This week is hell on Wall Street
Fed Chair Larry Summers: Pressure from the Wall Street on the US Economy and Implications for Oil and Gascoin Prices in the Light of the OPEC+ Decline
The US economy may still be running fast and strong, but its risk of suddenly falling into a recession still looms large, despite the Federal Reserve’s efforts, former Treasury Secretary Larry Summers warned Monday.
Powell said that it will be necessary for a sustained period of below-trend growth and weakness of labor market conditions to reduce inflation. “Restoring that price stability is essential to set the stage for achieving stable employment and stable prices in the longer run.”
I don’t think that means we are going to get the same results as we did after Covid, but I think the other side is likely.
What’s happening: Low unemployment rates and wage growth may appear to be good for an economy that’s close to recession, but has actually proven bad for markets.
”We expect Fed Chair Powell will insist on the need to hold policy at a restrictive level for some time to bring inflation down toward the 2% target,” wrote Gregory Daco, chief economist at EY-Parthenon, in a note to clients Monday. “This will serve to push back against current market pricing … Powell will stress that history cautions strongly against prematurely loosening policy.”
“The way we’ve got to think about this is not managing with a fire drill every time we have some oil price problem,” Summers said. It reduces our dependence on unstable areas of the world for our energy.
The group of major oil producers, which includes Saudi Arabia and Russia, said Wednesday that it will slash oil production by 2 million barrels per day, the biggest cut since the start of the pandemic, in a move that threatens to push gasoline prices higher just weeks before US midterm elections.
The Biden administration criticized the OPEC+ decision in a statement on Wednesday, calling it “shortsighted” and saying that it will hurt low and middle-income countries already struggling with elevated energy prices the most.
Inflationary Monitor of the State of the Economy: The First Five Years of Interest Rate Control Over the Last Three Months, and the First Report from the Federal Reserve
Higher interest rates have begun to have the desired effect. Consumer spending has cooled in recent months. Prices are climbing faster than the central bank would like, but inflation has dropped significantly.
How much pain today’s moves will ultimately cause remains unclear: So many countries are raising rates so quickly — and so in sync — that it is difficult to determine how intense any slowdown will be once it takes full effect. Monetary policy can take months or years to fully kick in.
But many economists and several international bodies have warned that there’s a pronounced danger or overdoing it, including a United Nations agency that warned the damage could be particularly acute in poorer nations. Developing economies had already been dealing with a cost-of-living crisis because of soaring food and fuel prices, and now their American imports are growing steadily more expensive as the dollar marches higher.
Back in 2018, Fed Chair Jerome Powell described the Fed’s approach to raising rates similar to being in a dark room with furniture and having to move carefully to avoiding running into something. Well, however dark that room was in 2018, it is a lot darker now. Inflation is much higher due to the fact that inflation is more opaque, and a rise in business debt will lead to more monetary tightening.
The report showed some progress in the battle against the increases, according to Mr. Biden who said costs have gone up by less over the past three months than they had in the prior three months. He acknowledged that inflation remained high.
The Federal Reserve has raised their target range for interest rates from zero to between 4 and 2.5% over the past year to fight inflation. They reduced the pace of their hikes to a quarter of a percentage point in February, compared to half a percent in December. The final three quarters of the year saw a decline in inflation after it reached a 40-year high. The data for January showed that the price increases had risen once again.
Considering how dramatically inflation has surged in the past couple of years, and how much damage this surge has done to households’ budgets, savings and confidence in the economy, the Federal Reserve has been right to raise interest rates aggressively. The rate increases have been needed to cool the economy, curb inflation expectations, and alleviate pressures causing prices to go up.
There is growing concern that the economy will be in danger of a recession within the next year due to a number of factors, including a possible slowdown in key areas of the economy.
During a one-on-one interview in Ohio that aired on CNN’s “Erin Burnett OutFront,” Yellen said the third quarter GDP data released Thursday underscored the strength of the US economy as policy makers urgently move to cool off pervasive and soaring inflation that has had a sharp effect on American views of the economy – and endangered the Democratic majorities on Capitol Hill less than two weeks from the midterm elections.
Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. In the first quarter, there was a 1.6% decline and in the second, there was a negative 0.6%.
The Complex Balance That the President Biden and his Economic Officials Have Learned about the Covid-19 Enigma: When Research and Development Grows to Competitiveness
Over the course of this year, President Joe Biden and his top economic officials tried to highlight a rapid economic recovery and major legislative victories, while also trying to tackle rising prices, but they were shown the complex balancing act by Yellen.
It’s a reality that has undercut efforts by the administrationto take advantage of what officials view as a robust record. Republicans criticized Biden after he said the economy is strong as hell.
As the efforts course through the economy, they will be felt. Asked if the general message of the administration was one of patience, she said yes.
“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. The problems we do not have are a result of what the Biden administration has done. You don’t often get credit for problems that don’t exist.
Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.
It’s a critical piece of an economic strategy designed to address many of the vulnerabilities and failings laid bare as Covid-19 ravaged the world, with significant federal investments in infrastructure and shoring up – or creating from scratch – key pieces of critical supply chains.
Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.
Not every bridge will come online, but it will be soon. Bridges that have been falling apart will be fixed in many communities. Research and development is a source of long-term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.
Source: https://www.cnn.com/2022/10/27/politics/janet-yellen-gdp-recession-cnntv/index.html
Demographics of the Economy, Climate Change and the Washington Debt Ceiling: A Key Role of the House Republicans in the Debt-Clearing Crisis
Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.
“It is important that America not be held hostage by members of congress who want to compromise the credit rating of our country and threaten default on US Treasuries, which are the bedrock of global financial markets,” she stated.
She made clear that she didn’t plan to be part of the time period when top officials usually leave the administration. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”
“I feel very excited by the program that we talked about,” Yellen said. It strengthens the economy and addresses climate change and strengthens American households. And I want to be part of that.”
At the Federal Reserve’s policy meeting on Wednesday, they are projected to raise interest rates by half a point, an indication that they will be less aggressive than they have been in the past.
The chief financial analyst at Bankrate said that interest rates are not done yet, because they have risen at a whiplash-inducing speed. “It will take a while for inflation to come down from these lofty levels, even if we start to see some improvement.”
Annual inflation in September was 6.2%, according to the Fed’s preferred yardstick — unchanged from the month before. The consumer price index shows that prices have increased by 8.2% a year.
Predictions for the Future of the Real Estate Market: Reducing Mortgage Rate Increases in a Depression-Tension-Induced Economic Crisis
“We see today that there is a bit of a savings buffer still sitting for households, that may allow them to continue to spend in a way that keeps demand strong,” said Esther George, president of the Federal Reserve Bank of Kansas City. “That suggests we may have to keep at this for a while.”
Like her colleagues on the Fed’s rate-setting committee, George has expressed a determination to control inflation. But she’s also cautioned against raising rates too rapidly at a time of economic uncertainty.
“I have been in the camp of steadier and slower [rate increases], to begin to see how those effects from a lag will unfold,” George said last month. “My concern being that a succession of very super-sized rate hikes might cause you to oversteer and not be able to see those turning points.”
“We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families,” Sen. Elizabeth Warren, D-Mass., and colleagues wrote in a letter Monday to Fed chairman Jerome Powell.
Shawn Woods, president of Shawn Woods, said his company decreased the number of houses they sold from a month before the Fed raised rates to fewer than five to a single house.
The president of the Home Builders Association of Kansas City said that he wouldn’t have thought his mortgage rates would go from 3% to 7% within six months.
We’re in for a rough six or eight months, according to Woods. It leads us out of downturns when housing leads us into downturns. And I think from a housing perspective, we’ve probably been in a housing recession since March or April.”
The labor market is showing signs of cooling, with layoffs moving higher, the number of jobs added slowly, and continuing claims increasing.
The Federal Reserve predicted that the unemployment rate would go up to 4.6% by the end of next year. There are 2 million Americans who will have to leave the workforce if the unemployment rate has risen that much outside of a recession.
Even as companies are laying off workers, job openings still outnumber job seekers by 2 to 1.
A strong job market in normal times is good news, but in 2022, it suggests the economy is overheating, as it may mean there is more jobs to be had. On Wednesday, the Fed announced its fourth-straight three-quarter-point hike, the latest in a series of aggressive moves that would have been unthinkable just a few months ago.
The Fed worries that inflation is keeping it uncomfortably high because there are 1.9 jobs for every one person looking for work. With plenty of options, workers are demanding more money, and managers are forking out higher pay, which bolsters demand and drives up prices.
The central bank is charged with a dual mandate: maximize employment (check) and ensure price stability (uncheck). Ideally, the Fed would like everyone to keep their jobs while damping demand just enough to take the heat off consumer prices, which have been hovering at 40-year-highs and currently sit at 8.2%. Powell still believes it is possible, but most economists think the chance of that is remote.
Democrats trying to hold onto power next week are likely to experience inflation outweighing positive sentiment about job security. The majority of voters think the country is in a recession, according to a new CNN poll.
First Time Buyers: Why Millennials, Gen Z, are Refusing to Give up on the Dream of Homebuying in the Age of Competition
The narrative got flipped when it was cut to 2020. It wasn’t that Millennials didn’t want homes in the suburbs, they just couldn’t afford them. The furor was driven by people in their 30s who had left jobs in the aftermath of the Great Recession to go and live on the other side of the world.
Baby Boomer parents with big investment portfolios were happy to give some of the gains from the stock surge to their kids.
As that 2020 housing boom begins to go bust, those who managed to close on a home in the crush of competition fed by rock-bottom mortgage rates should count themselves extremely lucky.
A new report showed that first time buyers made up just 26% of all home buyers in the year ending in June, the lowest level in the past four decades, according to a survey by the National Association of Realtors.
“They have to save while paying more for rent, as well as student debt, child care and other expenses,” said Jessica Lautz, NAR’s vice president of demographics and behavioral insights. “And this year were facing increasing home prices while mortgage rates are also climbing.”
Oh yeah, one other thing: In addition to mortgage rates going up, home prices also shot up, with the median peaking at $413,800 in June. (Imagine your starter home clocking in at 400 grand!)
Housing is broken. There is a clear part of the problem that involves inventory constraints and outdated rules forzoning.
Housing supply has expanded through subdivisions at the urban fringe, rather than rebuilding within existing neighborhoods. It is putting more people and homes in areas that are prone to wildfire.
Now is a good time to rethink the way we frame the American Dream as affordability reaches crisis levels. But that will only happen if those who stand to benefit — Millennials and Gen Z — are better represented in elected office. As Schuetz argues, the upper-middle class Boomers in power now are, understandably, reluctant to change the system that got them where they are.
Before the Bell Newsletter: The Minneapolis Fed President Opens to an Interest Rate Increase in the Context of the Largest Economy in the Last Three Years
The central bank raised the benchmark interest rate in 7 meetings starting in March. The sharp hike in rates has started to filter through the economy, its effects showing up first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac data.
The Minneapolis Fed President said last Wednesday that he was open to the idea of a larger interest rate increase in the March policy meeting. That is a quarter or half of a percent. The basis point is the difference between one and one percent.
CNN Business published a version of the story. Before the Bell newsletter. Do you not have a subscriber? You can sign up right here. Clicking on the same link will bring you an audio version of the newsletter.
Wall Street Hits After FTX Collapse: When the Fed is Not Going To Tighten, But It Does: The Case For Digital Currency
Stocks surged on Thursday in their best day since 2020 after a key inflation indicator came in softer than expected. The investors broke out of their party hats as they realized that the report indicated that peak inflation may be behind us. That means the Federal Reserve could be less aggressive with its rate hikes.
When investors get hopes up about a central bank pivot they are crushed by more negative news or messages from a Fed official.
The report shows the chair of the Fed will reiterate that more needs to be done to bring down annual inflation to 2%.
What else: Wednesday will also bring the Fed’s latest forecasts for the unemployment rate and gross domestic product (GDP) growth. Those numbers will highlight whether Fed officials think recession is likely and how high their tolerance for pain is as they continue the fight to bring down persistent inflation.
“If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller,” wrote Bill Adams, chief economist for Comerica Bank in a note.
In November, the price of the digital currency fell by more than 15%. It is not clear what the future holds for investors in digital currency after the collapse of FTX.
There is no place to hide in a market where rate hikes and recessions exist, and those assets have been hit just like stocks and bonds.
Crypto Thaw: The Covid Era, Wall Street Volatility, and the Consumers’ Choice Concerned by Inflation
A crypto thaw: The Covid-era was marked by near-zero interest rates, and a lot of investors from large institutions. It reached a record high of nearly $70,000 in November.
After central banks raised rates to fight inflation, investors preferred the dollar as their primary safe haven. At the same time, the economy began to sour and those new investors who still viewed bitcoin as a risky asset exited in droves.
The volatility on Wall Street may be unnerving — the CNN Business Fear & Greed Index, which measures seven indicators of market sentiment, is now in Neutral territory after spending the past month in Greed mode — but it pales in comparison to what’s happening with bitcoin and other cryptocurrencies.
The purchasing power of buyers plummeted when mortgage rates went up four percentage points. Those who remain in the market need to look at a lower price point or make compromises on other aspects of a house to find a house that is affordable.
The traders are hoping for a half-point increase. There is an 80% chance of a half-point hike in federal funds futures.
The Fed hopes that inflation pressures are starting to abate, so that it doesn’t crash the economy into a recession.
Inflation and retail sales in the U.S. After all, we are talking about inflation, not just inflation, but what we want to see next
But it may not be that simple. The government reported Friday that a key measure of wholesale prices, the Producer Price Index, rose 7.4% over the past 12 months through November. The rate was slightly higher than expected but still less than October’s 8% increase.
The more widely watched Consumer Price Index data for November comes out Tuesday, just a day before the Fed announcement. CPI rose 7.7% year-over-year through October.
The Fed will conclude its rate hike regimen by the second quarter of next year, predicted JPMorgan analysts in a recent note. According to them, inflation could begin to ease before the end of the year if the Fed ends its tightening cycle early in the new year. The first half of next year is when the analysts think there will be two quarter-point hikes.
There is an anticipated central bank meeting. The policy committee meeting of the Federal Reserve will be sandwiched between the inflation data and retail sales.
“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “Rate cuts may be too late. Recession risks are still high.
Economists are actually forecasting a small dip of 0.1% in retail sales from October. It is important to put that number in perspective. Retail sales surged 1.3% from September and 8.3% over the past 12 months.
Consumers may have been getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
“Everybody has been talking about inflation this year. Going forward, it will be more about disinflation in both of the following years, said Comgest’s CEO.
A Word for Investors: The Quest for Pricing Power and Profit Margins in the Energy, Retail, and Restaurant Business Cycles of the Gold Rush
Is that a word for investors? Cosserat said that people should look for quality companies that have pricing power and can maintain profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
On Friday there will be Eurozone’sPMI, retail sales from the UK, and earnings from some restaurants.
In October and November, stocks rallied due to optimism that the Fed would modestly scale back its rate hikes. They are still down sharply for the year, though, and stocks have been more volatile so far in December.
The yield on the 10-year US Treasury fell back to around 3.5%, after moving above 4.3% in late October. That was the highest the 10-year has been since 2008.
The Fed and other central banks may not begin to pause until the economy is too weak to use interest rates to help it, and until it’s too late.
“The macroeconomic focus will shift from fears of Fed tightening to how badly growth slows and earnings fall before global central banks can hint at providing accommodation,” said Tom Essaye, founder and editor of the Sevens Report investing newsletter, on Monday.
Investors may get some answers this week when FTX founder Sam Bankman-Fried testifies in front of the House Financial Services Committee on Tuesday. The Senate Banking Committee will hold its own FTX hearing Wednesday, but Bankman-Fried is not currently on the list of witnesses set to appear.
The Fed is Going to Stay Easier than It Used To Be: Implications For Wall Street, Consumer Price Pressure, And U.S. Bank Rates
Maybe investors will be able to relax and take a deep breath before the Fed announcement and press conference later that day. There is no guarantee that will happen.
It is still twice the rate that the Fed typically raises and will cause economic pain for millions of American businesses and households by making borrowing more expensive.
The average period between peak interest rates and the first reduction by the Fed is eleven months which means that if the central bank stops actively hiking rates, they could remain elevated into the year twenty four.
The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. The borrowing costs of some countries will likely go up this week.
Ben Bernanke created the dot plot to assure the public that the Fed was going to keep interest rates low. The dots have become a signal that the interest rates will stay elevated, which is scaring investors and Fed watchers alike.
In a note on Monday, Goldman Sachs analysts said they expect the median “dot” to rise to a new peak in Federal fund rates of 5%-5.25%, up from 4.5%-4.75% in September. The Fed said they expect to raise rates by a half a percent more than three months ago.
Economists at EY-Parthenon believe that projections for real GDP growth will likely be revised down from 1.2% in the fourth quarter of 2023 to around 0%. Unemployment rate projections are expected to approach 5% from 4.4% in September.
State of the Art: Tesla’s Self-Driving Limits Aren’t Enough, Even During the Winter of Discontent
Billy Palmer, senior fellow at Nuffield Trust, a health research firm, said it was unprecedented. While small pockets of nursing staff have walked out before, the country’s National Health Service has seen “nothing of this scale until now,” he added.
“Patient safety is always paramount,” the RCN says on its website, adding that some nursing staff would continue to work through the strike. The RCN has promised to maintain critical services, including chemotherapy and dialysis treatments, during this month’s stoppages.
It is the broadest wave of industrial unrest since the country’s infamous “winter of discontent” in the late 1970s, when huge numbers of workers, from truck drivers to gravediggers, went on strike.
Tesla CEO Elon Musk has said numerous times since 2015 that Tesla cars would be entirely self-driving in two years, or less. Years after his self-imposed deadlines, they haven’t happened. Even when equipped with a $15,000 technology package that is literally called “Full Self Driving Capability,” a Tesla car can’t actually drive by itself, reports my colleague Peter Valdes-Dapena.
“Mere failure to realize a long-term, aspirational goal is not fraud,” Tesla’s lawyers wrote in a November 28 court filing, asking that the suit be dismissed.
The lawsuit, filed by the California firm of Cotchett, Pitre & McCarthy, also cited numerous cases of crashes involving the use of Tesla’s driver assist technology.
The hike, smaller than the previous four increases, comes after the latest government reading showed inflation is running at its slowest annual rate in nearly a year.
“It’s clear there is more work to do,” Daly said in a speech at Princeton University. “In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”
The U.S. Consumer Prices Rise As Percolation Increases, Food and Energy Prices Rise, and the Labor Markets Decreasing
Many Americans, already contending with price increases in nearly every part of their lives, are feeling the effects as they pay more in interest on credit cards, mortgages and car loans. Used car buyers are paying a higher average interest rate than last year and are making the biggest monthly payments on record, according to a credit reporting firm.
The central bank said that inflation remains elevated due to supply and demand imbalances and higher food and energy prices.
The closely watched jobs report showed a strong labor market, which caused stocks to plunge. They fell again on Thursday when weekly numbers showed the number of Americans filing for unemployment benefits fell, indicating a still-tight labor market.
Fed officials think that shelter inflation may be behind us. Market rents have been increasing since spring.
The price of haircuts rose 6.8% over the last 12 months, while the price of dry cleaning increased 7.9%. Services other than housing and energy account for nearly a quarter of all consumer spending.
U.S. Consumer Prices: A Year After The Pandemic and the First Half of the Cold War, and an Outlook for the Rest of the World
“We see goods prices coming down,” Powell said. “We understand what will happen with housing services. But the big story will really be the the rest of it, and there’s not much progress there. It’s going to take some time.
Powell thinks the job market is out of balance because more openings than workers are able to fill them. The US economy has replaced all the jobs that were lost during the Pandemic but the share of adults who are working or looking for work has not fully recovered.
Many older workers who retired in the last two years may not return to the job market. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.
The central bank has said it will do anything it can to bring inflation down, and it raised its interest rates for the seventh time in nine months.
Gasoline prices have dropped sharply and are now lower than they were before Russia’s invasion of Ukraine. The prices of other goods like used cars and televisions have fallen, as pandemic kinks in the supply chain come untangled. And travel-related prices for things like airplane tickets and rental cars have dropped, as the pent-up demand that followed lockdowns has faded, and travelers become more price-conscious.
The Fed isn’t Fully Doing Business, but It’s Possible. Job Creation, Uncertainty, and the Predictions for the New Year
Still, Powell warned economy watchers that “the job is not fully done” and that the labor market remains too tight for his liking. He doesn’t expect to change rates this year unless the economy changes dramatically.
The central bank has lowered its forecast for economic growth next year and raised its forecast for unemployment. Powell says there’s uncertainty.
“I don’t think anyone knows whether we’re going to have a recession or not and if we do, whether it’s going to be a deep one or not,” he said on Wednesday.
The gas station and the grocery store could see big swings in prices if the war in Ukraine causes a change in the weather. Faster or slower economic growth around the world could also cause gyrations in the price of crude oil and other commodities.
The price of services is heavily dependent on what happens to wages. It depends on how many jobs are added each month, how many workers are available to fill those jobs and how productive workers are.
What might happen: “Boy the Fed is really committed to this put us in a high unemployment recession thing,” Jon Stewart, former host of The Daily Show, tweeted after Wednesday’s meeting.
Some economists still think that a Fed pivot could take place in the second half of next year if employment weakens in the first half.
“Employment has yet to soften notably, but I think the jobs data is likely to deteriorate meaningfully and quickly,” said finance professor Jeremy Siegel of The Wharton School of the University of Pennsylvania in his weekly commentary for WisdomTree last week.
Powell expressed optimism on Wednesday that a soft landing was still possible and that the labor market was tight enough to withstand an increase in unemployment without snowballing into a recession. Investors, meanwhile, will be watching jobs numbers very closely.
Superday as the Busiest Shopping Day of the Year: Bankman-Fried, a Newly Defrauded Investor and Customer
It’s not known when Bankman-Fried will appear in court. He would probably return to the United States quickly if he didn’t have to pay for his deportation. Once in the states, he will appear before a US judge for an arraignment and bail hearing.
Federal prosecutors in the Southern District of New York charged Bankman-Fried with eight counts of fraud and conspiracy. Bankman-Fried could face up to 115 years in prison if convicted on all eight counts against him, though he likely wouldn’t get the maximum sentence.
On top of that, US market regulators filed civil lawsuits accusing Bankman-Fried of defrauding investors and customers, saying he “built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.”
Super Saturday is the busiest shopping day of the year leading up to Christmas. With Christmas Day falling on a Sunday, and Christmas Eve falling on the preceding Saturday, Super Saturday this year is on Dec. 17th. More than 158 million consumers are estimated to shop that day, according to the National Retail Federation.
Shoppers have only completed half their gift purchasing so far, the NRF estimates. There are less than a week to go until Christmas, and people are racing against time to get the gifts they want.
Source: https://www.cnn.com/2022/12/19/investing/premarket-stocks-trading/index.html
Retail Prices and Implications for Consumer Behavior: The Fourth-Year Progress Report from the Perry-Civita Inflationary Expansion
Retailers pay for sitting on an oversupply of merchandise for too long. Retailers who own their own warehouses and distribution centers have a finite amount of space to work with, with some wiggle room to accommodate excess inventory. But costs add up if more space is needed for a protracted glut that they can’t quickly clear out.
Also, unsold products lose value over time. That’s especially true with fashion clothing as savvy shoppers won’t buy last year’s style if the trend has passed. Stores have to heavily discount which impacts profitability.
This year, stores were offering discounts of 50% to 60% off and free shipping online, well before the last full weekend before Christmas.
Ross Steinman, a professor of consumer behavior at Widener University in Chester, Pennsylvania, said that he had studied the holiday season for 20 years and hadn’t seen discounting as dramatic.
“Retailers are very nervous,” he said. They know they have to maximize every chance they have to get consumers to make purchases in order to survive.
The moderate price increases in November that the Federal Reserve preferred for inflation signal that the period of painfully high prices has ended.
Core PCE, which excludes the volatile food and energy categories, was up 4.7% annually and 0.2% on a monthly basis, matching expectations of economists polled by Refinitiv.
The PCE inflation index’s annual increases hit their lowest levels since October 2021, following declines in other inflation indicators.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending was up 0.1% in November as compared to 0.8% the month before. In October personal income increased by 0.7%.
The last major inflation gauge to be released in 2022, the PCE report, provided a snapshot of an economy in transition. The Fed has raised its interest rate many times to snuff out the demand for goods and services.
She added: “Their outlook for the economy may have improved, but it remains relatively weak. The sustainability of robust consumer spending is contingent on continued strength in incomes and labor markets in the quarters ahead.”
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-over-year increase of more than 11%, Faucher noted.
The risk of a wage-price spiral where rising wages lead to rising prices is low because the Fed has signaled its concern about tight labor markets boosting wage growth above levels compatible with its 2% inflation target.
Manufacturing Activity in the U.S. Declined in December, followed by a Five-Year High in the Consumer Confidence Index
A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.
The decline was driven by transportation equipment and new orders for aircraft and parts. Excluding transportation, new orders increase 0.2%.
Diane Swonk, Chief economist for KPMG, said Friday that core durable goods orders slowed but didn’t contract, reflecting growing unease about the economy. The prelim reading for December indicates that manufacturing activity will contract further at the end of the year. A cold winter expected for the manufacturing sector.
The index of consumer sentiment for the month of December came in at 59.7%, up slightly from a preliminary reading of 59.1 and November’s final reading of 58.6, according to data from the university.
The consumer confidence index, a measure of how consumers feel about the economy, reached a five-year high this week.
America’s central bank found itself in a glaring spotlight for much of this past year, as Federal Reserve Chairman Jerome Powell wielded blunt tools of interest rate hikes and quantitative tightening to curb surging inflation.
Powell stated that the labor shortage was caused by factors including early retirements, caring for sick family members, and a plunge in net immigration.
As such, employers are hesitant to lay people off, and other areas of the economy are showing such strength that those who are unemployed are able to get rehired quickly, Mayfield said.
It has been pretty impressive how well the consumer has held up over the last 18 months, and not taking the rug out from under the consumer is a good way to get to the soft landing.
The Fed Open Market Committee: A Very Hard Time for Wall Street, Gas Prices, and Wage Growth: The U.S. Economy in a Hard Times
The Federal Open Market Committee holds eight meetings a year. Over the course of two days, the 12-member group looks through economic data, assesses financial conditions and evaluates monetary policy actions that are announced to the public following the conclusion of its meeting on the second day, along with a press conference led by Chair Powell.
It was a very rough time for the stock market with more than a third of the S&P 500’s value dropping. All three major US markets suffered their worst years — by far — since 2008.
New numbers published last week show first-time applications for unemployment benefits edged up to 225,000. That’s still low historically and almost exactly where jobless claims were a year ago, long before recession fears emerged.
Mark Zandi, chief economist of Moody’s Analytics, told CNN on Thursday that the economy could skirt a recession. Consumers will not stop spending and the economy will suffer a downturn without mass layoffs.
Gas prices went above $5 a gallon in June for the first time, and have plummeted ever since. The national average for regular gasoline recently dropped to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to about $3.22 a gallon.
If the Fed has already done that, it will cause a recession if they raise rates so high and hold them there for so long.
Still, traders have been glued to economic reports even more than usual as of late, and stocks have been incredibly choppy based on what the latest figures indicate about inflation.
The weak report on the health of the manufacturing sector followed by signs of strength in the jobs market caused more market volatility.
The weekly jobless claims numbers that come out Thursday morning will be looked at by investors as well as a report from payroll processing company Automatic Data Processing about the private sector job market. More alarm bells about inflation and Fed rate hikes may be set off by further strength.
The level of wage growth will be looked at. Inflation can be caused by worker compensation increases. Consumers can afford to pay the higher prices that companies charge for their products and services if they have more disposable income.
Wage growth, which ismeasured by average hourly earnings, rose only4.7% over the previous 12 months in October. But year-over-year wage growth perked back up to 5.1% in November. Wage increases are expected to be around 5% in December.
“The persistent mismatch between labor supply and demand continues to put upward pressure on wages,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a report.
The Fed is likely to focus more on paychecks than jobs added in Friday’s report. Wall Street may do the same.
Overall, the jobs market is still in good shape. But you wouldn’t know from what’s happening in Silicon Valley. Software giant (and Dow component) Salesforce
(CRM) announced Wednesday it was laying off 10% of its workforce.
The hope was that businesses and consumers would continue to spend their money on tech products and services as the economy rebounded from a brief recession in 2020.
Tech companies are starting to feel the effects of inflation and rate hikes in their budgeting plans, even though they have not factored it into their plans.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing,” said Salesforce chair and co-CEO Marc Benioff in a recent note to employees.
“Companies that last a long time go through different phases. The company isn’t in heavy people expansion mode every year according to a memo from Andy Jassy.
The Federal Open Market Committee’s First Meeting on Inflation and the Economic Landscape in the UK and Emerging Markets (extended version)
The global economy is clearly not out of the woods. Many, including the head of the International Monetary Fund, are concerned about a possible downturn that will hit China and emerging markets particularly hard.
The pace of consumer price increases is starting to slow in France and Germany, which is good news for investors. The decline in energy prices is leading to the pull back.
The British Retail Consortium said in a report that food prices went up in the month of December. Meanwhile, data analytics firm Kantar noted in another report that UK grocery sales hit a record during the four weeks ending on December 25, even though the number of items that consumers bought fell 1% during the same period.
Steven Kamin is the senior fellow at the American Enterprise Institute, where he studies international macroeconomic and financial issues. He was director of the international finance division at the Federal Reserve from 2011 to 2020. His opinions are not shared in this commentary. View more opinion on CNN.
Price pressures are likely to continue to ease as remaining supply-side bottlenecks are resolved, the economy slows in response to the rise in interest rates, and labor markets tighten as a result.
The measures of inflation expectations are derived from financial markets and household surveys, but they have been moved down since last year. Wages have barely kept up with rising prices, while labor productivity has risen 4% since the beginning of the epidemic.
Workers have not received compensation for increased productivity. The consequence, as acknowledged by Fed Vice Chair Lael Brainard, is that “the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs.” This suggests that, going forward, wages may rise faster than prices as workers regain their share of corporate income. But that should not force firms into additional price increases, and therefore shouldn’t impede the Fed’s ability to reduce inflation, since firms should be able to absorb those wage hikes by reducing profit margins rather than increasing prices.
The decision, at the conclusion of the Federal Open Market Committee’s first meeting of 2023, comes after months of jumbo-sized rate increases intended to cool the economy, and marks the return to a more traditional interest-rate policy.
The language of the Wednesday statement makes it clear that more hikes are necessary to temper inflation. “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” they wrote. They said that thetent of these future increases would be determined by economic and financial factors.
Powell said it was difficult to manage the risk of doing too little and not getting the job done.
What is the best Valentine’s Day of the New Year? Why the Fed and the Fed can’t hide what it does (or not) want to admit
US markets rose after the Fed conference as investors anticipated a dovish Fed in the future. The S&P 500 closed the first day of February 1.1% higher after notching its best January in four years.
Excluding volatile food and energy costs, “core” prices in December were 4.4% higher than a year ago, according to the Fed’s preferred inflation yardstick. That’s down from a 5.2% annual rate in September.
Chris Waller, governor of the Fed, said two weeks ago that the Fed don’t want to be portrayed as fake. Three months of low readings of core inflation was the norm back in 2021.
If your heart goes pitter patter when central bankers discuss inflation (you know who you are on Twitter!), then this may be the best Valentine’s Day ever. Four members of the Federal Reserve (although not Fed Chair Jerome Powell) spoke on the economy today.
The first person was Thomas Barkin, who doesn’t vote on the interest-rate setting Federal Open Market Committee. Barkin said in an interview with Bloomberg TV Tuesday morning that there is “more persistence to inflation than maybe we’d all want,” adding that “inflation is normalizing, but it is coming down slowly.”
The problem is trying to predict future economic data. It is hard to have confidence in any outlook, when the forecasts are repeatedly higher than actual inflation or when the jobs report comes in with hundreds of thousands more jobs than expected.
The U.S. Economy in 2023: An Overview from Patrick Harker’s White House Addressing the Biden-Biden Decline
Patrick Harker sounded a bit less worried about inflation than his counterpart. He’s a voting member of the central bank this year. Harker said in a speech Tuesday that they are not done with the rate hikes and that they are likely close. Harker noted that “at some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place.”
Last up was New York Fed President John Williams, another FOMC member and also someone whose name has been mentioned as a possible successor to Lael Brainard as Fed vice chair now that President Biden is expected to name Brainard as his new top economic adviser.
In a time where the economic data has varied wildly, economists’ predictions for the year ahead are growing more and more opaque.
The National Association for Business Economics’ latest survey, released Monday, shows a “significant divergence” among respondents about where they think the US economy is heading in 2023, the organization’s president said.
“Estimates of inflation-adjusted gross domestic product or real GDP, inflation, labor market indicators, and interest rates are all widely diffused, likely reflecting a variety of opinions on the fate of the economy — ranging from recession to soft landing to robust growth,” Julia Coronado, NABE’s president, said in a statement.
The views of the panelists on how high the Fed can raise interest rates, how long rates can stay at their peak and when they might start to reduce are not as clear as they could be. The impact of China reopening on global inflation and the looming debt ceiling are both highly concerned, but also divided among the respondents as to whether they should be taken seriously.
In terms of the labor market, which remains strong and tight, panelists’ median projections for monthly payroll growth this year was 102,000, a significant upward revision from projections in December for 76,000 jobs per month.
On the housing front, they expect home prices and new home construction to continue to fall this year, projecting that housing starts could see their largest decline since 2009.
But they don’t anticipate the downturn to swing into “bust” territory. The Housing Market bust was the greatest downside risk to the US economy in the next decade, according to 2% of respondents.
Instead 51% of respondents said the biggest downside risk was too much monetary tightening. The broadening of war in Ukranian was one of the reasons behind second place.
Wall Street investors are ready for the employment data that will come in over the course of the next week, which could lead to swings in the market.
What to expect: ADP’s private payroll report for February and the JOLTS job openings, hires and quits report for January are expected Wednesday. On Thursday, Challenger, Gray & Christmas are set to release their job cuts numbers for February, and Friday brings the main show — the Labor Department’s monthly employment report.
Wall Street and Wall Street Sensitivities to High Inflation: What the US Economy’s Progress Has Learned Over the Last Six Months
“We’re stuck in the messy middle.” said Josh Hirt, senior US economist at Vanguard. “Activity has weakened in the most interest rate-sensitive sectors of the economy, but core areas are still showing resilience. The economy hasn’t been fully impacted by rates in this in-between period.
Hirt said he expects the unemployment rate will likely climb from its current 54-year low, albeit slowly and modestly, to around 4.5% to 5% by the end of this year.
Federal Reserve Chairman Powell is expected to testify on the monetary policy and economic outlook before the Joint Economic Committee on Tuesday.
The president’s budget is typically used as a guideline for Congress to help shape spending priorities for the year ahead. Wall Street investors will likely pour over the document in order to understand what market-shifting debates may be coming down the pipeline.
Biden said his proposed budget will raise taxes on the wealthy to help offset rising costs for Medicare, Social Security and health care. The president also proposed a “billionaire” tax last year. Increased taxation on capital gains and on corporate stock buys have made a difference to Wall Street.
High inflation has caused a lot of panic on Main Street, as well as on Wall Street, because the Fed has taken aggressive measures to bring it down. “The responses range from fearing these actions will tip the economy into a recession to fearing they won’t be enough to get the job done,” she said.
She said high inflation levels in goods, housing, and other sectors along with strong economic data have caused her to question the pace of disinflation.
The Superspeed Roadrunner meets the Fed: Expectations for a Big Break for the U.S. Economy and the Future of the Fed
The Atlanta Fed President believes that the Fed needs to raise its policy rate by half a percentage point at the next meeting.
On Thursday, the Fed Governor warned that interest rates could go higher than they expected because of the economic data.
And for the US economy, it could likely mean a “Wile E. Coyote moment,” Summers said, referencing the cartoon canine’s relentless — yet futile — pursuit of the speedy Roadrunner off a cliff and into mid-air.
But in the weeks following that meeting, there was a barrage of surprisingly strong economic data, showing blockbuster job gains, hearty consumer spending and unyielding inflation.
