of mining activity and exploration for thousands of years.

Saudi Arabia has developed 33 new exploration sites for mining, and aims to award foreign investors more than 30 mining exploration licenses in 2024, it announced at the forum.

Saudi minister: Security and stability are critical if we want to promote investment and trade

The concerted effort to invest in minerals exploration and mining and issue licenses to foreign investors is part of Saudi Arabia’s Vision 2030 program, a multi-trillion dollar initiative launched by Crown Prince Mohammed bin Salman to diversify the kingdom’s economy away from oil, attract foreign investment and provide more jobs for its burgeoning youth population. Mining is seen by the Saudi government as the third industrial pillar that will move its economy away from reliance on hydrocarbons.

Asked where the country was with respect to those Vision 2030 goals, the mining minister was optimistic.

“You know, sectors such as tourism show quick results, we are maybe a slower sector. But when I see the pipeline, the different projects that we are doing, pipeline of private sector investment, pipeline infrastructure, that is really to me the true proof that we are also going to hopefully meet our targets.”

“Our job actually today in the ministry and the ecosystem is to help accelerate, move projects much faster,” he said, stressing the importance of working with investors to address their needs. Part of that is the kingdom’s new mineral exploration incentive program, announced Wednesday, that has a budget of more than $182 million.

“Generally speaking, I’m really very happy to see the progress,” Al Khorayef said. “I mean, in terms of policies, it’s all set in terms of enablers, it’s all set in terms of the infrastructure. In terms of budgeting and financing all of the infrastructures, we have been enabled. So, you know, it’s our job now to do it.”

Top Goldman Sachs analyst says the world is moving into a new super cycle

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A screen displays the Dow Jones Industrial Average after the closing bell on the floor at the New York Stock Exchange on Dec. 13, 2023.

Brendan Mcdermid | Reuters

The global economy is moving into a new “super cycle,” with artificial intelligence and decarbonization being driving factors, according to Peter Oppenheimer, the head of macro research in Europe at Goldman Sachs.

“We are moving clearly into a different super cycle,” he told CNBC’s “Squawk Box Europe” Monday.

Super cycles are commonly defined as lengthy periods of economic expansion, often accompanied by growing GDP, strong demand for goods leading to higher prices, and high levels of employment.

The most recent significant super cycle that the world economy experienced began in the early 1980s, Oppenheimer said, discussing content from his newly launched book “Any Happy Returns.”

This was characterized by interest rates and inflation peaking, before a decades-long period of falling capital costs, inflation and rates, as well as economic policies such as deregulation and privatization, he explained. Meanwhile, geopolitical risks eased and globalization grew stronger, Oppenheimer noted.

But not all of these factors are now set to continue as they were, he added.

“We’re not likely to see interest rates trending down as aggressively over the next decade or so, we’re seeing some pushback to globalization and, of course, we’re seeing increased geopolitical tensions as well.”

The Russia-Ukraine war, tensions between the U.S. and China largely relating to trade, and the Israel-Hamas conflict which is raising concerns on the wider Middle East are just some geopolitical themes that markets have been fretting over in recent months and years.

While current economic developments should theoretically lead to the pace of financial returns slowing, there are also forces that could have a positive impact — namely artificial intelligence and decarbonization, Oppenheimer said.

AI is still in its early stages, he explained, however as it is used increasingly as the basis for new products and services, it could lead to a “positive effect” for stocks, he said.  

The hot topic of AI and productivity, which has often gone hand-in-hand with debates and concerns around human jobs being replaced or changed, will likely impact the economy.

“The second thing is [that] we haven’t yet seen, and I think we’re relatively positive that we will see, [is] an improvement in productivity on the back of the applications of AI which could be positive for growth and of course for margins,” Oppenheimer said.

Despite AI and decarbonization both being relatively new concepts, there are historical parallels, Oppenheimer explained.

One of the historical periods that stands out is the early 1970s and early 1980s, which he said were “not so dissimilar” to current developments. Elevated inflation and interest rates were perhaps more structural issues than compared to now, he said, however factors including growing geopolitical tensions, rising taxes and enhanced regulation appear similar.

In other ways, current shifts can be seen as reflective of changes even further back in history, Oppenheimer explained.

“Because of this tremendous twin shock that we’re likely to see, positive shock of technological innovation at a very rapid pace together with restructuring of economies to move towards decarbonization, I think that’s a period that’s more akin really to what we saw in the late 19th century,” he said.

Modernization and industrialization fueled by infrastructure and technological developments alongside significant increases of productivity mark this historical period.

Crucially, these historical parallels can provide lessons for the future, Oppenheimer pointed out.

“Looking back in time, cycles and structural breaks do repeat themselves but never in exactly the same way. And I think we need to sort of learn from history what are the inferences that we can look at in order to position best for the sort of environment we’re moving into.”

The 2023 U.S. economy, in a dozen charts

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A pedestrian holds an umbrella as they walk along a street in the rain in Times Square, New York, on Sept. 26, 2023.

Ed Jones | AFP | Getty Images

The state of the U.S. economy may be a chief concern among Americans, but 2023 wound up as a pretty good year for the macroenvironment.

Spending remained high, markets posted big gains and the Federal Reserve’s battle against inflation showed signs of cooling — without freezing. Then there’s the almost logic-defying resilience of the job market.

The U.S. labor market ended the year strong, creating more than 200,000 jobs in December, according to figures released Friday by the U.S. Bureau of Labor Statistics. While previous job creation estimates for October and November were revised downward by a combined 75,000, the unemployment rate remained at a low 3.7%, and December marked the 36th consecutive month of job creation for the U.S. economy.

In total, the U.S. created nearly 2.7 million jobs in 2023, when seasonally adjusted. That figure came despite concerns that the Federal Reserve’s ongoing fight against inflation through interest rate hikes might cool the labor market and put a chill on consumer spending.

Neither of those concerns came to fruition, however. In fact, consumer spending remained robust throughout the year, with monthly advanced retail sales staying above the $600 million mark for most of 2023, proving that despite many economic headwinds, U.S. consumers could not be deterred.

Here are nine other charts that show how the economy rounded out 2023.

Inflation, wages and spending

While inflation continues to be top of mind for U.S. consumers, the rate of inflation cooled significantly in 2023. Meanwhile, wages rose throughout the year, eventually outpacing price increases.

U.S. consumers were in a mood to spend, particularly on experiences: 2023 was officially the year that travel rebounded, with the Thanksgiving holiday period breaking U.S. records. Nearly 150 million passengers were screened by the Transportation Security Administration across U.S. airports in November and December.

Americans spent on entertainment, too. With major hits such as “Barbie,” “Oppenheimer” and Taylor Swift’s The Eras Tour concert film, the U.S. box office came back in a big way last year from its Covid-19 pandemic lows.

Markets

Even assets such as crypto saw a rebound in 2023 after hitting a low in November of the previous year. Bitcoin prices ended the year at almost three times that previous low.

Interest rates and housing

After its historic rate increases in 2022, the Federal Reserve tempered its war on inflation and only raised rates at four of its eight meetings in 2023. While the central bank’s target range for interest rates is the highest it has been since 2006, recent comments from Chair Jerome Powell have Fed watchers optimistic that rate cuts may be coming in 2024.

There were some trouble areas for consumers, however. Mortgage rates continue to be high. The average 30-year fixed rate in October was nearly triple what it was at the end of 2020 — although rates came down significantly by the end of the year — and existing home sales remain low, according to data from the National Association of Realtors. Until more housing inventory comes online, those issues are likely to persist into 2024.

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Jobless rate for Black Americans declines to 5.2% to end 2023 on a positive note

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A networking and hiring event for professionals of color in Minneapolis, MN. 

Michael Siluk | Getty Images

The unemployment rate for Black Americans fell significantly in December, closing out 2023 on a positive note, according to data released Friday by the Department of Labor.

Black Americans, the group with the highest jobless percentage in the country, saw their unemployment rate dip to 5.2% last month from 5.8% in November. Still, that’s higher than the overall unemployment rate, which held at 3.7% last month, as well as the 3.5% jobless rate for white Americans.

When accounting for gender, the unemployment rate for Black men aged 20 and older fell to 4.6%, a big decline from the 6.3% rate in November. Black women’s jobless rate remained unchanged at 4.8% in December.

Experts said that while the December number is a good sign, the monthly data could be too volatile to form a trend yet.

“We would caution against reading too much into large swings in monthly data, but in general, demographic groups, including Black Americans, that had traditionally been slower to experience the benefits of a tight labor market have realized stronger employment and wage gains in the current cycle,” Andrew Patterson, senior international economist at Vanguard, told CNBC. 

The Current Population Survey is “very noisy,” especially when looking at smaller populations, according to Julia Pollak, ZipRecruiter’s chief economist. She noted that the unemployment rate for Black Americans in 2023 ranged between 4.7% in April and 6.0% in June. 

Among Black workers, the labor force participation rate inched lower to 63.4% from 63.7% in the previous month.

Black Americans were hit particularly hard by the business shutdowns in the depths of the Covid-19 pandemic, with the unemployment rate for Black workers peaking at 16.8% in 2020. The overall unemployment rate hit a high of 14.7% in April 2020.

More progress needs to be made for Black workers as they still lag every other demographic group in the U.S.

“The unemployment rate among Black Americans staged a significant drop in December, but remains above the lower level seen last year,” Bankrate senior economic analyst Mark Hamrick said. “Still, it remains at historically low levels and still higher than the jobless rate overall and for Whites, Asians and Hispanics.”

For Hispanic Americans, the unemployment rate rose to 5% in December from 4.6% in November.

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U.S. payrolls increased by 216,000 in December, much better than expected

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The U.S. labor market closed out 2023 in strong shape as the pace of hiring was even more powerful than expected, the Labor Department reported Friday.

December’s jobs report showed employers added 216,000 positions for the month while the unemployment rate held at 3.7%. Payroll growth showed a sizeable gain from November’s downwardly revised 173,000. October also was revised lower, to 105,000 from 150,000, indicating a slightly less robust picture for growth in the fourth quarter.

Economists surveyed by Dow Jones had been looking for payrolls to increase 170,000 and the unemployment rate to nudge higher to 3.8%.

A more encompassing unemployment measure that includes discouraged workers and those holding part-time jobs for economic reasons edged higher to 7.1%. That increase in the “real” unemployment rate came as the household survey, used to calculate the unemployment rate, showed a decline in job holders of 683,000 as the ranks of those working multiple jobs increased by 222,000.

The labor force participation rate, or the share of the civilian working-age population either employed or looking for a job, slid to 62.5%, down 0.3 percentage point to its lowest since February and down 676,000 on a monthly basis.

The report, along with revisions to previous months’ counts, brought 2023 job gains to 2.7 million, or a monthly average of 225,000, down from 4.8 million, or 399,000 a month, in 2022.

Markets reacted negatively to the data, with stock market futures sliding and Treasury yields sharply higher. Major averages meandered through the day as markets reacted to a lower than expected reading from the ISM services gauge. The measure posted a lower than expected 50.6 reading, reflecting only narrow expansion, and the lowest level of the employment component since May 2020.

The December hiring boost as reflected in the Labor Department report came from a gain of 52,000 in government jobs and another 38,000 in health care-related fields such as ambulatory health-care services and hospitals. Leisure and hospitality contributed 40,000 to the total, while social assistance increased by 21,000 and construction added 17,000. Retail trade grew by 17,000 as the industry has been mostly flat since early 2022, the Labor Department said.

On the downside, transportation and warehousing saw a loss of 23,000.

The report showed that inflationary pressures, despite receding elsewhere, are still prevalent in the labor market. Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%. The average workweek edged lower to 34.3 hours.

Fed funds futures markets also reacted, lowering the odds of a March rate cut from the Federal Reserve to about 56%, according to the CME Group.

“Today’s report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation,” said Andrew Patterson, senior international economist at Vanguard. “The decision of when to first cut policy rates remains one for the second half of the year in our view.”

Friday’s data adds to the case that the U.S. economy continues to defy expectations for a slowdown, despite an inflation-fighting campaign from the Fed that has produced 11 interest rate hikes since March 2022 totaling 5.25 percentage points, the most aggressive monetary policy tightening in 40 years.

At their December meeting, Fed officials released projections that indicate they could enact three quarter-percentage point interest rate cuts this year. Markets, though, expect the central bank to be more aggressive, with futures traders pricing in up to six cuts.

Roger Ferguson: The Fed 'has been right' to push back on expectations of a quick pivot to rate cuts

The belief that the Fed can start cutting is fueled by the view that inflation will continue to recede after peaking at a 41-year high in mid-2022. Inflation is still above the Fed’s 2% target but has been making steady progress lower since the increases began.

However, Friday’s report could challenge the market narrative of a substantially easier Fed.

“Jobs growth remains as resilient as ever, validating growing skepticism that the economy will be ready for policy rate cuts as early as March,” said Seema Shah, chief global strategist at Principal Asset Management. “Indeed, the recent run of labor market data generally points in one direction: strength.”

Economic growth has held solid after consecutive negative-growth quarters to start 2022. Gross domestic product is on track to increase at a 2.5% annualized pace in the fourth quarter, according to the Atlanta Fed’s GDPNow real-time tracker of economic data.

Consumers have been resilient as well. Holiday spending likely hit a record this year, rising 5% to $222.1 billion, according to projections by Adobe Analytics.

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Here’s where the jobs are for December 2023 — in one chart

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The U.S. labor market beat expectations again in December, adding 216,000 jobs to close out the year while the unemployment rate held steady at 3.7%.

Yet the job gains were slower than the same period a year ago, with the three-month average gain dropping to 165,000 a month compared with an average of 284,000 in December 2022, according to Nick Bunker, director of economic research for North America at the Indeed Hiring Lab.

“After entering 2023 with a sonic boom, the US job market is headed into 2024 at a comfortable cruising speed,” Bunker said. “The pace of job creation is strong but not overwhelming, unemployment is low and stable, and job openings are plentiful.”

Bunker noted that just a few sectors – education and health services, government, and leisure and hospitality – accounted for more than 75% of the job growth in December. He cautioned that “turbulence lurks on the edges of the radar” with labor force participation dropping toward year-end while wage growth accelerated.

“While labor demand may still be high, labor supply may be struggling to keep pace,” Bunker said. Nevertheless, the report should alleviate short-term recession fears, he said.

“If there’s any surprise emerging in this report, it’s that the labor market might have more momentum than previously thought,” he said.

The public sector led the way last month with 52,000 jobs, overwhelmingly in local government, according to the Bureau of Labor Statistics.

Health care also saw solid growth with nearly 38,000 jobs added, primarily in ambulatory care and hospitals. Job growth was strong in the sector throughout 2023, adding 55,000 positions a month on average compared with monthly gains of 46,000 in 2022.

Social assistance positions rose by 21,000 in December, with jobs gains averaging 22,000 per month in 2023, slightly more than the 19,000 average monthly increase in 2022.

The leisure and hospitality industry was little changed in December, adding 40,000 positions, with employment in the sector remaining below its pre-pandemic level by 1%, according to the Bureau of Labor Statistics.

The retail sector added 17,000 jobs to end the year, also little changed, with gains offset by a loss of 13,000 positions in department stores. Employment in the industry has struggled to gain speed since recovering from pandemic losses in 2022, according to the data.

Construction also trended upward with 17,000 new positions in December. The sector saw monthly gains of 16,000 in 2023 on average, compared with 22,000 in 2022.

Employment was little changed last month in mining, oil and gas, manufacturing, wholesale trade, information, financial activities, and other services, according to the Bureau of Labor Statistics.

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Friday's jobs report will be a big signal for a market looking for good news

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A now hiring sign is posted in front of a U-Haul rental center on November 03, 2023 in San Rafael, California.

Justin Sullivan | Getty Images

When the December jobs report hits Friday morning, markets will be looking for a number that hits a sweet spot between not so robust as to trigger more interest rate hikes but not so slow as to raise worries about the economy.

In market jargon, that quest for the middle is sometimes referred to as a “Goldilocks” number (not too hot; not too cold) that can be difficult to find.

But in this case, the good news is that the range looks to be pretty wide with a higher probability of good news than bad.

While the Dow Jones estimate is for a nonfarm payrolls gain of 170,000, Art Hogan, chief market strategist at B. Riley Financial, said the acceptable range is really something like 100,000-250,000.

“I just feel like we have a much better receptivity to good news being good news now that we know that that’s not going to induce another rate hike,” Hogan said. “It’s just going to push off a rate cut.”

As things stand, markets figure the Federal Reserve is done hiking rates and could start cutting as early as March, eventually lopping off 1.5 percentage points from its benchmark rate by the end of 2024. Recent news coming out of the Fed is pushing back at least a little on that anticipated trajectory, and a strong number could dampen the likelihood of policy easing that quickly.

“If we were to get above [250,000], then people might look at that and say we have to cancel March as a potential rate cut and maybe take one off the table for this year,” Hogan said. “Frankly, we know we’re at a place now where the Fed is done raising rates. So if that’s the case, clearly good news could be good news. It’s just how good the news could be before you get concerned that some of the hope for rate cuts might get pushed out into the back half of the year.”

High hopes for cuts

Markets have gotten off to a rocky start in the new year as rate-sensitive Big Tech stocks have lagged. Traders are anticipating that the Fed will ease up on monetary policy, though such an aggressive schedule of cuts could imply something more than winning the battle against inflation and instead may infer economic weakness that forces the central bank’s hand.

Hogan said investors should be taking that into consideration when thinking about the impact of lower rates.

“This is a market that’s gotten itself a little jazzed up about rate cuts and when they’re going to happen,” he said. “People need to focus on why they’re going to happen.”

“If the wheels are coming off the economic cart and the Fed has to rush in to stimulate that, that’s bad rate cuts, right?” he added. “The good rate cuts are if the path of inflation continues toward the Fed’s target. That’s a good rate cut. So if that doesn’t happen until the second half, I’m fine with that.”

As usual, markets will be looking at more than the headline payrolls number for the health of the labor market.

Digging through details

Wages have been a concern as an inflation component. The expectation for average hourly earnings is a 12-month growth rate of 3.9%. If that proves accurate, it will be the first time wage gains come in under 4% since mid-2021.

The unemployment rate is expected to tick up to 3.8%, which will still keep it below 4% for 23 straight months.

“The overall picture is one in which the labor market is gradually decelerating in a very orderly fashion,” said Julia Pollak, chief economist at online jobs marketplace ZipRecruiter. “I expect December to continue the trend of just gradual cooling to around 150,000 [new jobs], and possibly a small uptick in unemployment because so many people have been pouring into the workforce.”

The labor force grew by about 3.3 million in 2023 through November, though the trend has had little impact on the unemployment rate, which was up just 0.1 percentage point from the same month in 2022.

However, Pollak noted that the hiring rate is still below where it was prior to the Covid pandemic. The quits rate, a Labor Department measure that is looked at as a sign of worker confidence in finding new employment, has tumbled to 2.2% after peaking at 3% during the so-called Great Resignation in 2021 and 2022.

The jobs picture overall has shifted since then, with the once-hot tech sector now lagging in terms of job openings and health care taking the lead, according to Nick Bunker, economic research director at the Indeed Hiring Lab.

“We’re seeing a labor market that is not as tight and as hot as what we saw the last couple years,” Bunker said. “But it’s got into a groove that seems more sustainable.”

St. Louis Fed names former Tudor executive Alberto Musalem as new president

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St. Louis Fed names Alberto G. Musalem as new president.

Source: St. Louis Federal Reserve

Economist Alberto Musalem was named the next president and CEO of the Federal Reserve Bank of St. Louis on Thursday.

Musalem, 55, will start on April 2. He succeeds James Bullard, who joined Purdue University last August. The St. Louis Fed representative is an alternate member of the rate-setting Federal Open Market Committee and will vote in 2025. St. Louis Fed First Vice President Kathy O’Neill has been holding the position in the interim.

“Alberto will be an outstanding president and CEO of the St. Louis Fed,” said St. Louis Fed director Carolyn Chism Hardy, president and CEO of Chism Hardy Investments and deputy chair of the bank’s search committee.

Hardy cited Musalem’s experience as an economist and in financial markets as well as his extensive background with the Fed.

In his most recent work, he served as co-chief investment officer and was co-founder of Evince Asset Management. Before that, he was executive vice president and senior advisor to the New York Fed.

In addition, he has financial market experience at Tudor Investment Corp., working with the firm’s founder, Wall Street titan Paul Tudor Jones.

“Alberto is a mission-focused leader, and I am confident he will work tirelessly to promote a healthy economy for all in representing the diverse views of the constituents across the Fed’s Eighth District,” Hardy said.

Musalem comes to the St. Louis Fed at a time when the central bank is at what appears to be an important policy pivot, away from inflation-fighting interest rate hikes and toward a normalization of policy and likely rate cuts ahead. However, the trajectory of how that will happen is uncertain as Fed officials have vowed to be data dependent and are holding open the possibility that rates may need to go up more if the inflation data moves the other way.

“I am deeply honored to serve as the next president of the St. Louis Fed and grateful for the opportunity to promote a strong, resilient and inclusive economy,” Musalem said.

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Private payrolls added 164,000 in December, beating expectations, ADP says

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Hiring in the private sector rose at a faster-than-expected pace in December, closing out a strong 2023 for the resilient U.S. jobs market, ADP reported Thursday.

Private payrolls increased by 164,000 for the month, a substantial rise from the downwardly revised 101,000 in November and better than the 130,000 estimate from the Dow Jones consensus, according to the payrolls processing firm.

In another sign of strength, initial jobless claims fell for the last full week of 2023, indicating that the labor market remains tight and vibrant and that companies are reluctant to lay off workers.

A rebound in leisure and hospitality led the way, as the sector added 59,000 positions, ADP reported. Hotels, restaurants, bars and similar establishments were leaders in job creation after getting eviscerated in the early days of the Covid pandemic, but that trend tailed off in recent months. The sector also led in wage gains, with annual growth of 6.4%.

Construction contributed 24,000 to the total, while the other services category, which includes dry cleaning and other support businesses, added 22,000. Financial activities increased 18,000.

There were only a few categories down on the month, with manufacturing off 13,000 and information services and natural resources and mining both seeing a decline of 2,000.

A worker at a restaurant at Grand Central Market in Los Angeles, California, US, on Thursday, Nov. 2, 2023.

Eric Thayer | Bloomberg | Getty Images

The pace of earnings growth decelerated again, with those staying in their job seeing annual pay increases of 5.4% while job changers saw earnings increase 8%, ADP said.

“We’re returning to a labor market that’s very much aligned with pre-pandemic hiring,” ADP’s chief economist, Nela Richardson, said. “While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

From a size perspective, companies with fewer than 50 employees led with 74,000 new jobs. Geographically, the West saw an increase of 109,000 while the Northeast added 94,000.

The ADP release comes a day ahead of the Labor Department’s more closely watched nonfarm payrolls count, and the two reports can differ substantially due to differences in methodology. Economists surveyed by Dow Jones expect December nonfarm payroll growth of 170,000, after November’s 199,000, which was nearly double the ADP estimate.

Federal Reserve officials are watching the jobs reports closely for clues on the labor market and its impact on inflation. According to minutes released Wednesday from the December meeting of the Federal Open Market Committee, the central bank’s rate-setting panel, officials see the labor market coming better into balance from the huge supply-demand mismatch over the past few years.

In related news, initial jobless claims for the week ended Dec. 30 totaled 202,000, a drop of 18,000 from the previous period and below the Dow Jones estimate for 219,000, the Labor Department reported. That was the lowest total since mid-October and counter to expectations that the labor market is starting to soften.

Continuing claims, which run a week behind, fell to 1.855 million, a drop of 31,000.

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Job openings nudged down in November, down to lowest in more than two years

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A job seeker visits a Job News USA career fair in Louisville, Kentucky, on June 23, 2021. A new Kentucky law cuts the maximum duration of unemployment benefits by more than half, to 12 weeks, during periods of low unemployment.

Luke Sharrett | Bloomberg | Getty Images

Demand for workers fell to its lowest level in more than 2½ years in November while hirings and layoffs both moved lower, the Labor Department reported Wednesday.

The department’s Job Openings and Labor Turnover Survey showed employment listings nudged lower to 8.79 million, about in line with the Dow Jones estimate for 8.8 million and the lowest since March 2021. Openings fell by 62,000, though the rate of vacancies as a measure of employment was unchanged at 5.3%.

In addition to the modest move lower in openings, hiring fell by 363,000, moving the rate down to 3.5%, a 0.2 percentage point decline. Layoffs dropped by 116,000, with the rate holding steady at 1%. A report last month from the Labor Department showed a net increase in nonfarm payrolls of 199,000 in November. A report Friday is expected to show growth of 170,000.

The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level that had been prevalent in 2022. Companies had faced a severe supply-demand mismatch in the period after the Covid pandemic began, a situation that has made gradual progress back to a more normalized state.

Job openings fell by 128,000 for transportation, warehousing and utilities and were off 97,000 in leisure and hospitality. Wholesale trade saw an increase of 63,000 and financial activities grew by 38,000.

Federal Reserve officials watch the JOLTS report for evidence of labor slack. The historically tight labor market had helped push inflation higher, hitting a more than 40-year peak in mid-2022 that also has slowly begun to recede. Policymakers in December indicated they are likely to begin a gradual reduction in interest rates this year if inflation continues to come down.

“Today’s JOLTS data is another signal that the Fed is delivering a soft landing,” said Ron Temple, chief market strategist at Lazard. “Today’s report is good news for American workers and the economy, but it also suggests to me that the Fed is unlikely to cut rates as aggressively in 2024, as markets currently indicate, given the risk of reigniting inflationary pressures.”

A separate report Wednesday showed that the U.S. manufacturing sector is still in contraction.

The ISM manufacturing report for December registered a reading of 47.4, representing the percentage of workers reporting expansion. Anything below 50 indicates contraction. The index was up 0.7 point from November and was slightly better than the 47.2 estimate from Dow Jones.

Employment, however, was a relative bright spot in the report, rising to 48.1, a 2.3-point monthly increase. Order backlogs jumped 6 points to 45.3 and new export orders rose to 49.9, a 3.9-point acceleration. There also was some positive inflation news as the prices sub-index decreased to 45.2, down 4.7 points.

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Saudi Arabia's sovereign wealth fund overtakes Singapore's GIC to top spending table

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Skyline of Riyadh in Saudi Arabia.

Simon Dawson | Bloomberg | Getty Images

Saudi Arabia’s Public Investment Fund (PIF) was the top spender among global sovereign wealth funds last year, accounting for about a quarter of the $124 billion splashed by state-owned investors, according to a preliminary report by research consultancy Global SWF.

The Saudi fund boosted its deal activities from a total $20.7 billion in 2022 to $31.6 billion in 2023, the research said, even as most other counterparts tapered down their spending. Overall, global sovereign wealth funds deployed 20% fewer funds compared to 2022, despite most major stock markets seeing a rally last year.

“This may signal an overly cautious approach, as there is no shortage of capital to put to work among these institutions,” the report, which tracks activities across the world’s sovereign funds, noted. 

“The clear winner was Saudi’s PIF, which has become a heavy-hitter both at home and overseas,” the analysts wrote. The PIF, controlled by Saudi Crown Prince Mohammed bin Salman, has total estimated assets of $776 billion. The Saudi fund has pursued frequent deals and joint ventures in its pursuit toward Vision 2030 — a plan originally launched back in 2016 which aims to increase economic diversification away from oil. Notable overseas investments in 2023, alongside golf and soccer, included Nintendo in Japan and Vale Basic Materials in Brazil. 

Asides from PIF, four other funds from the GCC (Gulf Corporation Council) made it into the top 10 — Mubadala, the Qatar Investment Authority, ADQ and the Abu Dhabi Investment Authority.

The PIF even surpassed Singapore’s GIC, which had led spending by wealth funds for the past six years. The Singaporean fund slashed its investment activity by 37%, in terms of volume, despite receiving one of its largest inflows from the central bank.

The report also noted the attention given to emerging markets among several sovereign investors. 

“In 2023 we can observe a renewed interest in emerging markets, including Saudi, Türkiye, and the UAE (with the help of domestic SWFs), and India, Brazil, China, and Indonesia,” it stated. 

Global economies will see more sovereign wealth funds coming online in 2024, such as Hong Kong’s HKIC, Philippines’ Maharlika and Pakistan’s PSWF.

“The formation of Dubai’s new SWF, DIF, will send shock waves and will surely attract personnel from other SWFs,” the research said.

From FedEx to airlines, companies are starting to lose their pricing power

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A FedEx worker delivers packages in New York, May 9, 2022.

Andrew Kelly | Reuters

After years of unbridled consumer spending on everything from home improvement to dream vacations, some companies are now finding the limits of their pricing power.

Shipping giant FedEx last week said customers have shied away from speedier, pricier shipping options. Airlines including Southwest discounted off-peak fares in the fall. The likes of Target and Cheerios maker General Mills have cut their sales outlooks as more consumers watch their budgets.

It’s a shift from the recent years when consumers spent at a breakneck pace — and at high prices — lifting corporate revenues to new records. But faced with weakening demand, more price-sensitive consumers, easing inflation and better supply, some sectors are now forced to find profit growth without the tailwind of price hikes.

The answer across industries has been to cut costs, whether it’s through layoffs or buyouts, or simply becoming more efficient. Executives have spent the past several weeks selling these cost-cutting plans to Wall Street.

Nike last week lowered its annual sales growth forecast and unveiled plans to cut costs by $2 billion over the next three years. Companies including Spirit Airlines, hit by a slowdown in domestic bookings and higher costs, offered salaried workers buyouts, while toymaker Hasbro announced layoffs of 1,100 employees as it struggles with lackluster toy sales.

Spirit Airlines jetliners on the tarmac at Fort Lauderdale Hollywood International Airport. (Joe Cavaretta/South Florida Sun Sentinel/Tribune News Service via Getty Images)

Joe Cavaretta | South Florida Sun-sentinel | Getty Images

“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.

“Goods companies don’t have the pricing power they did in the pandemic, and some in the hotel and travel [industries] — they don’t have the pricing power they did in the immediate post-Covid,” he added.

Sales growth for companies in the S&P 500 is on track to average 2.7% this year, according to mid-December analyst estimates posted by FactSet. That’s down from an average of 11% growth in 2022 over the year earlier. Meanwhile, net margins are forecast to fall only slightly year over year to 11.6% from 11.9%, FactSet said.

“Companies are extraordinarily committed to maintaining margins,” said Kelly.

FedEx, for example, despite its weaker sales forecast, maintained adjusted earnings outlook for its fiscal year that ends May 31. The company announced cost-cutting measures last year.

Sector shifts

Consumer spending has largely been resilient, but growth is slowing.

The Mastercard SpendingPulse survey showed holiday retail spending, which excludes auto sales and travel spending, rose 3.1% from Nov. 1 through Dec. 24 of this year over the same time frame in 2022, when consumers’ year-over-year retail spending increased 7.6%. Those figures are not adjusted for inflation.

The drag isn’t felt equally across industries.

According to the Mastercard survey, restaurant spending rose 7.8% during the holiday period, outpacing overall gains. Executives at Starbucks, for one, say sales are still strong and customers are opting for pricier drinks, fueling sales and profits.

Consumer spending on apparel and groceries rose 2.4% and 2.1%, respectively, from the year-earlier period, according to the survey. Spending on jewelry, however, fell 2.4% and spending on electronics dropped 0.4%, the report showed.

Airline executives have touted robust demand through the summer as travel rebounds from pandemic halts, but fares are dropping from 2022, when capacity was constrained by staffing shortages and aircraft delays. The latest inflation report from the U.S. Department of Labor showed airfare declined 12% in November from a year earlier.

Travelers walk with their luggage at John F. Kennedy International Airport in New York on Dec. 23, 2023.

Jeenah Moon | Getty Images

Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that the carrier’s fares are still up from last year, despite some discounting during off-peak travel times. The carrier has trimmed its capacity growth plans for 2024 and plans to utilize aircraft more during higher demand periods.

“The capacity changes next year are all about getting the network optimized to match the new demand patterns,” Jordan said. “In some cases, the peak and trough [of demand] are farther apart.”

Automakers are also losing their pricing power following years of resilient demand and low supplies of new vehicles that led to record North American profits for Detroit automakers as well as foreign-based companies such as Toyota Motor.

Average transaction prices of new vehicles climbed from less than $38,000 in January 2020 to more than $50,000 at the start of 2023 — an unprecedented 32% increase over that time. Prices remain elevated but were down more than 3.5% through October to roughly $47,936, according to the most recent data from Cox Automotive.

“The consumer is definitely pushing back,” said Ohsung Kwon, an equities strategist at Bank of America, referring to some prices.

“But we think the consumer is healthy,” he continued. “The balance sheet of the consumer still looks phenomenal.”

Spending hangover

There is plenty to cheer about the state of the U.S. consumer — the job market is still strong, unemployment is low and spending has been resilient.

But consumers have also tapped into their savings and racked up credit card debt, with balances reaching a record $1.08 trillion at the end of the third quarter, according to the New York Federal Reserve. Credit card delinquency rates are above pre-pandemic levels.

Those dynamics have some consumers pulling back on expenses at a time when companies had already been grappling with spending shifts as pandemic fears eased. Consumers that had spent heavily during Covid lockdowns on things such as home improvement supplies shifted their money to services such as travel and restaurants when restrictions lifted.

While airlines, many retailers and others have forecast a strong holiday season, the question remains whether consumers will continue their spending habits in the coming months, which are typically a low season for shopping and travel, especially as they pay off their recent purchases. That could mean a challenging period for companies to push price increases on consumers.

Even if companies can’t raise prices and if sales growth is muted, analysts are still upbeat about earnings next year.

FactSet data shows analysts expect a 6.6% increase in earnings of S&P 500 companies in the first quarter of 2024 from a year earlier. They forecast a sales increase of 4.4%. Both growth metrics would mark an annual improvement and quarter-on-quarter improvement. Net margins are expected to expand 11.8%.

Bank of America’s Kwon said he expects earnings to improve even if U.S. economic growth slows due in part to company strategy shifts.

“Companies are really focusing on what they can cut,” he said. “Companies have overhired and overbuilt capacity. They’ve stopped doing that.”

— CNBC’s Michael Wayland contributed to this article.

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Inflation has created a dark cloud over how everyday Americans view the economy

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Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois.

Scott Olson | Getty Images

When Kyle Connolly looks back at 2023, she sees it as a year defined by changes and challenges.

The newly single parent reentered the workforce, only to be laid off from her job at a custom home-building company in November. At the same time, Connolly has seen prices climb for everything from her Aldi’s grocery basket to her condo’s utility costs.

In turn, she’s cut back on everyday luxuries like eating out or going to the movies. Christmas will look pared down for her three kids compared to years prior.

“I’ve trimmed everything that I possibly can,” said the 41-year-old. “It sucks having to tell my kids no. It sucks when they ask for a little something extra when we’re checking out at the grocery store and having to tell them, ‘No, I’m sorry, we can’t.'”

Economic woes have seemed more apparent within her community in Florida’s panhandle. Connolly has noticed fewer 2022 Chevy Suburbans on the road, replaced by older Toyota Camry models. The waters typically filled with boats have been eerily quiet as owners either sold them or tried to cut back on gas costs. Fellow parents have taken to Facebook groups to discuss ways to better conserve money or rake in extra income.

The struggles among Connolly and her neighbors highlight a key conundrum puzzling economists: Why does the average American feel so bad about an economy that’s otherwise considered strong?

‘High prices really hurt’

By many accounts, it has been a good year on this front. The annualized rate of price growth is sliding closer to a level preferred by the Federal Reserve, while the labor market has remained strong. There’s rising hope that monetary policymakers have successfully cooled inflation without tipping the economy into a recession. 

Yet closely watched survey data from the University of Michigan shows consumer sentiment, while improving, is a far cry from pre-pandemic levels. December’s index reading showed sentiment improved by almost 17% from a year prior, but was still nearly 30% off from where it sat during the same month in 2019.

“The main issue is that high prices really hurt,” said Joanne Hsu, Michigan’s director of consumer surveys. “Americans are still trying to come to grips with the idea that we’re not going back to the extended period of low inflation, low interest rates that we had in the 2010s. And that reality is not the current reality.”

Still, Hsu sees reason for optimism when zooming in. Consumer sentiment has largely improved from its all-time low seen in June 2022 — the same month the consumer price index rose 9.1% from a year earlier —as people started noticing inflationary pressures recede, she said.

One notable caveat was the drop in sentiment this past May, which she tied to the U.S. debt ceiling negotiations. The 2024 presidential election has added to feelings of economic uncertainty for some, Hsu said.

Inflation vs. the job market

Continued strength in the labor market is something economists expected to sweeten everyday Americans’ views of the economy. But because consumers independently decide how they feel, jobs may hold less importance in their mental calculations than inflation.

There are still more job openings than there are unemployed people, according to the latest data from the Bureau of Labor Statistics. Average hourly pay has continued rising — albeit at a slower rate than during the pandemic — and was about 20% higher in November than it was in the same month four years ago, seasonally adjusted Labor Department figures show.

That’s helped boost another widely followed indicator of vibes: the Conference Board’s consumer confidence index. Its preliminary December reading was around 14% lower than the same month in 2019, meaning it has rebounded far more than the Michigan index.

While the Michigan index compiles questions focused on financial conditions and purchasing power, the Conference Board’s more closely gauges one’s feelings about the job market. That puts the latter more in line with data painting a rosier picture of the economy, according to Camelia Kuhnen, a finance professor at the University of North Carolina.

“You think that they’re talking about different countries,” Kuhnen said of the two measures. “They look different because they focus on different aspects of what people would consider as part of their economic reality.”

A hot job market can be a double-edged sword for sentiment, Michigan’s Hsu noted. Yes, it allows workers to clinch better roles or higher pay, she said. But when those same workers put on their consumer hats, a tight market means shorter hours or limited availability at their repair company or veterinarian’s office.

Silver linings for some

Other reasons why consumers feel positively about the economy this year can only be true for certain — and often wealthier — groups, economists say.

UNC’s Kuhnen said Americans would be pleased if they are homeowners seeing price appreciation. Another reason for optimism: If they had investments during 2023’s stock market rebound.

Without those cushions, people on the lower end of the income spectrum may feel more of a pinch as higher costs bite into any leftover savings from pandemic stimulus, Kuhnen said. Elsewhere, the resumption of student loan payments this year likely also caused discontent for those with outstanding dues, according to Karen Dynan, a Harvard professor and former chief economist for the U.S. Treasury Department.

Marissa Lyda moved with her husband and two kids to Phoenix from Portland earlier this year, in part due to lower housing costs. With profits from the value gained on the property she bought in 2019, her family was able to get a nicer house in the Grand Canyon state.

Yet she’s had to contend with an interest rate that’s more than double what she was paying on her old home. Though Arizona’s lower income tax has fattened her family’s wallet, Lyda has found herself allocating a sizable chunk of that money to her rising grocery bill.

The stay-at-home mom has switched her go-to grocer from Kroger to Walmart as value became increasingly important. She’s also found herself searching harder in the aisles for store-brand food and hunting for recipes with fewer ingredients.

Her family’s financial situation certainly doesn’t feel like it reflects the economy she hears experts talking about, Lyda said. It’s more akin to the videos she sees on TikTok and chatter among friends about how inflation is still pinching pocketbooks.

“I look at the news and see how they’re like, ‘Oh, best earnings, there’s been great growth,'” the 29-year-old said. “And I’m like, ‘Where’s that been?'”

‘Just trying to hold on’

Economists wonder if social media discourse and discussion about a potential recession have made Americans think they should feel worse about the economy than they actually do. That would help explain why consumer spending remains strong, despite the fact that people typically tighten their belts when they foresee financial turmoil.

There’s also a feeling of whiplash from the runaway inflation that snapped a long period of low-to-normal price growth, said Harvard’s Dynan. Now, even as the annual rate of inflation has cooled to more acceptable levels, consumers remain on edge as prices continue to creep higher.

“People are still angry about the inflation we saw in 2021 and, in particular, 2022,” Dynan said. “There’s something about the salience of … the bill for lunch that you see every single day that just maybe resonates in your brain, relative to the pay increase you get once a year.”

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023. 

Kevin Lamarque | Reuters

Another potential problem: The average person may not completely understand that some inflation is considered normal. In fact, the Federal Reserve, which sets U.S. monetary policy, aims for a 2% increase in prices each year. Deflation, which is when prices decrease, is actually seen as bad for the economy.

Despite these quandaries, economists are optimistic for the new year as it appears increasingly likely that a recession has been avoided and the Fed can lower the cost of borrowing money. For everyday Americans like Connolly and Lyda, inflation and their financial standing will remain top of mind.

Lyda has cut treats like weekly Starbucks lattes out of the budget to ensure her family can afford a memorable first holiday season in their new home. In 2024, she’ll be watching to see if the Fed cuts interest rates, potentially creating an opportunity to refinance the loan on that house.

“You just have to realize that every season of life may not be this huge financial season,” Lyda said. “Sometimes you’re in a season where you’re just trying to hold on. And I feel like that’s what it’s been like for most Americans.”

Fed's favorite inflation gauge shows prices rose at 3.2% annual rate in November, less than expected

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A gauge the Federal Reserve uses for inflation rose slightly in November and edged closer to the central bank’s goal.

The core personal consumption expenditures price index, which excludes volatile food and energy prices, increased 0.1% for the month, and was up 3.2% from a year ago, the Commerce Department reported Friday.

Economists surveyed by Dow Jones had been expecting respective increases of 0.1% and 3.3%.

On a six-month basis, core PCE increased 1.9%, indicating that if current trends continue the Fed essentially has reached its goal.

“Adding in the further sharp slowdown in rent inflation still in the pipeline, it’s hard to see any credible reason why the annual inflation rate won’t also return to the 2% target over the coming months,” wrote Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Markets reacted little to the report, with Wall Street set for a mixed open Friday in its last session before the Christmas.

Elsewhere in the report, consumer expenditures in November increased 0.3% while income rose 0.4%, numbers that were in line with expectations and indicative that spending was continuing apace despite ongoing inflation pressures.

Including food and energy costs, so-called headline PCE actually fell 0.1% on the month and was up just 2.6% from a year ago, after peaking above 7% in mid-2022. That was the first monthly decline since April 2020, according to Fed data.

The 12-month numbers are significant in that both show inflation making continued progress toward the Fed’s 2% target.

“The Federal Open Market Committee is not yet ready to declare victory on inflation, but the outlook is much better than it was just a few months ago,” wrote Gus Faucher, chief economist at PNC Financial Services. “The slowing in core inflation opens the door for fed funds rate cuts in 2024; the timing will depend on core PCE numbers over the next few months.

The Fed prefers PCE as an inflation measure over the more widely followed CPI as the former focuses more on what consumers actually spend rather than the latter’s measure of what goods and services cost. Though policymakers watch both measures, they are more concerned with core prices as a longer-run inflation gauge.

November’s report reflected a shift in consumer appetite, as prices for services increased 0.2% while goods slumped 0.7%. A 2.7% slide in energy prices and a 0.1% decrease in food helped hold back inflation for the month.

Much of the market’s focus lately has been on the Fed’s inflation view and what that will mean for interest rates.

For each of its last three meetings, the Federal Open Market Committee has heled the line, keeping its benchmark overnight borrowing rate targeted between 5.25%-5.5%. At its meeting last week, the committee indicated it is done raising rates and expects to implement cuts totaling 0.75 percentage point in 2024. Markets expect the first rate cut to happen in March.

UK inches closer to technical recession as growth is revised down

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People shopping on Oxford Street in London. Picture date: Thursday December 29, 2022. (Photo by James Manning/PA Images via Getty Images)

James Manning – Pa Images | Pa Images | Getty Images

LONDON — The U.K. is edging closer to recession after revised figures showed the economy shrank in the previous quarter.

U.K. gross domestic product (GDP) fell by 0.1% between July and September, a downward revision from the earlier estimate of flat growth, according to new data released Friday by the Office for National Statistics.

There was also zero growth in the prior three months, the new figures showed, down from the 0.2% growth previously calculated.

Data due out in February will show whether the U.K. has entered a technical recession — defined as when the economy shrinks for two consecutive quarters.

Responding to the revisions Friday, Finance Minister Jeremy Hunt insisted that the “medium-term outlook for the U.K. is far more optimistic than these numbers suggest.”

However, analysts said it shows that the U.K. has so far just “scraped by” without a recession.

“Growth is weakening and interest rates are really beginning to bite and while a recession has just been avoided to date, there is no guarantee one will be avoided in 2024,” Richard Carter, head of fixed interest research at Quilter Cheviot, said in a note.

“Inflation has eased more than anticipated and interest rate predictions are suggesting more easing than originally thought in 2024, but the damage may already have been done. Certainly, Rishi Sunak’s pledge to grow the economy is now severely in doubt,” he said.

That could put further pressure on the Bank of England to cut interest rates sooner than planned in a bid to shore up a weaker economy.

Better-than-expected data released Wednesday showed that inflation hit 3.9% in November, raising speculation that the central bank could cut rates in the spring.

Prime Minister Rishi Sunak has made growing the economy one of his key pledges this year. Downing Street said it will be met if GDP increases in the three months to December versus the previous quarter.

A near-term drop in interest rates would be a win for Sunak’s government, as the U.K. enters an election year.

Still, the BOE’s governor Andrew Bailey has insisted that rates may need to remain “higher for longer” after holding them steady at 5.25% at the final policy meeting of the year.

UK and Switzerland to sign post-Brexit financial services deal

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The U.K. and Switzerland are deepening the ties between their financial services sectors with a new post-Brexit deal.

Sopa Images | Lightrocket | Getty Images

LONDON — The U.K. and Switzerland on Thursday will sign a post-Brexit financial services deal designed to bring two of Europe’s largest banking centers closer together.

British Finance Minister Jeremy Hunt is meeting with his Swiss counterpart, Karin Keller-Sutter, in Bern to sign the mutual recognition agreement, which they are expected to say will ease business ties between financial firms and wealthy individuals in the two markets.

The U.K. Treasury said Wednesday that the deal was a win for post-Brexit Britain that would improve cross-border market access for a range of financial services sold by banks, insurers and asset managers.

“The Bern Financial Services Agreement is only possible due to new freedoms granted to the UK following its exit from the EU,” the Treasury said, according to the FT. “The agreement will enhance the U.K. and Switzerland’s already thriving financial services relationship,” it added.

The details of the agreement have yet to be formally announced. However, some commentators said it would likely mark an improvement on the equivalence framework Britain had with Switzerland while in the European Union.

David Henig, U.K. director at independent think-tank the European Centre for International Political Economy, said the deal was “broadly good news” which would leverage Britain’s heft in the financial services sector.

U.K. Prime Minister Rishi Sunak initially launched talks with Switzerland in 2020, when he was finance minister, claiming that the accord would demonstrate the countries’ shared vision of an “open, global and free” economy.

The current Conservative government in Britain has long positioned signing new trade deals as a key benefit of Brexit. In June, Britain signed a deal to join an 11-nation Asia-Pacific free-trade bloc that includes Australia, Singapore, Japan and Canada, marking its third new trade deal since formally exiting the bloc on Jan. 31, 2020.

Retail sales rose 0.3% in November vs. expectations for a decline

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Consumers showed unexpected strength in November, giving a solid start to the holiday season as inflation showed signs of continued easing.

Retail sales rose 0.3% in November, stronger than the 0.2% decline in October and better than the Dow Jones estimate for a decrease of 0.1%, the Commerce Department reported Thursday. The total is adjusted for seasonal factors but not inflation.

Excluding autos, sales rose 0.2%, also better than the forecast for no change. Stripping out autos and gas, sales rose 0.6%.

With the consumer price index up 0.1% on a monthly basis in November, the retail sales number shows consumers more than keeping up with the pace of price increases.

On a year-over-year basis, sales accelerated 4.1%, compared with a headline CPI rate of 3.1%. The inflation rate is still above the Federal Reserve’s 2% target but is well below its peak above 9% in mid-2022.

“The rebound in retail sales in November provides further illustration that the continued rapid decline in inflation is not coming at the cost of significantly weaker economic growth,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Sales held up despite a 2.9% slide in receipts at gas stations, as energy prices broadly slumped during the month. Gas station sales were off 9.4% on a 12-month basis.

That weakness was offset by an increase of 1.6% at bars and restaurants, a 1.3% gain at sporting goods, hobby, book and music stores, and a 1% increase at online retailers.

The so-called control group of sales, which excludes auto dealers, building materials retailers, gas stations, office supply stores, mobile homes and tobacco stores and feeds into calculations for gross domestic product, increased 0.4%.

In other economic news Thursday, the pace of layoffs slowed sharply last week.

Initial claims for unemployment insurance totaled a seasonally adjusted 202,000 for the week ended Dec. 9, a decline of 19,000 from the previous week and the lowest total since mid-October, according to the Labor Department. Economists had been looking for 220,000.

Both reports come the day after the Federal Reserve indicated that enough progress has been made in the inflation fight to start lowering interest rates next year. According to projections following the policy meeting of the Federal Open Market Committee, central bank officials expect to cut about 0.75 percentage point off short-term borrowing rates in 2024.

Though Fed officials expect economic growth to slow considerably in the year ahead, they do not foresee a recession.

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European Central Bank holds rates, will start shrinking balance sheet

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BRUSSELS, BELGIUM – NOVEMBER 27: Christine Lagarde, President of the European Central Bank speaks during the European Parliament’s Committee on Economic and Monetary Affairs (ECON) meeting in Brussels, Belgium on Nevember 27, 2023. (Photo by Dursun Aydemir/Anadolu via Getty Images)

Anadolu | Anadolu | Getty Images

The European Central Bank on Thursday held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower and announced plans to shrink its balance sheet.

The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation, as investors instead chase signals on when the first rate cut may come and assess the ECB’s plans to shrink its balance sheet.

“The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” it said in a statement. However, it switched language around inflation from describing it as “expected to remain too high for too long,” saying instead that it will “decline gradually over the course of next year.”

The latest staff macroeconomic projections see average real GDP expanding 0.6% in 2023, from a prior forecast of 0.7%. They estimate GDP will expand by 0.8% in 2024, from 1%, previously. The forecast for 2025 was unchanged, at 1.5%.

Headline inflation is meanwhile seen averaging 5.4% in 2023, 2.7% in 2024 and 2.1% in 2025. It had previously forecast readings of 5.6% this year, 3.2% in 2024 and 2.1% in 2025. The ECB now also released a new estimate for 2026, at 1.9%.

The ECB cautioned that domestic price pressures remain elevated, primarily because of growth in the cost of labor. Members see core inflation, excluding energy and food, averaging 5% this year and 2.7% in 2024, 2.3% in 2025 and 2.1% in 2026.

It said that tighter financing conditions were dampening demand and helping control inflation, adding that growth would be subdued in the short term before recovering due to the rise in real incomes and improved foreign demand.

The decision keeps the central bank’s key rate at a record high of 4%.

The ECB also announced that reinvestments under its pandemic emergency purchase programme (PEPP), a temporary asset purchase scheme, would complete at the end of 2024.

The transition will be gradual, with a reduction in the PEPP portfolio by 7.5 billion euros ($8.19 billion) per month on average over the second half of 2024, it said, after the Governing Council agreed to “advance the normalisation of the Eurosystem’s balance sheet.”

“I think most people thought [the announcement on PEPP] would come a little bit later, might come in the rate cut debate and was the sort of price that the doves would have to pay,” James Smith, developed market economist at ING, told CNBC’s Joumanna Bercetche after the announcement.

Fall in inflation

Euro zone year-on-year inflation has moderated from 10.6% in October 2022 to 2.4% in the most recent reading in November. That has put the ECB’s 2% target within grasp, even as officials note the threat that wage pressures and energy market volatility will cause a potential resurgence.

It has also fueled bets on cuts next year, with some analysts and market pricing both suggesting trims could come before the summer.

Asked about the timing of cuts in a press conference following the announcement, ECB President Christine Lagarde told CNBC’s Annette Weisbach that the central bank was “data dependent, not time dependent.”

“Clearly when we look at our inflation outlook, look at the projections, we see inflation at 2.1% in 2025…and the path to get there is flatter than it was before, which lowers the risk of inflation expectations deanchoring,” Lagarde said.

“A lot of indicators are showing that underlying inflation comes below expectations, with a decline across all components.”

She continued, “So, should we lower our guard? We ask ourselves that question. No, we should absolutely not lower our guard.”

A major reason for that is the continued risk from domestic inflation, Lagarde said, adding that there is a need to assess fresh wage data in the spring.

Market reaction

European bourses gained ground through Thursday, with the regional Stoxx 600 index reaching its highest level since January 2022, while European bonds rallied.

After the ECB news, the euro extended gains to trade 0.8% higher against the dollar at $1.095. It also moved from a slight loss to trade flat against the British pound.

The moves partly reflected the U.S. Federal Reserve’s Wednesday decision to hold rates steady and release the latest “dot plot” rate trajectory from its members, triggering expectations of a dovish pivot from major central banks.

Gains held after the Bank of England also announced a rate hold at midday U.K. time, even as its committee said monetary policy was “likely to need to be restrictive for an extended period of time.”

Fed lowers inflation forecast for 2024, seeing core PCE falling to 2.4%

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Federal Reserve Board Chairman Jerome Powell answers a question during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, November 1, 2023.

Kevin Lamarque | Reuters

The Federal Reserve dialed back its inflation projections on Wednesday, seeing its favorite gauge falling to 2.4% in 2024.

The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 and finally reach its 2% target in 2026. The gauge rose 3.5% in October on a year-over-year basis.

These new forecasts suggest a softer inflation picture in the next two years than that from the last update in September. The Fed had foreseen the core PCE hitting 2.6% in 2024 and 2.3% in 2025.

In the post-meeting statement released Wednesday, the Federal Open Market Committee said inflation has “eased over the past year” while maintaining its description of prices as “elevated.” 

While the public more closely watches the consumer price index as an inflation measure, the Fed prefers the core PCE reading. The former measure primarily looks at what goods and services cost, while the latter focuses on what people actually spend, adjusting for consumer behavior when prices fluctuate. Core CPI was at 4% in November while headline was at 3.1%.

Committee members also upgraded their forecast for gross domestic product. They now expect GDP to grow at a 2.6% annualized pace in 2023, a half percentage point increase from the last update in September.

Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.  

Dot plot

Projections released by the Fed showed the central bank would slash rates to a median 4.6% by the end of 2024, which would be three quarter-point reductions from the current targeted range between 5.25%-5.5%. 

The individual members of the FOMC indicate their expectations for rates in the following years in the “dot plot.”

Here are the Fed’s latest targets:

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Wholesale prices held flat in November, providing another encouraging inflation signal

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Wholesale prices were flat in November, providing a leading indicator that inflation is easing, the Labor Department reported Wednesday.

The producer price index, which measures a broad range of prices on final demand items, was unchanged for the month, following a 0.4% decrease in October but less than the Dow Jones estimate for a 0.1% gain. On a year-over-year basis, headline PPI accelerated just 0.9%, after peaking above 11.5% in March 2022.

Excluding food and energy, the index also was unchanged against an estimate for a 0.2% increase. Excluding food, energy and trade services, PPI increased 0.1%, posting a sixth straight increase and good for a 12-month gain of 2.5%.

The release comes a day after the Labor Department said its consumer price index rose just 0.1% in November and 3.1% from a year ago. The PPI gauges the prices producers receive for what they produce while CPI measures what consumers pay and is considered a leading signal for prices in the pipeline.

Together, the easing inflation data, along with other economic signals, likely will give the Federal Reserve enough room to hold benchmark interest rates steady when its policy meeting concludes Wednesday.

At the wholesale level, indexes for both goods and services were unchanged, though there were some big swings within components.

Gasoline, for instance, fell 4.1% while chicken eggs soared 58.8%. The index for final demand energy fell 1.2%, offsetting increases of 0.6% for foods and 0.2% for goods less food and energy.

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European Central Bank to focus on shrinking balance sheet as markets bet on rate cuts

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Christine Lagarde, president of the European Central Bank (ECB).

Bloomberg | Bloomberg | Getty Images

FRANKFURT — The European Central Bank meets this week with investors closely monitoring to see when the Frankfurt institution might start to cut interest rates.

It will be too early to declare victory in the battle against inflation, but with inflation at a two-year low, it certainly gives the ECB’s Governing Council breathing space to focus on another important issue: its gigantic balance sheet.

“Having reached its policy rate plateau at a 4% deposit rate, the ECB can now shrink its balance sheet at a faster pace without risking too much of a blowout in yield spreads within the euro zone,” said Holger Schmieding of Berenberg in a research note to clients.

“Nonetheless, markets will probably have to correct some of their overoptimistic rate cut expectations once the ECB has spoken this Thursday.”

Inflation plunge

Inflation declined to 2.4% in November and core inflation also has gone down. With inflation falling faster than expected, investors have increased their bets for ECB rate cuts next year, especially after one of the more hawkish members of the board, Isabel Schnabel, called the consume price slowdown “remarkable” and “a pleasant surprise,” according to a transcript of a Dec. 1 interview with Reuters.

Money markets are currently pricing in almost 150 basis points of rate cuts next year. The bank’s key deposit rate is at a record high of 4%, after 10 consecutive hikes that began in July 2022 and pushed rates back into positive territory for the first time since 2011.

“The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed,” said Mark Wall, an ECB watcher with Deutsche Bank.

But he believes the ECB will most likely keep its cards close to its chest: “We expect the ECB to keep the guidance that maintaining restrictive rates for sufficiently long will bring inflation back to target in a timely manner.”

PEPP roll-off

Looking ahead, there will be a new round of staff projections for inflation and economic growth in March, which will give the central bank more data to back their data-dependent policy approach and possibly give it room for rate cuts.

But this week, the main policy change at the conclusion of the ECB’s meeting on Thursday might come in the form of a shift in forward guidance — specifically when it will end reinvestments of its PEPP program.

The PEPP, or the Pandemic Emergency Purchase Program, is a flexible bond purchase program introduced during the coronavirus pandemic. The ECB reinvests any maturing securities it gets from its PEPP portfolio but that could soon change. 

Allianz economist explains why ECB cuts will not come until late 2024

“We have indicated that we would continue reinvesting until at least 2024,” ECB President Christine Lagarde told European Parliament lawmakers on Nov. 27.

“This is a matter which will come probably for discussion and consideration within the Governing Council in the not-too-distant future, and we will reexamine possibly this proposal.”

Deutsche Bank’s Wall explained that “if rate cuts are moving forward, the ECB might accelerate the preliminary steps in the exit from PEPP reinvestments.”

 

 

 

Bank of England set to hold interest rates as economists debate 2024 cuts

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A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England is all but certain to keep its main interest rate unchanged at 5.25% for a third consecutive meeting on Thursday, but economists are split over when to expect the first cut next year.

The market is pricing an almost 100% chance of a hold on Thursday, according to LSEG, with economic data since the Bank’s last meeting proving largely inconclusive.

Real GDP was flat in the third quarter, in line with the Monetary Policy Committee’s projections, while both inflation and wage growth have undershot expectations and domestic demand has been weak. U.K. headline inflation fell to an annual 4.6% in October, its lowest in two years.

The latest labor market data on Tuesday indicated a continuation of recent trends, with unemployment remaining broadly flat and vacancies continuing to decline at pace.

“This fits the hypothesis of some US Federal Reserve officials that, with vacancies so high, it may be possible to introduce slack into the labour market without significantly raising unemployment,” PwC Economist Jake Finney said in an email Tuesday.

Average pay including bonuses fell by 1.6% between September and October, versus an average monthly growth rate of 1.1% in the first half of the year.

Finney noted that real inflation-adjusted wages are still growing on a year-on-year basis due to a steep fall in headline inflation, suggesting the worst of the country’s cost of living crisis is behind the average household.

Signs of the labor market cooling will offer some reassurance to the MPC ahead of Thursday’s meeting, Finney said, especially given the lack of major surprises in the economic data over the past month.

Rhetoric to remain hawkish

In light of this, Barclays expects the MPC to deliver a split vote in favor of a hold, but keep its rhetoric hawkish as it pushes back against the market’s pricing of “premature” cuts. Barclays does not expect rates to fall until August 2024.

Economists at the bank, Abbas Khan and Jack Meaning, said they expect the MPC to continue to indicate that its current monetary policy stance is “restrictive,” with growing signs of its impact on activity and the labor market.

“An unchanged forward guidance will also serve the MPC well to push against the current market pricing of Bank Rate which assigns an increasing probability to cuts in H1 2024,” they said.

PWC: UK festive spending will decline by 13% in 2023

“We continue to expect the beginning of the cutting cycle in August 2024 and a terminal Bank Rate at 3.25% by Q2 2025.”

Khan and Meaning added that a repricing of the timing and magnitude of cuts by the U.S. Federal Reserve and the European Central Bank, both of which will also announce policy decisions this week, may exert pressure on the MPC to start cutting the Bank rate earlier if sterling was to spike and cause inflation to fall below the Bank’s 2% target sooner or by a greater margin.

“However, given the timing of data cycles, the level of inflation, in particular in services, and the y/y rate of wage growth, we think it is unlikely that the MPC will pivot in H1 2024 and almost certainly not before May,” they added.

No change in narrative

Both the Fed and the ECB have seen their hawkish stances tempered by dovish interventions from pivotal voting committee members — Christopher Waller in the U.S. and Isabel Schnabel in Europe.

By contrast, the Bank of England’s centrist policymakers, such as Governor Andrew Bailey and Chief Economist Huw Pill, have repeatedly emphasized that it is too soon to talk about cuts, while more hawkish members have raised further concerns about the potential persistence of inflationary pressures.

“While current market pricing is not too far away from our Bank Rate forecast — first cut in June and 100bp of cuts over 2024 — at this stage we think that the BoE will want to prevent financial conditions loosening too much, too soon,” BNP Paribas European economists Paul Hollingsworth and Matthew Swannell said in a research note last week.

The French bank expects the Bank of England to reiterate the need to remain in restrictive territory on Thursday, though as there will be no press conference or updated projections, this will need to be conveyed through the vote split, guidance and any post-meeting communications.

“Ultimately, however, we expect both growth and inflation to be weaker than the BoE forecasts for H1 2024, bringing a first cut in June 2024 and taking Bank Rate to 4.25% by the end of the year,” Hollingsworth and Swannell added.

Inflation slowed to a 3.1% annual rate in November

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Prices across a broad range of goods and services edged higher in November but were mostly in line with expectations, further easing pressure on the Federal Reserve.

The consumer price index, a closely watched inflation gauge, increased 0.1% in November, and was up 3.1% from a year ago, the Labor Department reported Tuesday. Economists surveyed by Dow Jones had been looking for no gain and a yearly rate of 3.1%.

While the monthly rate indicated a pickup from the flat CPI reading in October, the annual rate showed another decline after hitting 3.2% a month earlier.

Excluding volatile food and energy prices, core CPI increased 0.3% on the month and 4% from a year ago. Both numbers were in line with estimates and little changed from October.

The report was “somewhat in in line, although, I suppose not as good as what some might have hoped that we would start to see more deceleration on a month over month basis,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. The Fed “will probably talk about continued disinflation being good news.”

A 2.3% decrease in energy prices helped keep inflation in check, as gasoline fell 6% and fuel oil was off 2.7%. Food prices increased 0.2%, boosted by a 0.4% jump in food away from home. On an annual basis, food rose 2.9% while energy was down 5.4%.

Shelter prices, which make up about one-third of the CPI weighting, increased 0.4% on the month and were up 6.5% on a 12-month basis. However, the annual rate has showed a steady decline since peaking in early 2023.

The release comes as the Federal Reserve begins its two-day policy meeting, during which it is expected to hold interest rates steady for the third consecutive time.

However, markets are looking more closely at what the Fed signals for the future.

After hiking rates 11 times since March 2022, policymakers are expected to signal that the policy tightening is over, with the next step likely to be cuts at a still-to-be-determined pace. Following the release, futures pricing continued to indicate virtually no chance of any further rate hikes, with the first cut likely to happen in May.

In fact, futures markets indicate the Fed will ease aggressively in 2024, cutting rates up to 1.25 percentage points by the end of the year. Respondents to the CNBC Fed Survey, though, think the central bank will move at a more measured pace, cutting about three times, assuming quarter percentage point increments.

This is breaking news. Please check back here for updates.

'Somebody has it wrong' on U.S. recession risks as oil, gold and Treasurys diverge, fund manager says

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Markets are confused over the odds of a U.S. recession, and “somebody has got it wrong,” according to hedge fund manager David Neuhauser.

The CIO of Livermore Partners told CNBC on Monday that many investors are hoping for a “Goldilocks” scenario, in which the economy doesn’t grow too quickly, or shrink too much.

“The outlook was, of course, that the Fed’s going to look to be cutting rates because they see a soft landing approaching. And it looks like, on the surface, it is,” he told “Squawk Box Europe.”

Recent jobs data and inflation figures have boosted hopes that a recession can be avoided in the U.S. Nonfarm payrolls outpaced expectations in November, and inflation figures for October also beat estimates, with consumer prices coming in flat on the previous month and up 3.2% from a year prior.

“But at the same time, underneath the surface, you’re seeing a lot of cracks,” Neuhauser added.

He identified weakness in the U.S. consumer and the global economy — China in particular — and in the fact that inflation numbers remain stubbornly high in a number of countries.

“It looks like the U.S. is the best spot to be in, and I think that today that’s true. Except I think that [the] forward path — are we going to see things start to fall off a cliff? Or are we going to, sort of, glide path down and corporate earnings are going to be sheltered from the storm?” he said.

“That’s the thing, I think, people don’t have a really good understanding of today, but they’re believing that that’s going to happen — that’s the narrative.”

Oil and gas markets, which Livermore Partners is invested in, are “telling a whole different story” when it comes to the economic outlook, according to Neuhauser.

“When you look at the oil … and you look at the gold market, that’s telling you recession is in the front,” he said. “But when you read the tea leaves in terms of what analysts are saying, economists are saying as far as the U.S. economy — that the soft landing is approaching. That’s what, actually, the 10-year [Treasury yield] is telling you.”

Brent crude futures with February expiry were trading around $75.67 per barrel early Monday, down over 20% from their peak of around $97 per barrel in September.

Spot gold prices have soared from their early October lows of around $1,810 per ounce. The commodity was trading around $1,991 an ounce Monday, off a record high above $2,100 per ounce seen last week.

Both falling oil prices and rising gold prices indicate growing recessionary fears. At the same time, heightened expectations of a soft landing (following the strong jobs data) saw 10-year Treasury yields jump Friday. The 10-year yield was hovering around 4.254% early Monday.

“Somebody has it wrong here, is what I’m trying to tell you,” Neuhauser added. “It’s hard to describe who has it [wrong] yet. So I’m just really waiting and seeing to decipher what’s the right path to take.”

Spanish economist picked to lead the EU's massive lending unit lays out her priorities

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The incoming head of one of the world’s largest development banks says it must become faster and more efficient in order to finance priorities such as the climate transition and Ukraine rebuild.

Nadia Calviño, Spain’s finance minister and deputy prime minister, was appointed head of the European Investment Bank Friday — in what has been touted as a boost for Spanish influence within the European Union. Known as the EU’s lending arm it approved some 75.86 billion euros ($81.6 billion) in new projects in 2022.

“One of my priorities when I get to the European Investment Bank will be to see how to speed up procedures, how to make the institution, not leaner, but more efficient in funding, public and private investment,” Calviño told CNBC’s “Squawk Box Europe” on Monday.

“We also have a European Union with 27 member states, and it is a complex construction. But still, it leads the green transition in the world, it has a leading role in many of today’s debates, and I think this leading role should be preserved going forward.”

The organization “has the capability, the ability, to mobilize large amounts of investment, public and private investment, in the areas of the green transition, the rebuilding of Ukraine, and all other European priorities. So indeed, I do think that we need an EIB which is fit for purpose to support European policies going forward,” she said. She said she will also look to increase co-operation and discussion between global multilateral development banks to create a “global safety net” fit to meet new challenges.

Calviño said that Spain had launched a “massive” investment program using funds from the NextGenerationEU pandemic recovery instrument.

“What we see is that we launched strategic projects in the area of electric vehicles, or precision health, or agri-tech … or chips. And this is actually attracting large private investments that see Spain as a great opportunity for them to set their bases and invest in R&D [research and development] and the development of new technologies. So I do think there is a chance for us to crowd in private investment if we do things right,” she said.

‘Global standard’ on AI

Asked about the negative reaction by some tech leaders to landmark new EU regulation around artificial intelligence, Calviño was firm that the bloc had reached the “right balance.”

The rules, agreed in an initial form by lawmakers Friday, divides AI into categories including “unacceptable” uses that must be banned, along with high, medium and low-risk. High-risk technologies will be required to comply with various requirements, including an impact assessment, in order to access the EU market.

“Some parts of the industry may not want to have any regulation whatsoever. But, you know, citizens are also expecting the public sector to ensure that the development and the innovation in this area is going to preserve human rights, our values and actually go in the direction of improving humankind’s living conditions … from this point of view, I think that we’ve struck the right balance.”

“There is proportionality in the rules for smaller players and for large platforms. We’re going step by step, starting with artificial intelligence having to show that something, a picture, a video, has been created through artificial intelligence, to start with … It is a very important step forward so that Europe is also leading standard-setting at the global level.”

On whether the rules risked hampering the ability of Europe’s technology firms to grow and compete on the global stage, Calviño said: “This debate took place when we adopted the general data protection regulation. And many people said, well, companies are going to abandon Europe.”

“Actually, that has become the global standard. And I think it’s going to be something similar in artificial intelligence. But I agree, we need a global standard. And that’s why it’s important that the United Nations is also looking into these issues.”

Here’s where the jobs are for November 2023 — in one chart

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The U.S. job market once again surprised to the upside in November, as strong growth in health care and a few other sectors helped the economy add nearly 200,000 jobs and push the unemployment rate down.

Health care and social assistance added more than 93,000 jobs for the month, making it the top category for job growth, according to the U.S. Bureau of Labor Statistics. Government jobs grew by 49,000, while leisure and hospitality added 40,000 jobs.

The job gains for health care and social assistance rise to 99,000 when including private education, as some economists do.

Much of the labor market story over the past two years has been tied to the economic rebound from the Covid-19 pandemic, but the health-care growth appears to be part of a longer-term trend.

“We’re back to 2019 in some ways. If prior to the pandemic, you would have said, ‘Hey, health care’s going to be one of the largest sources of hiring in late 2023,’ no one would have been surprised by that, I think. There are very long-term structural tailwinds here,” Nick Bunker, director of economic research at Indeed Hiring Lab, told CNBC.

Bunker also pointed out that health care is less sensitive to higher interest rates or other cyclical factors that affect the U.S. labor market.

Another key part of the jobs growth story in November was returning strike workers.

Manufacturing employment rose by 28,000, helped by the 30,000 jobs gained in motor vehicles and parts as the United Auto Workers strike ended. The information sector was also bolstered by the addition of 17,000 jobs from the motion picture and sound recording industries, as Hollywood production restarts after the actors’ strike was resolved.

Retail trade was an outlier area to the downside, losing more than 38,000 jobs. The sector is roughly flat year over year in terms of total jobs, according to the Labor Department.

“I’m not spooked by it right now. … If you look at the nonseasonally adjusted gains for that sector, it’s roughly in line with what we saw last year. So maybe the seasonal adjustments need to catch up or change. I think we’ve seen this with a variety of data,” Bunker said.

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The runway is getting clearer, but the U.S. economy still isn't assured of a soft landing

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A UPS seasonal worker delivers packages on Cyber Monday in New York on Nov. 27, 2023.

Stephanie Keith | Bloomberg | Getty Images

November’s solid jobs report did not assure that the economy will come in for a soft landing, but it did help to clear the runway a little more.

After all, there’s nothing about a 3.7% unemployment rate and another 199,000 jobs that even whispers “recession,” let alone screams it.

At least for now, then, the U.S. economy can take another win with a small “W” as it looks to navigate through what had been the highest inflation level in more than 40 years — and a still-uncertain path ahead.

“Overall, the jobs market is doing its part to get us to a soft landing,” said Daniel Zhao, lead economist at jobs rating site Glassdoor. “It’s boring in all the right ways. That’s a welcome change after a few years of less-boring reports.”

Indeed, despite a high level of anxiety heading into the Labor Department’s nonfarm payrolls report, the details were fairly benign.

The level of job creation was just above the Wall Street estimate of 190,000. Average hourly earnings rose 4% from a year ago, exactly in line with expectations. The unemployment rate unexpectedly declined to 3.7%, easing worries that it could trigger a historically dead-on signal known as the Sahm Rule, which coordinates increases of the unemployment rate by half a percentage point to recessions.

Still, the solid report couldn’t dispense the lingering feeling that the economy isn’t out of the woods yet. The fear primarily comes from worries that the Federal Reserve’s aggressive interest rate increases haven’t exacted their full toll and still could trigger a painful downturn.

“The key uncertainty for the labor market in 2024 is whether job growth slows to a more sustainable pace, or whether the economy moves from monthly job gains to monthly job losses. The former would be consistent with the Fed’s soft-landing scenario, while the latter would mean recession,” said Gus Faucher, chief economist at PNC Financial Services. “PNC still thinks recession is the more likely outcome in 2024, but it is a close call.”

All about consumers and inflation

Key to whether the so-called landing is soft or hard will be the consumer, who collectively accounts for nearly 70% of all U.S. economic activity.

On that front, there was another round of good news Friday: The University of Michigan’s closely watched consumer sentiment survey showed that inflation expectations, a key economic variable for prices, plummeted in December. Respondents put one-year inflation expectations at 3.1%, a stunning 1.4 percentage point drop.

However, such gauges can be “fluky” and are not in line with some other signals coming from consumers, said Liz Ann Sonders, chief investment strategist at Charles Schwab. Debates over soft landings and inflation expectations and interest rate outlooks tend to miss bigger points, Sonders added.

Prior to 2023, Sanders and Schwab had been stressing the notion of “rolling recessions,” meaning that contractions could hit certain sectors individually while not dragging down the economy as a whole. The distinction may still apply heading into 2024.

“The recession versus soft landing debate sort of misses the necessary nuances of this unique cycle,” Sonders said. “A best-case scenario is not so much a soft landing, because that ship has already sailed for [some] segments. It’s that we continue to roll through such that if and when services gets hit more than the brief ding so far and it takes the labor market with it, you’re already in stabilization or recovery mode in areas that already took their big hits.”

Getting to the soft landing, then, likely will require navigating some of those peaks and valleys, none more so than establishing confidence that inflation really has been vanquished and the Fed can take its foot off the brake. Inflation, according to the Fed’s preferred gauge, is running at 3.5% annually, well above the central bank’s 2% goal, though is consistently falling.

Still nervous about rates

There was one other good piece of inflation news Friday: Rental costs nationally declined 0.57% in November and were down 2.1% year over year, the latter being the biggest slide in more than 3½ years, according to Rent.com.

However, one interesting development from the latest economic data was a bit less market confidence that the Fed will be cutting interest rates quite as aggressively as traders previously believed.

While the traders in the fed funds futures space still roundly expect that the Fed is done hiking, it now expects only about a 45% chance of a previously expected cut in March, according to CME Group data. Traders previously had been expecting 1.25 percentage points worth of cuts in 2024 but lowered that outlook as well to a toss-up with just a full point of decreases following the data releases.

That may in itself seem like only a nuanced change, but the move in pricing reflects uncertainty over whether the Fed keeps talking tough on inflation, or concedes that policy no longer needs to be as tight. The fed funds rate is targeted in a range between 5.25% and 5.5%, its highest level in more than 22 years.

“The key thing though, from a broader perspective, is that they can cut if the economy were to see more of a slowdown than we expect. Then the Fed could cut, could provide some support,” Jan Hatzius, chief economist at Goldman Sachs, said Friday on CNBC’s “Squawk on the Street.” “That means the risk of recession is in my view quite low.”

Goldman Sachs thinks there’s about a 15% chance of a recession next year.

If that forecast, which is about the standard probability given normal economic conditions, holds up, it will require continued strength in the labor market and for consumers.

Periods of labor unrest this year indicate, though, that not all may be well on Main Street.

“If things were going great, then people would not be marching in the cold and rain because they want more pay because the cost of living is going up,” said Giacomo Santangelo, an economist at job search site Monster.

Workers won’t need economists to tell them when the economy has landed, he added.

“The alleged definition of a soft landing is to bring inflation down to 2% to 2½% and have unemployment go up to that full employment level. That’s really what we’re looking for, and we’re not there yet,” Santangelo said. “When you’re on an airplane, you know what it feels like when a plane lands. You don’t need the person in the cockpit to come on and go, ‘Alright, we’re going to be landing now.”

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Unemployment among Asian workers and Black men rises in November while the overall rate declines

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Commuters arrive at the Oculus Center in Manhattan, New York City, on Nov. 17, 2022.

Spencer Platt | Getty Images

The labor market deteriorated for both Asian and Black workers in November, according to data released Friday by the U.S. Department of Labor.

The overall unemployment rate declined 0.2% to 3.7% last month, against a forecast that it would hold steady at 3.9%. Overall, the labor force participation rate ticked up to 62.8% alongside a surge of 532,000 workers into the labor force.

For white Americans, the jobless rate fell 0.2 percentage points to 3.3%. Hispanic Americans also saw their unemployment rate slip 0.2 percentage points to 4.6%.

On the other hand, Asian Americans saw a 0.4 percentage-point jump in the unemployment rate to 3.5%. This was accompanied by a decline in the participation rate for Asian workers to 65% from 65.3% in October.

“That uptick in unemployment is not because more Asian workers are flooding into the labor market, feeling optimistic about getting jobs. It’s actually accompanied by a fall in participation as well as a fall in employment,” Elise Gould, senior economist at the Economic Policy Institute, told CNBC.

The unemployment rate for Black Americans — the demographic with the highest jobless percentage in the U.S. — held steady last month at 5.8%. The jobless rate for Black men age 20 or older spiked more than 1 percentage point to 6.4% from October’s 5.3%. That said, those gains came as the participation rate for this cohort increased to 69.2% from 67.5%.

“The rise in unemployment is because more workers are optimistic, coming back in or entering the labor market for the first time, and many of them are finding jobs. And many of them are not, which is why the unemployment rate went up,” Gould added.

Black Americans were hit harder by business shutdowns during the Covid-19 pandemic. The unemployment rate for Black workers peaked at 16.8% in 2020, versus the overall unemployment rate’s April 2020 high of 14.7%.

Gould added the caveat that the Asian workers in the survey made up a relatively smaller demographic group, and that both of these series are incredibly volatile from month to month.

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U.S. payrolls rose 199,000 in November, unemployment rate falls to 3.7%

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Job creation showed little signs of a letup in November, as payrolls grew even faster than expected and the unemployment rate fell despite signs of a weakening economy.

Nonfarm payrolls rose by a seasonally adjusted 199,000 for the month, slightly better than the 190,000 Dow Jones estimate and ahead of the unrevised October gain of 150,000, the Labor Department reported Friday.

The unemployment rate declined to 3.7%, compared with the forecast for 3.9%, as the labor force participation rate edged higher to 62.8%. A more encompassing unemployment rate that includes discouraged workers and those holding part-time positions for economic reasons fell to 7%, a decline of 0.2 percentage point.

“The job market continues to be resilient after a year of dodging recession fears,” said Daniel Zhao, lead economist at job ratings site Glassdoor. “Really the one concern that we had coming in today’s report was the recent rise in the unemployment rate. So the improvement in unemployment was a welcome relief.”

The department’s survey of households, used to calculate the unemployment rate, showed much more robust job growth of 747,000 and an addition of 532,000 workers to the labor force.

Average hourly earnings, a key inflation indicator, increased by 0.4% for the month and 4% from a year ago. The monthly increase was slightly ahead of the 0.3% estimate, but the yearly rate was in line.

Markets showed mixed reaction to the report, with stock market futures modestly negative while Treasury yields surged.

“What we wanted was a strong but moderating labor market, and that’s what we saw in the November report,” said Robert Frick, corporate economist with Navy Federal Credit Union, noting “healthy job growth, lower unemployment, and decent wage increases. All this points to the labor market reaching a natural equilibrium around 150,000 jobs [per month] next year, which is plenty to continue the expansion, and not enough to trigger a Fed rate hike.”

Health care was the biggest growth industry, adding 77,000 jobs. Other big gainers included government (49,000), manufacturing (28,000), and leisure and hospitality (40,000).

Heading into the holiday season, retail lost 38,000 jobs, half of which came from department stores. Transportation and warehousing also showed a decline of 5,000.

Duration of unemployment fell sharply, dropping to an average 19.4 weeks, the lowest level since February.

The report comes at a critical time for the U.S. economy.

Though growth defied widespread expectations for a recession this year, most economists expect a sharp slowdown in the fourth quarter and tepid gains in 2024. Gross domestic product is on pace to rise at just a 1.2% annualized pace in the fourth quarter, according to an Atlanta Fed data gauge, and most economists expect growth of around 1% in 2024.

‘Squawk on the Street’ crew react to November jobs report

Federal Reserve officials are watching the jobs numbers closely as they continue to try to bring down inflation that had been running at a four-decade high but has shown signs of easing.

Futures markets pricing strongly points to the Fed halting its rate-hiking campaign and beginning to cut next year, though central bank officials have been more circumspect about what lies ahead. Pricing had been pointing to the first reduction happening in March, though that swung following the jobs report, pushing a higher probability for the first expected cut now to May.

The Fed will hold its two-day policy meeting next week, its last of the year, and investors will be looking for clues about how officials view the economy.

Policymakers have been aiming to bring the economy in for a soft landing that likely would feature modest growth, a sustainable pace of wage increases and inflation at least receding back to the Fed’s 2% target.

Consumers hold the key to the U.S. economy, and by most measures they’ve held up fairly well.

Retail sales fell 0.1% in October but were still up 2.5% from the previous year. The numbers are not adjusted for inflation, so they indicate that consumers at least have nearly kept pace with higher prices. A gauge the Fed uses showed inflation running at a 3.5% annual rate in October, excluding food and energy prices.

However, there is some worry that the end of Covid-era stimulus payments and the continued pressure from higher interest rates could eat into spending.

Net household wealth fell by about $1.3 trillion in the third quarter to about $151 trillion, owing largely to declines in the stock market, according to Fed data released this week. Household debt rose 2.5%, close to the pace where it has been for the past several quarters.

Fed officials have been watching wage data closely. Rising prices tend to feed into wages, potentially creating a spiral that can be difficult to control.

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China vows to 'moderately' strengthen fiscal policy to bolster economic recovery

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Chinese President Xi Jinping chairs a symposium on advancing the integrated development of the Yangtze River Delta and delivers an important speech in east China’s Shanghai, Nov. 30, 2023.

Xinhua News Agency | Xinhua News Agency | Getty Images

China’s top decision-making body of the ruling Communist Party on Friday said that the country’s fiscal policy “must be moderately strengthened” to stimulate economic recovery, according to state-run news outlet Xinhua.

China’s Politburo said it would continue to implement “proactive” fiscal policies and “prudent” monetary policies next year, in a bid to bolster domestic demand.

Chaired by Chinese President Xi Jinping, the Politburo’s Friday meeting analyzed the economic work to be undertaken in 2024. It pledged to effectively enhance “economic vitality,” to prevent and defuse risks and to consolidate and enhance the upward trend of an ailing recovery in the world’s second-largest economy.

China’s Politburo said that “proactive fiscal policy must be moderately strengthened, improve quality and efficiency, and the prudent monetary policy must be flexible, appropriate, precise and effective.”

Lost momentum

Demand for Chinese goods has fallen this year as global growth slows, stoking concerns about Beijing’s ability to mount a robust post-pandemic recovery. Momentum has taken a hit from a slew of factors, including the country’s beleaguered property market, sluggish global growth and geopolitical tensions.

HSBC Chief Asia Economist Frederic Neumann told CNBC on Thursday that the Chinese economy is unlikely to be bolstered by further fiscal stimulus and still has a “steep hill to climb,” even after a surprise pickup in exports.

Exports in U.S. dollar terms rose by 0.5% year-on-year in November, defying expectations for a 1.1% decline among analysts polled by Reuters. Imports in U.S. dollar terms fell by 0.6% over the 12 months, well below a consensus forecast of a 3.3% increase.

Economists have noted that external demand in China is still relatively weak and warned that policy support that focuses purely on the supply side will likely not be enough to achieve lasting results.

— CNBC’s Elliot Smith contributed to this report.

'Excess profits' at big energy and consumer companies pushed up inflation, report claims

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LONDON — Major companies in the energy and food sectors amplified inflation in 2022 by passing on greater cost increases than needed to protect margins, according to a new report.

British think tanks the Institute For Public Policy Research and Common Wealth said in a report Thursday that big firms made inflation “peak higher and remain more persistent,” particularly within the oil and gas, food production and commodities sectors.

“We argue that market power by some corporations and in some sectors – including temporary market power emerging in the aftermath of the pandemic – amplified inflation,” the report said.

The author’s analysis of financial reports from 1,350 companies listed in the U.K., U.S., Germany, Brazil and South Africa found nominal profits were on average 30% higher at the end of 2022 than at the end of 2019.

This does not necessarily mean that overall profit margins have risen, but it does mean that higher prices have been shouldered by consumers, the authors said.

“Companies with (temporary) market power seemed to be able to protect their margins or even reap ‘excess profits’, setting prices higher than would be socially and economically beneficial,” they wrote.

The report stresses that corporate profits were not the sole driver of inflation and did not cause the energy market shock following Russia’s invasion of Ukraine in February 2022. But the report authors argue that so-called “market power” has not been sufficiently captured in the current debate around the causes of inflation, particularly when compared with the impact from the labor market and rising wages.

“In an energy shock scenario, if costs were equally shared between wage earners and company owners, one would expect the rate of return to fall as firms do not increase prices fully to make up for higher costs, and wage earners do not fully keep up with inflation. But this is not what happened. A stable rate of return – for example, as seen in the UK – suggests pricing power by firms, which allowed them to increase prices to protect their margins,” it said.

It identified Shell, Exxon Mobil, Glencore and Kraft Heinz as among the firms that saw profits “far outpace” inflation.

Glencore declined to comment when contacted by CNBC. The other companies did not respond.

Inflation began a steady march higher in mid-2020 amid a host of factors including global supply chain constraints, volatile food production conditions, tight labor markets, pandemic stimulus measures and the Russia-Ukraine war.

The impact of so-called “greedflation,” or companies raising prices more than needed to protect margins from higher input costs and market movements, has been contested.

Several analysts, along with policymakers including European Central Bank President Christine Lagarde, have cited the issue as a potential contributing factor to inflation.

But what constitutes “greedflation” is not an exact science. This year, the boss of U.K. supermarket giant Tesco suggested that some food producers may be raising prices more than necessary and fueling inflation, a claim that was strongly denied by the industry.

A blog posted by economists at the Bank of England in November found “no evidence” of a rise in overall profits among companies in the U.K., where they say prices have risen alongside wages, salaries and other input costs, with a similar picture in the euro zone.

“However, companies in the oil, gas and mining sectors have bucked the trend, and there is lots of variation within sectors too – some companies have been much more profitable than others,” they wrote.

Here's what the market will be looking for in Friday's key jobs report

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Amazon workers deliver packages on Cyber Monday in New York, US, on Monday, Nov. 27, 2023. 

Stephanie Keith | Bloomberg | Getty Images

At a time when the economy is supposed to be slowing, Friday’s jobs report is expected to show that employers actually picked up the hiring pace in November.

Not that there’s anything wrong with that. A growing economy is a good thing, and nothing underpins that better than a solid labor market. Economists surveyed by Dow Jones expect the Labor Department to report that nonfarm payrolls expanded by 190,000 last month, up from the 150,000 in October.

But investors and policymakers have been expecting things to slow down enough to at least allow the Federal Reserve to call an end to this cycle of interest rate hikes as inflation ebbs and the supply-demand mismatch in employment evens out.

A hot jobs report could undermine that confidence, and put a damper on what has been a buoyant mood on Wall Street.

“There’s some risk to the upside because of the returning auto workers who were on strike,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “So it looks like a steady but slowing jobs market.”

Payroll growth has averaged 204,000 over the past three months, a solid gain though well below the 342,000 level for the same period in 2022. The unemployment rate over the past 12 months, however, has risen just 0.2 percentage point to 3.9%, elevated from where it was earlier in the year but still characteristic of a robust economy.

However, there are a number of dynamics at play in the current picture that make this week’s report, which will be released at 8:30 a.m. ET, potentially critical.

Wage growth and inflation

Probably the most important data point outside the headline numbers will be wages.

Average hourly earnings are expected to show acceleration of 0.3% from October and 4% over the 12-month period, according to Dow Jones.

The yearly average hourly earnings level is not consistent with the Fed’s 2% inflation goal, but it is off its March 2022 peak of 5.9%. Getting wage growth to a sustainable level is vital to bringing inflation down, so anything more pronounced could generate a market reaction.

“When you come down to trying to measure supply and demand, price is probably the most accurate way to look at it, and you know that wage growth has slowed considerably,” Jones said. “So it tells you supply and demand are coming back on track.”

Jobless rate as a recession indicator

Outside of wages, the headline unemployment rate could get some extra scrutiny.

Though the jobless figure has risen just incrementally from a year ago, it’s up half a percentage point from its recent low of 3.4% in April.

The difference is significant in that a time-tested indicator known as the Sahm Rule shows that when the unemployment rate rises half a point from its most recent low on a three-month average, the economy is in recession.

However, even the rule’s author, economist Claudia Sahm, said there are no guarantees that will be the case this time around, though warning signs are definitely in place.

“There is a logic to it that … once the unemployment rate starts rising, it often keeps going, and it picks up steam and it’s a feedback loop,” Sahm said recently on CNBC. “That’s why a small increase in the unemployment rate can be really bad news, because it keeps going.”

Signs of strength, and weakness

Other data this week showed some wobbles in the labor market.

Job openings hit their lowest level in 2 1/2 years, and ADP reported that private payrolls grew just incrementally. Though continuing jobless claims edged lower, they are running high.

However, workers returning from strikes in the auto industry and Hollywood could bolster the November total by as much as 38,000, according to Goldman Sachs. The firm’s economists, in fact, expect that the report will be considerably above the Wall Street estimate – for a total of 238,000 that could jangle some nerves for its potential to harden the Fed’s position.

Neil Costa, founder and CEO of recruitment marketing firm HireClix, said he’s witnessed a slowdown in job ads.

“We’ve definitely seen a cooldown happening this year,” he said. “It started in the early part of the year, and we’ve seen people pull back on their recruitment advertising dollars, without a doubt.”

However, he said pockets of the jobs market remain strong, citing health care specifically, while he has seen a slowing in transportation, logistics and manufacturing. Costa is looking for continued slowing in 2024, though nothing consistent with a deep recession.

“People are just being extremely cautious at this particular point,” he said.

China's economy has a 'steep hill to climb' despite positive export surprise, HSBC says

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Hong Kong observation wheel, and the Hong Kong and Shanghai Bank, HSBC building, Victoria harbor, Hong Kong, China.

Ucg | Universal Images Group | Getty Images

The Chinese economy still has a “steep hill to climb” despite a surprise pickup in exports and is unlikely to be bolstered by further fiscal stimulus, according to HSBC‘s Chief Asia Economist Frederic Neumann.

Exports in U.S. dollar terms rose by 0.5% year-on-year in November, defying expectations for a 1.1% decline among analysts polled by Reuters. However, imports fell in U.S. dollar terms by 0.6% over the 12 months, well below a consensus forecast of a 3.3% increase.

Yet economists have noted that external demand is still relatively weak, and that policy support from Beijing that focuses on the supply side will struggle to make inroads into reigniting domestic demand to compensate.

Neumann told CNBC’s “Squawk Box Europe” on Thursday that the Chinese economy remains weak, and that the positive export figure, released earlier Thursday, should be taken with a pinch of salt.

“Some of the Asian numbers have looked better on the trade front — Korea as well, Taiwan, for example — but this is a lot of inventory adjustment coming through the global system,” he noted.

“There’s not going to be follow-through on the export side in the next few months, and of course on the domestic side with imports contracting again, that just highlights that there is still a steep hill to climb when it comes to generating that accelerating growth in mainland China.”

This global inventory adjustment, particularly among U.S. importers, combined with base effects pushing up the numbers, means the positive export surprise does not necessarily mean exports are accelerating meaningfully, he suggested.

Demand for Chinese goods has fallen this year as global growth slows.

“All the forward-looking indicators — new orders for electronics, for example, new export orders — they all suggest that there is not a pick-up in demand and in fact, it’s more likely the U.S. economy will slow into next year, European demand looks still wobbly and so does the rest of EM [emerging markets], so where is that demand going to come from for a sustained export cycle?” Neumann said.

“That’s really a bit of a headache then for Asian policymakers including in mainland China, because they need to rely on domestic demand to really get the engine going again, and for that we haven’t seen evidence of that happening just yet.”

The value of China’s exports to the U.S. rose by 7% in November from a year ago, according to CNBC calculations of official data. In contrast, China’s exports to the European Union fell by 14.5% year-on-year in November and those to the Association of Southeast Asian Nations fell by 7%, the analysis showed.

The government has tapped fiscal stimulus to shore up its ailing post-pandemic recovery and contain its spiraling debt crisis among the country’s property developers, and the International Monetary Fund forecasts GDP growth of 5.4% this year, and 4.6% in 2024.

'Bit of a surprise' that other rating agencies are not following Moody's in downgrading China

Neumann said there was no doubt that there are still “very powerful levers” available to Beijing despite its substantial debt pile, but that the economic growth numbers are not sufficiently “catastrophic” to warrant further fiscal action that may increase that debt burden.

“It is not as if we see mass unemployment, it’s not as if we don’t see construction in infrastructure, for example — we do see that, so in some sense, the numbers aren’t bad enough to really trigger a big, big stimulus,” he said.

“That is I think a little bit of a disappointment for the market, because you’re still hoping for the bazooka, but guess what? Growth is just not so bad that you really need to bring out those big, big stimulus packages at the moment, so we just stay muddling through here for a while and it’s hard to see that pattern changing over the next few months.”

– CNBC’s Evelyn Cheng contributed to this report.

Saudi Arabia offers 30-year tax relief plan to lure regional corporate HQs

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Cityscape of Saudi capital Riyadh.

Harri Jarvelainen Photography | Moment | Getty Images

DUBAI, United Arab Emirates — Saudi Arabia announced a 30-year tax exemption package for foreign companies establishing their regional headquarters in the kingdom, the latest move in its aggressive campaign to attract international investment and headcount.

“The Ministry of Investment of Saudi Arabia, in coordination with the Ministry of Finance and the Zakat, Tax and Customs Authority today announced 30-year tax incentive package for The Regional Headquarters (RHQ) Program, to further streamline the process for multinational companies (MNCs) to establish their RHQ in Saudi Arabia,” the Saudi state press agency wrote in a statement Tuesday.

The offer includes a 0% corporate tax rate for 30 years, which will be applied for companies “from the day they obtained their RHQ license,” the statement read.

The program “aims to attract MNCs to set up their RHQ in Saudi Arabia and position the Kingdom as the leading commercial, industrial and investment hub for the MENA region, by offering a range of benefits and premium support services that complement the Kingdom’s globally competitive value proposition,” the statement added.

A controversial ultimatum

The kingdom grabbed investor attention and sparked controversy in February 2021 when it first announced its RHQ campaign, declaring that any foreign company that did not have its regional headquarters office in Saudi Arabia by the start of 2024 would be barred from doing business with state entities.

The news stunned investors and expat workers, many of whom saw the move as a shot at Dubai, the United Arab Emirates commercial capital that is home to the highest concentration of Middle East regional headquarters.

In October of this year, Saudi ministers made clear that the ultimatum still held firm: Foreign companies will need to base their regional headquarters in the kingdom by Jan. 1, 2024 or be barred from lucrative government contracts.

Many foreign investors are still skeptical of the ability of Saudi Arabia — an infamously conservative Muslim theocracy known for its highly criticized human rights record — to sufficiently attract foreign talent.

Expats in the regional HQ hub of Dubai question the kingdom’s ability to provide sufficient quality-of-life services like international schools, ample housing, and aspects of a more Western lifestyle, such as alcohol, which is currently illegal in Saudi Arabia.

Saudi Arabia says the RHQ program has so far licensed more than 200 companies to operate their regional head offices in the kingdom. And in an apparent response to the concerns of many expat workers that families there would struggle to find international schools for their children, “seven international K-12 schools have announced their new campuses in the Kingdom,” the Saudi Press Agency statement wrote.

Saudi Arabia's Vision 2030 is 'very clear' in what it wants to achieve, ACWA Power CEO says

“The tax incentive gives multinational companies operating in the region yet another reason to make Saudi Arabia home to their regional headquarters, on top of other benefits such as relaxed Saudization requirements and work permits for the spouses of RHQ executives,” Saudi Minister of Investment Khalid Al-Falih was cited by the SPA as saying.

The kingdom’s regional HQ drive is a part of Vision 2030, an ambitious campaign launched by Crown Prince Mohammed bin Salman in 2016, which aims to create private sector jobs and diversify its economy away from oil as Saudi Arabia’s population — more than 60% of whom are under the age of 30 — grows.

Bank of England warns that higher rates 'have yet to come through' to an already weak economy

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A member of the public walks through heavy rain near the Bank of England in May 2023.

Dan Kitwood | Getty Images News | Getty Images

LONDON — The Bank of England on Wednesday warned that although household finances are faring better than expected, higher borrowing costs have yet to fully feed through to the economy.

In its half-yearly Financial Stability Report, the central bank noted that “the overall risk environment remains challenging” amid a sluggish domestic economy, further risks to global growth and inflation and heightened geopolitical tensions.

The Bank of England hiked interest rates by more than 500 basis points between December 2021 and August 2023, taking its main rate to a 15-year high in a bid to combat soaring inflation. Its Financial Policy Committee highlighted in the report that long-term interest rates in both the U.K. and the U.S. are now around their pre-2008 levels.

“The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments, which could be amplified by vulnerabilities in the system of market-based finance,” the FPC said.

“So far, and while the FPC continues to monitor developments, U.K. borrowers and the financial system have been broadly resilient to the impact of higher and more volatile interest rates.”

Since its last FSR in July, household income growth has been greater than expected, the FPC noted, which has reduced the share of households experiencing high cost-of-living adjusted debt-servicing ratios. Meanwhile, a lower expected path for the Bank of England’s main interest rate has reduced the extent to which that share is likely to rise.

“Nevertheless, household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments,” the FPC said.

“Arrears for secured and unsecured credit remain low but are rising as the impact of higher repayments is felt by borrowers.”

Companies’ ability to service their debt has improved on the back of robust earnings growth, and the FPC expects the corporate sector to remain largely resilient to the impact of higher rates and weaker economic activity.

“But the full impact of higher financing costs has not yet passed through to all corporate borrowers, and will be felt unevenly, with some smaller or highly leveraged UK firms likely to remain under pressure,” the FPC added.

“Corporate insolvency rates have risen further but remain low.”

Private payrolls increased by 103,000 in November, below expectations, ADP says

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Private sector job creation slowed further in November and wages showed their smallest growth in more than two years, payrolls processing firm ADP reported Wednesday.

Companies added just 103,000 workers for the month, slightly below the downwardly revised 106,000 in October and missing the 128,000 Dow Jones estimate.

Along with the modest job growth came a 5.6% increase in annual pay, which ADP said was the smallest gain since September 2021. Job-changers saw wage increases of 8.3%, making the premium for switching positions the lowest since ADP began tracking the data three years ago.

After leading job creation for most of the period since Covid hit in early 2020, leisure and hospitality recorded a loss of 7,000 jobs for the month. Trade, transportation and utilities saw an increase of 55,000 positions, while education and health services added 44,000 and other services contributed 15,000.

Services-related industries provided all the job gains for the month, as goods-producers saw a net loss of 14,000 due to declines of 15,000 in manufacturing, despite the settlement in the United Auto Workers strikes, and 4,000 in construction. Recent layoffs in Silicon Valley and on Wall Street also did not show up in the data, as both sectors posted gains on the month.

“Restaurants and hotels were the biggest job creators during the post-pandemic recovery,” said ADP’s chief economist, Nela Richardson. “But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024.”

Companies with between 50 and 499 employees led job creation, with an addition of 68,000. Small businesses contributed just 6,000.

The ADP report comes two days before the more widely watched nonfarm payrolls count from the Labor Department. The two reports can differ widely, though the numbers for private payrolls were close in October as the Labor Department reported growth of 99,000, just 7,000 below the revised ADP tally.

Including government jobs, nonfarm payrolls increased 150,000 in October and are expected to show growth of 190,000 in November, according to Dow Jones.

Another sign that the labor market is loosening came Tuesday, when the Labor Department reported that job openings declined to 8.73 million in October, the lowest level since March 2021.

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Correction: Annual pay increased 5.6%, which ADP said was the smallest gain since September 2021. An earlier version misstated the month. The Labor Department reported private payroll growth of 99,000 for October, just 7,000 below the revised ADP tally. An earlier version misstated a figure.

U.S. consumers will soon wake up to ‘out of control’ interest on their credit cards, economist says

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The U.S. economy should be able to avoid a recession next year — but a sharp pullback in consumer spending is among the biggest risks of that occurrence, according to economist Carl Weinberg.

“Consumers are just waking up to the fact that they’re financing their spending by running up their credit cards, and that the interest on those credit cards is over the top, out of control, off the hook right now,” the chief economist of High Frequency Economics told CNBC’s “Squawk Box Europe” on Wednesday.

“That’s going to lead to, I think, a retrenchment in consumer spending, as we get into the new year.”

Weinberg’s base case assumes a slowdown in growth, rather than a recession.

“But the risk is, and I agree it’s a nontrivial risk, that consumers get into trouble,” Weinberg said, noting figures from the New York Federal Reserve showing a rise in delinquencies on credit cards.

“Real incomes have just started coming back again, and not by nearly enough to cover some of the increases in the debt burdens that we’re seeing. So credit to the household sector, consumer credit cards, that’s where the downside risk is. That’s where the risk to this Goldilocks forecast is, and I’m watching it.”

A “Goldilocks” scenario is one in which an economy is growing enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.

'The U.S. consumer is walking towards a cliff': Longview Economics CEO

A U.S. recession in the first half of next year is the base case for Monica Defend, head of the Amundi Investment Institute.

“Financing and financial conditions, eventually, will start to bite the U.S. consumer that is progressively depleting the excess savings that have been … protected during 2023,” Defend said Wednesday on “Squawk Box Europe.”

“Consumption will slow down, we’re seeing the labor market progressively cooling, and this is going to continue. And therefore, we do expect a technical recession in the United States first and second quarter.”

Many strategists see the U.S. as having achieved a “soft landing” for its economy through interest rate hikes. They nevertheless remain cautious on the outlook for 2024, as they warn of the delayed and unpredictable impacts of higher rates.

U.S. growth has stayed strong this year, as other major economies — including the euro zone and U.K. — have stagnated.

Investment stimulus delivered by initiatives such as the Inflation Reduction Act will not be enough to overcome the slowdown in consumption, Defend said Wednesday.

“During the pandemic, there has been substantial transfers from the government into households and, therefore, consumers. If you look at saving rates, it has been really peaking, but now is pointing south quite remarkably,” she said.

“Because of this and the excess savings actually depleting, we don’t think that the U.S. consumer will be able to stand and to maintain the same levels it had over the last two years.”

Job openings slide to 8.7 million in October, well below estimate, to lowest level since March 2021

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Workers at a restaurant at Grand Central Market in Los Angeles, California, US, on Thursday, Nov. 2, 2023. 

Eric Thayer | Bloomberg | Getty Images

Job openings tumbled in October to their lowest in 2½ years, a sign that the historically tight labor market could be loosening.

Employment openings totaled 8.73 million for the month, a decline of 617,000, or 6.6%, the Labor Department reported Tuesday. The number was well below the 9.4 million estimate from Dow Jones and the lowest since March 2021.

The decline in vacancies brought the ratio of openings to available workers down to 1.3 to 1, a level that only a few months ago was around 2 to 1.

Federal Reserve policymakers watch the report, known as the Job Openings and Labor Turnover Survey, closely for signs of labor slack. The Fed has boosted interest rates dramatically since March 2022 in an effort to slow the labor market and cool inflation, and is contemplating its next policy move.

While job openings fell dramatically, total hires only nudged lower while layoffs and separations were modestly higher. Quits, which are seen as a measure of worker confidence in the ability to change jobs and find another one easily, also were little changed.

Declines in job openings were widespread by industry.

The biggest sector decline was education and health services (-238,000), followed by financial activities (-217,000), leisure and hospitality (-136,000) and retail (-102,000).

The JOLTS report comes just a few days ahead of the Labor Department’s nonfarm payrolls count for November. Economists expect that report to an increase of 190,000, an uptick from October’s 150,000, according to Dow Jones.

Fed officials have been targeting the red-hot jobs market as a specific area of concern in their battle to take inflation down from what had been a four-decade high last year. Seeing a decline in job openings likely will be welcome news to policymakers as it could mean that less labor demand could help bring the jobs market back in line from what had been a huge mismatch with supply.

The Fed holds its two-day policy meeting next week, with markets largely expecting the Federal Open Market Committee to leave interest rates unchanged. Traders in the fed funds futures market are pricing in rate cuts to begin in March on anticipation that inflation data will continue to show progress and as the central bank tries to fend off a potential slowdown or recession ahead.

Fed's favorite gauge shows inflation rose 0.2% in October and 3.5% from a year ago, as expected

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Inflation as measured by personal spending increased in line with expectations in October, possibly giving the Federal Reserve more incentive to hold rates steady and perhaps start cutting in 2024, according to a data release Thursday.

The personal consumption expenditures price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis, the Commerce Department reported. Both numbers aligned with the Dow Jones consensus.

Headline inflation was flat on the month and at a 3% rate for the 12-month period, the release also showed. Energy prices fell 2.6% on the month, helping keep overall inflation in check, even as food prices increased 0.2%.

Goods prices saw a 0.3% decrease while services rose 0.2%. On the services side, the biggest gainers were international travel, health care and food services and accommodations. In goods, gasoline led the gainers.

Personal income and spending both rose 0.2% on the month, also meeting estimates and indicating that consumers are keeping pace with inflation.

While the public more closely watches the Labor Department’s consumer price index as an inflation measure, the Fed prefers the core PCE reading. The former measure primarily looks at what goods and services cost, while the latter focuses on what people actually spend, adjusting for consumer behavior when prices fluctuate.

In other economic news Thursday, weekly jobless claims rose to 218,000, an increase of 7,000 from the previous period though slightly below the 220,000 estimate. However, continuing claims, which run a week behind, surged to 1.93 million, an increase of 86,000 and the highest level since Nov. 27, 2021, the Labor Department said.

Markets already had been pricing in the likelihood that the Fed is done raising interest rates this cycle, and the PCE reading, along with signs of a loosening labor market, could solidify that stance. Along with the anticipation that the rate hikes are over, markets also are pricing in the equivalent of five quarter percentage point rate cuts in 2024.

The fed funds rate, the central bank’s benchmark level for short-term lending, is targeted in a range between 5.25%-5.5%, its highest in more than 22 years. After implementing 11 hikes since March 2022, the Fed skipped its last two meetings, and most policymakers of late have been indicating that they are content now to watch the impact of the previous increases work their way through the economy.

Other economic signals lately have shown the economy to be in fairly good shape, though several Fed officials recently have said the data doesn’t square with comments they are hearing on the ground.

“I’m hearing consumers slowing down,” Richmond Fed President Thomas Barkin said Wednesday at the CNBC CFO Council Summit. “I’m not hearing [the] consumer falling off the table. I’m hearing normalizing, not recession, but I am hearing consumer slowing down.”

The Fed’s inflation report comes the same day as encouraging news from the euro zone.

Headline inflation there fell to 2.4% on a 12-month basis, though core, which excludes food, energy and tobacco, was still at 3.6%. Like the Fed, the European Central Bank targets 2% as a healthy inflation level.

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Here's what it would take for the Fed to start slashing interest rates in 2024

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The Marriner S. Eccles Federal Reserve building during a renovation in Washington, DC, US, on Tuesday, Oct. 24, 2023.

Valerie Plesch | Bloomberg | Getty Images

Interest rate cuts don’t happen during good times, something important for markets to remember amid hotly anticipated easing next year from the Federal Reserve.

If the Fed meets market expectations and starts cutting aggressively in 2024, it likely will be against a backdrop of a sharply slowing economy and rising unemployment, which in turn would bring lower inflation.

Central bank policymakers, however, won’t cut for the sake of cutting. There will have to be a compelling reason to start easing, and even then rate decreases are likely to come slowly — unless something breaks, and the Fed is forced into more aggressive action.

“The market keeps trying to front-run these rate cuts, only to be disappointed,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “In a different cycle, when inflation hadn’t spiked so much, I think the Fed would have been cutting rates already. This is a very different cycle. There is going to be much more caution on their part.”

The latest market rumble over the prospect of rate cuts came Tuesday morning, when Fed Governor Christopher Waller said he could envision easing policy if inflation data cooperates over the next three to five months.

Never mind that fellow Governor Michelle Bowman, just minutes later, said she still expects rate hikes will be necessary. The market instead chose to hear Waller more clearly, perhaps because he has been one of the more hawkish Fed officials when it comes to monetary policy, while Bowman was merely reiterating an oft-stated position.

Five rate cuts anticipated

“If the economy moderates at all, you could be talking about a real disinflation story, and I think that’s what Waller would be getting at,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “If the real fed funds rate continues to go higher as I expect it will, then you’d want to offset that through rate cuts. And the amount of rate cuts I think they’re going to have to do is a relatively large amount.”

LaVorgna, the chief economist at the National Economic Council under former President Donald Trump, said he thinks the Fed could have to cut by as much as 200 basis points next year, or 2 percentage points.

Market pricing has grown more aggressive on Fed policy easing, with fed funds futures now pointing to five quarter percentage point rate cuts next year, one more than before the latest speeches, according to the CME Group. Stocks have rallied since as investors prepare for lower rates.

It could be a risky bet if inflation doesn’t cooperate.

“The Fed doesn’t want to take its foot off the brake too early. I don’t see them cutting just to reach some theoretical neutral rate,” said Chris Marangi, co-chief investment officer for value at Gabelli Funds. “We expect some economic softness next year, so that won’t be a surprise. But a significant cut in rates needs to be preceded by significant economic weakness, and that’s not discounted in stock prices today.”

Fed officials at their meeting in two weeks will update their economic projections over the next several years, a process that includes revisions to the so-called “dot plot” of individual members’ expectations for interest rates.

During the last update, in September, Federal Open Market Committee members penciled in the equivalent of two quarter-point cuts next year. However, that was predicated on another rate increase in 2023 that almost certainly is not happening, judging both by recent Fed commentary and market expectations.

The idea, then, that the Fed would go on a cutting spree next year would almost have to be accompanied by pronounced economic weakness.

Fears of a hard landing

Hedge fund titan Bill Ackman said Tuesday that unless the Fed starts cutting, it will in fact be the cause of a sharp downturn that it then would have to address.

“We’re betting that the Federal Reserve is going to have to cut rates more quickly than people expect,” Ackman said in an upcoming episode of “The David Rubenstein Show: Peer-to-Peer Conversations,” which is aired by Bloomberg. “That’s the current macro bet that we have on.”

“I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” the head of Pershing Square Capital Management added.

However, even some of the historically more dovish Fed officials aren’t showing their hands on when they think cuts will come.

Atlanta Federal Reserve President Raphael Bostic, an FOMC voter next year, wrote Wednesday that he sees pronounced downward trends in economic activity and inflation. Richmond President Thomas Barkin said he also sees slowing but added that he remains “skeptical” that inflation will come down to the Fed’s 2% target quickly and said policymakers need to keep potential rate hikes on the table.

Expect rates sustained at the higher levels for at least another 7-8 months, says Apollo's Slok

“The Fed is trying to slow the economy down, and if they don’t succeed with slowing consumption down … that would then imply that maybe the market should be pricing that rates are going to be higher for longer than what futures are pricing at the moment,” Tosten Slok, chief economist at Apollo Global Management, told CNBC on Tuesday. “Maybe we need to get all the way into Q3 before the Fed will begin cutting.”

Indeed, Gary Cohn, former director of the NEC under Trump and former chief operating officer at Goldman Sachs, said the kind of economic weakness that would precipitate rate cuts is unlikely, at least in the first part of 2024. Consequently, the Fed could lag its global counterparts when it comes to relaxing the fight against inflation and not start cutting until “maybe” the third quarter, he said.

“You don’t want to be early to leave when you’re the last one to come to the party,” Cohn told CNBC’s Dan Murphy at the Abu Dhabi Finance Week conference on Wednesday. “You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party,”

Market vulnerabilities and a possible U.S. recession: Strategists give their cautious predictions for 2024

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A security guard at the New York Stock Exchange (NYSE) in New York, US, on Tuesday, March 28, 2023.

Victor J. Blue | Bloomberg | Getty Images

With central banks having hiked interest rates at breakneck speed and those rates likely to stay higher for longer while the lagged effects set in, the macroeconomic outlook for 2024 is far from clear.

The International Monetary Fund baseline forecast is for it to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024, well below the historical average of 3.8% between 2000 and 2019, led by a marked slowdown in advanced economies.

The Washington-based institution sees U.S. GDP growth, which has remained surprisingly resilient in the face of over 500 basis points of interest rate hikes since March 2022, to remain among the strongest developed market performers at 2.1% this year and 1.5% next year.

The U.S. economy’s resilience has fueled an emerging consensus that the Federal Reserve will achieve its desired “soft landing,” slowing inflation without tipping the economy into recession.

The market is now largely pricing a peak at the current Fed funds target range of 5.25-5.5%, with interest rate cuts to come next year.

Yet Deutsche Bank‘s economists, in a 2024 outlook report published Monday, were quick to point out that monetary policy operates with lags that are “highly uncertain in their timing and impact.”

“With the lagged impact of rate hikes taking effect, we can already see clear signs of data softening. In the U.S., the most recent jobs report showed the highest unemployment rate since January 2022, credit card delinquencies are at 12-year highs, and high yield defaults are comfortably off the lows,” Deutsche’s Head of Global Economics and Thematic Research, Jim Reid, and Group Chief Economist David Folkerts-Landau said in the report.

“At the outer edges of the economy there is obvious stress that is likely to spread in 2024 with rates at these levels. In the Euro Area, Q3 saw a -0.1% decline in GDP, with the economy in a period of stagnation since Autumn 2022 that will likely extend to mid-Summer 2024.”

The German lender has a considerably bleaker prognosis than market consensus, projecting that Canada will have the highest GDP growth among the G7 in 2024 at just 0.8%.

“Although that is still positive and the profile improves through the year, it means the major economies will be more vulnerable to a shock as they work through the lag of this most aggressive hiking cycle for at least four decades,” Reid and Folkerts-Landau said, noting that potential “macro accidents” would be more likely in the aftermath of such rapid tightening.

“We had 10-15 years of zero/negative rates, plus an increase in global central bank balance sheets from around $5 to $30 trillion at the recent peak, and it was only a couple of years ago that most expected ultra-loose policy for much of this decade. So it’s easy to see how bad levered investments could have been made that would be vulnerable to this higher rate regime.”

U.S. regional banks triggered global market panic earlier this year when Silicon Valley Bank and several others collapsed, and Deutsche Bank suggested that some vulnerabilities remain in that sector, along with commercial real estate and private markets, creating “a bit of a race against time.”

‘Higher for longer’ and regional divergence

The prospect of “higher for longer” interest rates has dominated the market outlook in recent months, and Goldman Sachs Asset Management economists believe the Fed is unlikely to consider cutting rates next year unless growth slows by substantially more than current projections.

In the euro zone, weaker growth momentum and a large drag from tighter fiscal policy and lending conditions increase the likelihood that the European Central Bank pauses its monetary policy tightening and potentially pivots toward cuts in the second half of 2024.

“While the Fed and ECB seem to have steered away from a hard landing path during the tightening cycle, exogenous shocks or a premature pivot to policy easing may reignite inflation in a way that requires a recession to force it lower,” GSAM economists said.

“Conversely, further monetary tightening might trigger a downturn just as the effects of prior tightening begin to take hold.”

CEO explains why economies are still 'relatively resilient' to interest rate rises

GSAM also noted regional divergence in the trajectory of growth prospects and inflation patterns, with Japan’s economy surprising positively on the back of resurgent domestic demand driving wage growth and inflation after many years of stagnation, while China’s property market indebtedness and demographic headwinds skew its risks to the downside.

Meanwhile Brazil, Chile, Hungary, Mexico, Peru and Poland were early hikers of interest rates in emerging markets and were among the first to see inflation slow sharply, meaning their central banks have either begun cutting rates or are close to doing so.

“In a desynchronized global cycle, with higher-for-longer rates and slower growth in most advanced economies, the road ahead remains uncertain,” GSAM said, adding that this calls for a “diversified and risk conscious investment approach across public and private markets.”

Recession risk ‘delayed rather than diminished’

In a roundtable event on Tuesday, JPMorgan Asset Management strategists echoed this note of caution, claiming that the risk of a U.S. recession was “delayed rather than diminished” as the impact of higher rates feeds through into the economy.

JPMAM Chief Market Strategist Karen Ward noted that many U.S. households took advantage of 30-year fixed rate mortgages while rates were still around 2.7%, while in the U.K., many shifted to five-year fixed rates during the Covid-19 pandemic, meaning the “passthrough of interest rates is much slower” than previous cycles.

However, she highlighted that U.K. exposure to higher rates is due to rise from about 38% at the end of 2023 to 60% at the end of 2024, while first-time buyers in the U.S. will be exposed to much higher rates and the cost of other consumer debt, such as auto loans, has also risen sharply.

“I think the the key conclusion here is that interest rates do still bite, it’s just taking longer this time around,” she said.

We see slowdown in the U.S. economy in 2024 and no Europe recession: SocGen economist

The U.S. consumer has also been spending pent-up savings at a faster rate than European counterparts, Ward highlighted, suggesting this is “one of the reasons why the U.S. has outperformed” so far, along with “incredibly supportive” fiscal policy in the form of major infrastructure programs and post-pandemic support programs.

“All of that fades into next year as well, so the backdrop for the consumer just doesn’t look as strong for us as we go into 2024 that will start to bite a little bit,” she said.

Meanwhile, corporates will over the next few years have to start refinancing at higher interest rates, particularly for high-yield companies.

“So growth slows in 2024, and we still think the risks of a recession are significant, and therefore we’re still pretty cautious about the idea that we’ve been through the worst and we’re looking at an upswing from here on,” Ward said.

U.S. GDP grew at a 5.2% rate in the third quarter, even stronger than first indicated

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The U.S. economy grew at an even stronger pace then previously indicated in the third quarter, the product of a better than expected business investment and stronger government spending, the Commerce Department reported Wednesday.

Gross domestic product, a measure of all goods and services produced during the three-month period, accelerated at a 5.2% annualized pace, the department’s second estimate showed. The acceleration topped the initial 4.9% reading and was better than the 5% forecast from economists polled by Dow Jones.

Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures equipment and intellectual property. The category showed an increase of 1.3%, which still marked a sharp downward shift from previous quarters.

Government spending also helped boost the Q3 estimate, rising 5.5% for the July-through-September period.

However, consumer spending saw a downward revision, now rising just 3.6%, compared to 4% in the initial estimate.

There was some mixed news on the inflation front. The personal consumption expenditures price index, a gauge the Federal Reserve follows closely, increased 2.8% for the period, a 0.1 percentage point downward revision. However, the chain-weighted price index increased 3.6%, a 0.1 percentage point upward move.

Corporate profits accelerated 4.3% during the period, up sharply from the 0.8% gain in the second quarter.

Former Trump advisor says the U.S. economy is 'back to normal,' but markets may be jumping the gun on rate hikes

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Gary Cohn, vice chairman of International Business Machines Corp. (IBM), during the Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, Oct. 19, 2021.

Kyle Grillot | Bloomberg | Getty Images

The U.S. economy is “back to normal” for the first time in two decades, but the market is getting ahead of the likely pace of interest rate cuts, according to IBM Vice Chairman Gary Cohn.

The market is narrowly pricing a first rate reduction from the Federal Reserve in May 2024, according to CME Group’s FedWatch tool, with around 100 basis points of cuts expected across the year.

The central bank in September paused its historically aggressive monetary tightening cycle with the Fed funds rate target range at 5.25-5.5%, up from just 0.25-0.5% in March 2022.

Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 and is a former director of the National Economic Council — does not see the Fed starting to unwind its position until at least the second half of next year, after similar moves from other major central banks that began hiking sooner.

“You don’t want to be early to leave when you’re the last one to come to the party. You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party,” Cohn told CNBC’s Dan Murphy on stage at the Abu Dhabi Finance Week conference on Wednesday.

“The economy will clearly turn down before the Fed had starts to cut interest rates, so I strongly believe that for the first half of ’24, we will see no rate activity in the Fed. Maybe [in the third quarter], we’ll start hearing rumblings of some forward guidance of lower rates.”

The U.S. consumer price index increased 3.2% in October from a year ago, unchanged from the previous month but down considerably from a pandemic-era peak of 9.1% in June 2022.

Despite the sharp rise in interest rates, the U.S. economy has so far remained resilient and avoided a widely predicted recession, fueling bets that the Fed can engineer a fabled “soft landing” by bringing inflation down to its 2% target over the medium term without triggering an economic downturn.

Cohn highlighted that U.S. consumer debt has soared to record highs of over $1 trillion, and that consumer spending is persisting despite tightening financial conditions. He said the consumer and the broader economy is “back to a normal, but we all forgot what normal is.”

“We haven’t seen normal for over two decades. We went through a decade plus of zero interest rates, we went through a decade of quantitative easing, zero interest rates and the Fed trying to see if they could create inflation,” he said.

'No evidence' that Fed rate cuts are needed: Embark Group CIO

“We’ve gone from the Fed not being able to create inflation — we now know the answer, the Fed can’t create inflation, but the market can — to us trying to unwind a shorter term inflationary shock. We’re back into a normal world.”

He noted that the 100-year average for 10-year U.S. Treasury yields is around 4.5%, and that the 10-year yield has moderated from the 16-year high of 5% logged in October to around 4.3% as of Wednesday morning. Meanwhile, inflation is “running back towards the mean” of between 2% and 2.5%.

“So every piece of economic data, if you look, is sort of heading back towards its very long term average. If you look at these over 100-year generational cycles, we seem to be running into that phase right now,” Cohn added.

Fed's Waller expresses confidence that policy is in the right place to bring down inflation

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Federal Reserve Governor Christopher Waller said Tuesday he’s growing more confident that policy is in a place now to bring inflation back under control.

There was nothing in Waller’s prepared remarks for a speech in Washington, D.C., that suggests he’s contemplating cutting interest rates, and he noted that inflation currently is still too high. But he pointed out a variety of areas where progress has been made, suggesting the Fed at least won’t need to hike rates further from here.

“While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained,” he said. “But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”

A subsequent speech Tuesday morning from Governor Michelle Bowman offered a contrasting view, in which she reiterated her belief that more rate hikes likely will be needed as evolving dynamics keep inflation elevated.

The commentary comes two weeks before the rate-setting Federal Open Market Committee’s Dec. 12-13 policy meeting. Markets largely expect the committee to hold its key lending rate steady in a target range between 5.25%-5.5%. But Fed officials have stressed the importance of remaining vigilant on inflation and keeping their options open.

During the central bank’s ongoing battle against inflation, Waller has been one of the more hawkish members, meaning he has favored tighter policy and higher rates. However, he titled his Tuesday speech, “Something Appears to Be Giving,” a contrast to a recent speech titled “Something’s Got to Give.”

“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” he said.

Waller cited a variety of areas where activity is moderating, from retail sales to the labor market to manufacturing. He also noted easing in supply chain pressures that were largely responsible for the initial jump in inflation, but he said that factor can’t be counted on to help bring inflation down further.

“Monetary policy will have to do the work from here on out to get inflation back down to 2 percent,” he said.

Waller noted easing in inflation gauges such as the consumer price index, which was flat in October and “what I want to see.” However, he said there will be multiple other data points in the next weeks that he will be watching closely, including Thursday’s report on inflation as measured by personal consumption expenditures.

Bowman cited several factors as likely to keep inflation elevated.

She echoed Waller’s point about supply chains and said further improvements in labor force participation could be limited, a situation that could boost pay as businesses struggle to find enough workers. Also, Bowman noted the uncertainty of future productivity gains due to education disruptions from the Covid pandemic.

A switch back to heavy services consumption also could boost inflation, as could some sectors of the economy that are not sensitive to higher rates.

“My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2 percent target in a timely way,” Bowman said.

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'Funflation' drives sporting event ticket prices up a whopping 25%

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John Brown #16 of the Buffalo Bills celebrates with fans after catching a touchdown pass during the third quarter against the New England Patriots at Highmark Stadium on January 08, 2023 in Orchard Park, New York. (Photo by Bryan M. Bennett/Getty Images)

Bryan M. Bennett | Getty Images Sport | Getty Images

Dan Hornberger has been a fan of the National Football League’s Philadelphia Eagles for as long as he can remember. As an adult, his office has team memorabilia lining the walls.

Last year, the devout supporter went to five home games, about an hour-and-a-half drive from his house. This year, however, Hornberger’s only on track to attend two games as costs soar.

“I’m a huge fan,” Hornberger, 40, said. “Ultimately, what it comes down to is just outright refusal on my part to pay those kinds of prices.”

Sports prices have surged this fall, according to federal data. That’s made game tickets the latest victim of “funflation,” a term used by economists to explain the increasing price tags of live events as consumers hanker for the experiences they lost during the pandemic.

‘A gigantic bounce back’

Admission prices for sporting events jumped 25.1% in October 2023 from the same month a year prior, according to the Bureau of Labor Statistics’ consumer price index data. The category saw the highest annualized inflation rate out of the few hundred that make up the inflation gauge.

CPI as a whole rose a relatively modest 3.2% on an annualized basis. The index tracks the prices of a broad basket of items including milk, jewelry and airline fares.

“We’ve seen this through the entire leisure and hospitality sector,” said Victor Matheson, a professor and sports economist at the College of the Holy Cross. “People are getting back to things that they enjoy doing and are willing to pay a bunch.”

Part of the reason consumers may be seeing higher ticket prices for their favorite sports teams is because of the increasing use of dynamic pricing models, Matheson said. These structures allow ticket-selling platforms to fetch more or less per ticket, depending on demand for the event at any given moment.

There’s also an alignment of attention-grabbing sporting events taking place this fall. Beyond the typical major-league seasons, the Formula One race in Las Vegas last week and the announcement of soccer legend Lionel Messi’s move to the Inter Miami team this summer have boosted enthusiast spending.

But a large reason for the eye-popping 25.1% jump is because of how low prices were a year ago, Matheson said. Teams slashed ticket values in 2022 in a bid to win back fans who had grown accustomed to watching at home.

Sports ticket prices were 14.2% higher in October than in November 2019, a smaller gain than the entire index’s 19.6% increase, a CNBC analysis of CPI data shows. Much of the upward pressure on admission costs has come this year, underscoring the role of funflation as consumers shift their attention from Taylor Swift and Beyoncé concerts to NFL and Major League Baseball games.

“We’re seeing a gigantic bounce back in prices,” Matheson said. 

NFL and National Hockey League sales have approximately doubled in 2023 compared with the prior year, according to ticket platform StubHub. NBA sales were up nearly 60% at the start of the season compared with the last, while college football has seen an increase of around 50%.

To be sure, not every sport this year has seen the same price growth. StubHub said ticket prices across the top 10 sporting events were 15% higher in 2022 than they were in 2023.

Matheson said tamer inflation overall should help cool sector-specific growth. A return to a more normalized entertainment spending routine following the post-pandemic experience boom can also help quell demand and prices, he added.

‘Really upsetting’

Rodney Paul, director of the sports analytics program at Syracuse University, said interest in attending games should be somewhat stable even if the economy worsens. That’s because a sizable portion of the consumer base is well-off enough to afford pro-sports tickets — which he said is essentially a luxury item — and should be able to better weather a downturn given their financial status.

But Paul said a meaningful change to the state of the economy could push fans who are less financially stable to cut back on extraneous expenses, in turn hurting demand. Cash-strapped consumers may justify spending more than they’d like to this year by reminding themselves they didn’t splurge as much or at all on game tickets during the pandemic, Matheson said.

Part of the financial stress comes from the resale market for tickets, some sports enthusiasts say. The rising price of parking and food inside of the stadium also have to be factored in to the financial calculation of fans such as Hornberger and Sara Weddington.

Weddington was able to save enough enough to attend a Kansas City Chiefs game last season, but she said it feels out of the question this year as prices have climbed. The long-time resident of the Kansas City area said she feels for people who have never gotten to see a game before recent cost increases.

“To have such a monumental part of the community be so out of reach for a lot of people is really upsetting,” the 23-year-old said. “Not being able to go to a game is like going to a candy store and not being able to get any candy.”

Still, Paul of Syracuse University said sports have taken on a new meaning in the post-pandemic world. As people increasingly work from home, he said there’s a larger need for in-person social spaces — and those who can afford it are more willing to shell out.

“There’s a real craving for that kind of feeling of togetherness that the sports world brings,” he said. It’s “a really exciting experience that maybe is even more exciting now because people had lost it in the past.”

— CNBC’s Gabriel Cortes contributed to this report.

Geopolitical instability and a packed election calendar have strategists wary of 2024

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Israeli soldiers transfer detained Palestinians out of the Gaza Strip on November 20, 2023, as battles between Israel and the Hamas movement continue.

Gil Cohen-magen | AFP | Getty Images

Geopolitical risks will be the key threat to the economic outlook for 2024, as large-scale wars converge with a slew of pivotal elections across major global powers.

As the world’s financial institutions map out the investment landscape for next year, they expect an increasingly fraught geopolitical backdrop and greater divergence across key regions, compounding uncertainty and market volatility.

In a global risk survey carried out among 130 businesses last month by Oxford Economics, almost two fifths of respondents viewed the Israel-Hamas war as a very significant risk to the global economy over the next two years.

Yet worries over relations between China and Taiwan and Russia and NATO were similarly widespread, and geopolitical tensions were the top business concern over both the near and medium term, with 62% of businesses citing geopolitics as a very significant risk to the global economy.

“Deglobalisation and persistently higher oil prices, both of which could be triggered by an intensification of geopolitical tensions, are also fairly prominent in the latest survey,” Oxford Economics researchers said.

The International Monetary Fund expects global growth to slow to 2.9% in 2024, amid widening divergence between regions — stronger growth is projected in the U.S. and large emerging markets, while China and the euro area are expected to struggle.

In its 2024 investment outlook published Monday, Goldman Sachs Asset Management noted that elections in the U.S., U.K., South Africa, India, Taiwan and Russia will add to the range of possibilities for the global economy to diverge from its current path.

The Wall Street giant’s asset management arm noted that concerns over government debt sustainability and the fiscal trajectory in the U.S. may mount in the run-up to the presidential election of next November, while domestic socioeconomic risks — such as strikes in certain industries amid stubbornly high inflation — could persist across major economies and further weigh on growth.

“Rising geopolitical tensions could trigger more trade restrictions across the globe, resulting in further economic fragmentation. We expect economies to continue to invest heavily in their economic security over the next 12 months and beyond,” GSAM strategists wrote.

“This may be driven by developed markets ‘re-shoring’ and ‘friend-shoring’ critical supply chains that remain highly interdependent and, in some cases, over-concentrated, such as leading-edge semiconductors.”

Russia-Ukraine, Israel-Hamas, China-Taiwan

The view was echoed by Roland Temple, chief market strategist at Lazard, who said in a global outlook report last week that, while predicting the course of any single geopolitical crisis is fraught, what is clear is that “the global trajectory is toward more frequent conflicts of increasing consequence.”

“Navigating the evolving — at times treacherous — geopolitical landscape will likely require access to deep wells of expertise, as geopolitical issues that could have been ignored in the past now stand to directly impact companies’ supply chains and customer bases,” Temple said.

“Ongoing geopolitical conflicts and tensions are likely to depress growth further, while adding to inflationary pressures that are beyond the control of central banks.”

Temple predicted that the Russia-Ukraine conflict will extend well into 2024, as the Ukrainian counteroffensive loses momentum due to the encroaching winter, while concerns mount over the reliability of Western funding and military aid.

Xi-Biden meeting in San Francisco is a baby step in the right direction, EU Chamber of Commerce's Wuttke says

“While a negotiated settlement is likely the only way to end the war, both sides remain far from the point of agreeing to capitulate on their grand designs — that is, for Russia to control all of Ukraine and for Ukraine to control all of its sovereign territory,” he said.

As for the Middle East, the most “combustible situation” would be a spill-over of the Israel-Hamas conflict into nearby states, including Iran, which could “spiral into a regional conflict with global and military implications.” The primary risk of this form of escalation would be a disruption of the transit of energy supplies through the Strait of Hormuz, through which around 20% of global oil supply is shipped.

But Temple argued that all parties, including Iran, Israel and the United States have strong incentives to avoid this outcome, and that the most economically consequential geopolitical situation is China’s multi-faceted tensions with the West over competition and Taiwan.

“Early 2024 Taiwan elections will set the stage for the rest of the year. The Democratic Progressive Party (DPP) is currently well ahead of the more Beijing-friendly Kuomintang (KMT),” he noted.

“A DPP victory would likely escalate tension with Beijing as the DPP is seen as favoring a formal declaration of independence, a red line for the Chinese government.”

Continuum Economics: Rate cuts to be market driver in 2024

A clear result of both direct industrial competition between China and the U.S. and concerns over China’s intentions in Taiwan is growing supply chain fragmentation, as trade tariffs and barriers along with post-Covid logistical concerns have led developed economies to pursue “friend-shoring” or “near-shoring” policies.

“These plans are proving more difficult than policymakers might have envisioned, given inertia around supply chains and the challenge of cultivating the necessary skills among workers in new locales,” Temple said.

“Still, geopolitical tension is contributing to economic fragmentation which, at least in the short run, may dampen global growth and contribute to inflationary forces.”

On a positive note, Temple suggested that sustained disinflation should allow the U.S. Federal Reserve and other central banks to consider cutting interest rates as early as the second quarter, which should “mitigate headwinds to growth and invigorate capital expenditures in anticipation of a cyclical economic rebound.”

Security and semiconductors

GSAM Head of Asset & Wealth Management Marc Nachmann and his team expect critical mineral supply chains to receive attention due to their growing importance in the clean energy transition, along with their potential vulnerability to supply shocks.

As a result, GSAM suggested investors should avoid trying to time the market or make calls on binary political or geopolitical outcomes, but instead take a proactive approach to asset allocation based on “extensive bottom-up research.”

“We think companies that successfully align with corporate and government efforts to boost the security of supply chains and resources as well as national security will emerge as long-term winners,” the strategists said, adding that firms with pricing power, durable business models and strong balance sheets should be the focus.

“Public equity market may present opportunities to gain targeted exposure to more established firms that produce semiconductors and to semiconductor manufacturing equipment, as well as to industrial automation and technology companies that are facilitating the reshoring of manufacturing.”

Demand for natural gas products is likely to rise, as nations seek affordable, reliable and sustainable energy, GSAM predicted, while growing and more complex security threats create opportunities for cybersecurity platforms and aerospace and defense technology providers.

Ray Dalio says U.S. reaching an inflection point where the debt problem quickly gets even worse

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Soaring U.S. government debt is reaching a point where it will begin creating larger problems, Bridgewater Associates founder Ray Dalio said Friday.

The hedge fund titan warned during a CNBC appearance that the need to borrow more and more to cover deficits will exacerbate the political and social problems the country is facing.

“Economically strong means financially strong,” Dalio said on “Squawk Box.” “Financially strong means: do you earn more than you spend? Do you have a good income statement as a country? And do we have a good balance sheet?”

The U.S. is $33.7 trillion in debt, a total that exploded by 45% since the Covid pandemic in early 2020, according to Treasury Department data. Of that total, $26.7 trillion is owed by the public. Last year, the government rang up a $1.7 trillion deficit as it sought to keep up the pace of spending.

As the debt built up and the Federal Reserve raised interest rates to try to tamp down inflation, the government spent $659 billion on net interest costs in fiscal 2023 to finance the debt.

Dalio said that is a recipe for trouble.

“The worse that gets, the more we are going to have that long-term problem,” he said. “You can see it in the numbers. It’s just a matter of numbers. We are near that inflection point.”

Along with the basic budget issues, Dalio also cautioned that foreign buyers, who make up about 40% of demand for U.S. Treasurys, have been backing off, creating a supply-demand problem.

Data through January indicate that foreign holdings of U.S. government debt total $7.4 trillion, down $253 billion, or 3.3% over the past year. China in particular has cut its holdings strongly, pulling back 17% during the period.

“You want to keep spending at the same level, there is the need to get more and more into debt. The way that works, it accelerates,” Dalio said. “We are at the point of that acceleration, which creates the supply-demand problem. It’s made worse by the other issues that we’re talking about, the internal political issue, the internal social conflict issue.”

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The market thinks the Fed is going to start cutting rates aggressively. Investors could be in for a letdown

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Traders work on the floor of the New York Stock Exchange (NYSE) on November 15, 2023 in New York City. 

Spencer Platt | Getty Images News | Getty Images

Markets seem to have taken this week’s positive economic data as the all-clear signal for the Federal Reserve to start cutting interest rates aggressively next year.

Indications that both consumer and wholesale inflation rates have eased considerably from their mid-2022 peaks sent traders into a frenzy, with the most recent indications on the CME Group’s FedWatch gauge pointing to a full percentage point of cuts by the end of 2024.

That may be at least a tad optimistic, particularly considering the cautious approach central bank officials have taken during their campaign to bring down prices.

“The case isn’t conclusively made yet,” said Lou Crandall, chief economist at Wrightson ICAP. “We’re making progress in that direction, but we haven’t gotten to the point where they’re going to say that the risk of leveling out at a level too far above target has gone away.”

This week has featured two important Labor Department reports, one showing that consumer prices in aggregate were unchanged in October, while another indicated that wholesale prices actually declined half a percent last month.

While the 12-month reading of the producer price index sank to 1.3%, the consumer price index was still at 3.2%. Core CPI also is still running at a 12-month rate of 4%. Moreover, the Atlanta Fed’s measure of “sticky” prices that don’t change as often as items such as gas, groceries and vehicle prices, showed inflation still climbing at a 4.9% yearly clip.

“We’re getting closer,” Crandall said. “The data we’ve gotten this week are consistent with what you would want to see as you move in that direction. But we haven’t reached the destination yet.”

In search of 2% inflation

The Fed’s “destination” is a place where inflation isn’t necessarily at its 2% annual goal but is showing “convincing” progress that it’s getting there.

“What we decided to do is maintain a policy rate and await further data. We want to see convincing evidence, really, that we have reached the appropriate level,” Fed Chair Jerome Powell said at his post-meeting news conference in September.

While Fed officials haven’t indicated how many months in a row it will take of easing inflation data to reach that conclusion, 12-month core CPI has fallen each month since April. The Fed prefers core inflation measures as a better gauge of long-run inflation trends.

Traders appear to have more certainty than Fed officials at this point.

Futures pricing Wednesday indicated no chance of additional hikes this cycle and the first quarter percentage point cut coming in May, followed by another in July, and likely two more before the end of 2024, according to the CME Group’s gauge of pricing in the fed funds futures market.

If correct, that would take the benchmark rate down to a target range of 4.25%-4.5% and would be twice as aggressive as the pace Fed officials penciled in back in September.

Markets, then, will watch with extra fervor how officials react at their next policy meeting on Dec. 12-13. In addition to a rate call, the meeting will see officials make quarterly updates to their “dot plot” of rate expectations, as well as forecasts for gross domestic product, unemployment and inflation.

But pricing of Fed actions can be volatile, and there are two more inflation reports ahead before that meeting. Wall Street could find it self disappointed in how the Fed views the near-term policy course.

“They’re not going to want to signal that now is the time to start talking about decreases in interest rates, even if fed funds futures already has that incorporated,” former Boston Fed President Eric Rosengren said Wednesday on CNBC’s “Squawk Box.”

‘Soft landing’ sightings

Market enthusiasm this week was built on two basic supports: the belief that the Fed could start cutting rates soon, and the notion that the central bank could achieve its vaunted “soft landing” for the economy.

However, the two points are hard to square, considering that such aggressive easing of monetary policy historically has only accompanied downturns in the economy. Fed officials also seem reticent to get too dovish, with Chicago Fed President Austan Goolsbee saying Tuesday that he sees “a way to go” before reaching the inflation target even as he holds open a possible “golden path” to avoiding a recession.

“A slower economy rather than a recession is the most likely outcome,” Rosengren said. “But I would say there’s certainly downside risks.”

The stock market rally plus the recent drop in Treasury yields also pose another challenge for a Fed looking to tighten financial conditions.

“Financial conditions have eased considerably as markets project the end of Fed rate hikes, perhaps not the perfect underpinning for a Fed that professes to keeping rates higher for longer,” said Quincy Krosby, chief global strategist at LPL Financial.

Indeed, the higher-for-longer mantra has been a cornerstone of recent Fed communication, even from those members who have said they are against additional hikes.

It’s part of a broader feeling at the central bank that it doesn’t want to repeat the mistakes of the past by quitting the inflation fight as soon as the economy shows any signs of wobbling, as it has done lately. Consumer spending, for instance, fell in October for the first time since March.

For Fed officials, it adds up to a difficult calculus in which officials are loathe to express overconfidence that the final mile is within sight.

“Part of the problem the Fed always has to deal with is this illusion of control,” said Crandall, the economist who started at Wrightson ICAP in 1982. “They can influence things, but they can’t control them. There are just too many exogenous factors feeding into the complex dynamics of the modern global economy. So I’m moderately optimistic [the Fed can achieve its inflation goals]. That’s a little different than being confident.”

Wholesale prices fell 0.5% in October for biggest monthly drop since April 2020

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Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois. 

Scott Olson | Getty Images

Wholesale prices in October posted their biggest decline in 2½ years, providing another indication that the worst of the inflation surge may have passed.

The producer price index, which measures final-demand costs for businesses, declined 0.5% for the month, against expectations for a 0.1% increase from the Dow Jones consensus, the Labor Department reported Wednesday. The department said that was the biggest monthly decline since April 2020.

Excluding food and energy, core PPI was unchanged, also below the forecast for a 0.3% increase. Excluding food, energy and trade services, the index increased 0.1%.

The report comes a day after the Labor Department said that the consumer price index, which measures prices for goods and services at the consumer level, was unchanged in October from the previous month. That set off an aggressive rally on Wall Street, where sentiment is rising that the Federal Reserve is done raising interest rates and could in fact start cutting in the first half of 2024.

However, consumers in October showed some sensitivity to prices.

The Commerce Department’s advance retail sales report for the month showed a decline of 0.1%, according to a number that is adjusted for seasonal factors but not inflation. Wall Street had been looking for a decline of 0.2%. Excluding autos, sales rose 0.1%, compared to expectations for an unchanged number.

This is breaking news. Please check back here for updates.

Inflation was flat in October from the prior month, core CPI hits two-year low

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Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the U.S. economy.

The consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday. Economists surveyed by Dow Jones had been looking for respective readings of 0.1% and 3.3%.

Headline CPI had increased 0.4% in September.

Excluding volatile food and energy prices, core CPI increased 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual level was the lowest in two years, though still well above the Federal Reserve’s 2% target.

Markets spiked on the news. Futures tied to the Dow Jones Industrial average were up 300 points as Treasury yields fell sharply. Traders also took any potential Fed interest rate hikes almost completely off the table, according to CME Group data.

The flat reading on headline CPI came as energy prices declined 2.5% for the month, offsetting a 0.3% increase in the food index. Shelter costs, a key component in the index, rose 0.3% in October, half the gain in September as the year-over-year increase eased to 6.7%.

The report comes as markets are closely watching the Fed for its next steps in a battle against persistent inflation that began in March 2022. The Fed ultimately increased its key borrowing rate 11 times for a total of 5.25 percentage points.

While markets overwhelmingly believe the central bank is done tightening monetary policy, the data of late has sent conflicting signals.

Nonfarm payrolls in October increased by just 150,000, indicating that the labor market finally is showing signs that it is reacting to Fed efforts to correct a supply-demand imbalance that has been a contributing inflation factor.

Labor costs have been increasing at a much slower pace over the past year and a half as productivity has been on the rise this year.

More broadly speaking, gross domestic product surged in the third quarter, rising at a 4.9% annualized pace, though most economists expect the growth rate to slow considerably.

However, other indicators show that consumer inflation expectations are still rising, the likely product of a spike in gasoline prices and uncertainty caused by the wars in Ukraine and Gaza.

Fed Chair Jerome Powell last week added to market anxiety when he said he and his fellow policymakers remain unconvinced that they’ve done enough to get inflation back down to a 2% annual rate and won’t hesitate to raise rates if more progress isn’t made.

“Despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to the long-run 2% target,” said Jeffrey Roach, chief economist at LPL Financial.

Even if the Fed is done hiking, there’s more uncertainty over how long it will keep benchmark rates at their highest level in some 22 years.

This is breaking news. Please check back here for updates.

UBS sees a raft of Fed rate cuts next year on the back of a U.S. recession

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U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.

Evelyn Hockstein | Reuters

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.

In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%.

The central bank has since paused at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.

“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”

The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.

“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

U.S. Treasury yield curve will likely continue to steepen, analyst says

“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”

UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.

“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.

Worst credit impulse since the financial crisis

Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.

“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.