Tag Archives: Inflation Figures/Price Indices

Business

U.S. GDP Rose 2.9% in the Fourth Quarter After a Year of High Inflation

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The U.S. economy grew at a solid 2.9% annual rate last quarter but entered this year with less momentum as rising interest rates and still-high inflation weighed on demand.

U.S. growth in the fourth quarter was down slightly from a 3.2% annual rate in the third quarter, the Commerce Department said Thursday. Consumer spending helped drive the fourth-quarter gain, while the housing market weakened and businesses cut back their spending on equipment.

The October-to-December period capped a year of economic slowdown with growth of 1% in the fourth quarter of 2022 compared with a year earlier, down sharply from 5.7% growth in 2021. The slowdown in part reflected a return to a more normal pace of growth after output surged amid business reopenings, fiscal stimulus and a waning pandemic in 2021.

Markets were mixed following Thursday’s release. Investors have been closely scrutinizing economic data for signs that U.S. growth is coming under pressure from the Federal Reserve’s campaign of interest-rate increases aimed at cooling the economy and bringing down high inflation.

So far in 2023, many traders and portfolio managers appear satisfied that economic activity remains strong enough that a recession this year is far from certain. That conclusion, together with cooling inflation readings, has helped fuel a modest rebound in U.S. stock indexes following last year’s washout.

The Fed is on track to slow interest-rate increases when it meets next week and debate how much higher to raise them this year as it tracks inflation’s trajectory and other economic developments.

The labor market has cooled some but continues to run strong. Jobless claims—a proxy for layoffs—fell last week and held near historic lows, despite the spread of layoff announcements beyond tech companies.

Workers received large wage gains through the end of last year. That helped consumer spending, the economy’s main engine, grow at a solid annual pace of 2.1% last quarter.

Despite some signs of resilience, recent data suggest consumers and businesses are starting to falter. Retail sales fell last month at the sharpest pace of 2022. Surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in January in the manufacturing and service sectors. Companies cut temporary workers in December for the fifth consecutive month, a sign that broader job losses could be on the horizon.

Many economists are concerned about the possibility of a U.S. recession this year. They worry that the Fed’s efforts to curb inflation could trigger broad spending cutbacks and job losses.

“Headwinds from the big jump in interest rates, consumers cutting back on discretionary spending and weak economies overseas were big problems for the U.S. in late 2022,” said

Bill Adams,

chief economist for Comerica Bank. “I expect real GDP growth will likely turn negative in the first half of this year.”

A buildup in inventories helped drive economic growth at the end of last year. That category is volatile, though.

Final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, cooled to a 0.2% annual pace in the fourth quarter from 1.1% in the third, the Commerce Department said, a sign of economic cooling in line with the Fed’s goals.

One of the most interest-rate-sensitive sectors—housing—is stumbling amid high mortgage rates. Residential investment declined throughout last year, while existing-home sales fell almost 18% in 2022 from the previous year.

Some economists say the worst of the housing downturn is over as mortgage rates are down from their peak last fall. But few expect a return to the boom times of 2021 any time soon.

The Fed had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.”

“If we continue to get strong job growth and if we continue to get consumer spending on services, and companies don’t cut back on [capital expenditures], I think that adds fuel to the soft-landing story,” said Luke Tilley, chief economist at Wilmington Trust.

Consumer spending rose by 1.9% in the fourth quarter of 2022 compared with a year earlier, a slowdown from 7.2% growth in 2021 but close to 2019’s gain.

StoryBright Films, which provides photography and planning services for elopements in the Blue Ridge Mountains, photographed 16 couples’ elopements last year, down from 20 in 2021, said Mark Collett, the company’s co-owner.

Mr. Collett said his small business received many inquiries and engaged in conversations with a lot of potential clients last year. But more couples expressed concern about their financial situations and ability to pay for a big event than a year earlier.

“We would even get as far as sending them a contract to book, but then they got cold feet,” Mr. Collett said.

For 2022 marriages, clients tended to book at the bottom and top ends of the price range, rather than the middle, he added.

Purchasing power from paychecks fell for middle-income households last year, while it rose for lower-income and higher-income households. Many lower-income households benefited from wage increases and pandemic savings, while higher-income households had a large-enough savings buffer to spend aggressively.


Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

A shrinking trade

deficit continued

to drive growth,

but less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

A shrinking trade

deficit continued

to drive growth,

but less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

The trade deficit

continued to

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less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Goods

spending

(pct. pts.)

Goods

spending

(pct. pts.)

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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Business

Stay for Pay? Companies Offer Big Raises to Retain Workers

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Workers who stay put in their jobs are getting their heftiest pay raises in decades, a factor putting pressure on inflation.

Wages for workers who stayed at their jobs were up 5.5% in November from a year earlier, averaged over 12 months, according to the Federal Reserve Bank of Atlanta. That was up from 3.7% annual growth in January 2022 and the highest increase in 25 years of record-keeping.

Faster wage growth is contributing to historically high inflation, as some companies pass along price increases to compensate for their increased labor costs. Prices rose at their fastest pace in 40 years earlier in 2022. Inflation has cooled in recent months but remains high. Federal Reserve officials are closely monitoring wage gains as they consider future interest-rate increases to slow the economy and bring down inflation. 

Employees who changed companies, job duties or occupations saw even greater wage gains of 7.7% in November from a year earlier. The prospect that employees might leave for bigger paychecks is a main reason companies are raising wages for existing employees. 

Many workers aren’t feeling the pay gains, though. Wages for all private-sector workers declined by 1.9% over the 12 months that ended in November, after accounting for annual inflation of 7.1%, according to the Labor Department.

Workers in sectors such as leisure and hospitality can easily find job openings that might pay more, making it more enticing to switch jobs, said

Layla O’Kane,

senior economist at Lightcast.

“If I can see that the Burger King down the street is offering $22 an hour, and I’m making $20 an hour at the Dunkin’ Donuts that I work at, then I know very clearly what my opportunity cost is,” she said. “Employers are reacting to that and saying, ‘Well, we’re going to increase wages internally because we don’t want to lose the staff that we’ve already trained.’”

Employee bargaining power has increased as the economy rebounded from the pandemic, likely emboldening some employees to ask for wage increases from their current employers, Ms. O’Kane added. 

Alexandria Carter,

a billing specialist and accountant at an insurance company in Baltimore, received a promotion and a small pay bump earlier in 2022. After her year-end performance review, she received another 7% pay increase to reward her for her progress, and her bosses told her about their plans for her to keep moving up in the company. 

That was a contrast with some previous jobs she has held, where praise and pay raises were less forthcoming.

“They were telling me that I’m excelling in my position, and I just got it,” she said. “To have that recognition and that they notice the work I’ve put in and to be rewarded, it’s just nice.”

Alexandria Carter, a Baltimore billing specialist and accountant, got a promotion and two pay increases this past year.



Photo:

Alexandria Carter

There are signs wage gains are beginning to ease as the tight labor market loosens a bit. Average hourly earnings were up 5.1% in November from a year earlier, slowing from a recent peak of 5.6% in March. Many analysts expect wage growth could cool further in coming months.

In industries with high demand for workers, “companies are prepared for wage growth to match inflation,” said

Paul McDonald,

senior executive director at Robert Half, a professional staffing company. “As inflation comes down, it will be more in line with what wage growth has been.”

The consumer-price index, a measurement of what consumers pay for goods and services, climbed 7.1% in November from a year earlier, down from 7.7% in October. The pace built on a trend of moderating price increases since June’s 9.1% peak.

Still, wage pressures will likely continue in a competitive job market where poaching remains common. More than half of professionals feel underpaid, and four in 10 workers would leave their jobs for a 10% raise elsewhere, according to a Robert Half survey released in September.

Famous Toastery, a Charlotte, N.C.-based breakfast, brunch and lunch chain, is raising pay faster than ever before, said

Mike Sebazco,

the company’s president. Across the eight company-owned locations, wages for existing kitchen staff members are up about 15% from a year earlier.

“We didn’t want to be as easy to poach,” he said. It isn’t uncommon for managers from other companies to come to Famous Toastery’s dumpster pads to tell the breakfast chain’s workers, “‘Hey, come work for me, and I’ll give you an extra $2 an hour,’” Mr. Sebazco said.

To help cover higher labor costs, Famous Toastery raised menu prices in August for items such as the Western omelet composed of ham, roasted peppers, caramelized onions and American cheese. 

“Bacon and eggs and a lot of produce items will go up and down, and you can weather that,” Mr. Sebazco said. “We’ve never really experienced labor increases such as this.”

Many businesses in the Boston Fed district cited labor costs as a bigger source of inflationary pressure for 2023 than other types of expenses, according to the central bank’s collection of business anecdotes known as the Beige Book. 

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Most business executives remain confident that they can pass along wage increases to consumers in the form of higher prices, said

Lauren Mason,

senior principal at consulting firm Mercer LLC. “This makes compensation investments somewhat easier to absorb,” she said.

Wage and price increases can feed off each other. In fact, higher inflation is pushing some workers to seek cost-of-living increases, helping contribute to wage growth among job stayers, economists say.

More broadly, pay is rising for both job stayers and switchers because companies can’t find enough workers. Across the economy, job openings—at 10.3 million in October—far exceeded the 6.1 million unemployed Americans looking for work that month.

Companies are using merit-pay increases to hold on to employees and minimize the potential productivity drain of recruiting and training new hires. Firms are budgeting more for merit-pay increases in 2023 than they have in 15 years, according to a Mercer survey of more than 1,000 companies. 

Daniel Powers,

a recent college graduate, received a 10% year-end raise at a management consulting firm in Chicago, after starting out with a six-figure salary when he was hired in September.

“They understand the realities of the market—there’s no false illusion of, ‘we’re family here,’” Mr. Powers said of his firm’s management.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com and Sarah Chaney Cambon at sarah.chaney@wsj.com

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Business

The stock market is sliding because investors fear recession more than inflation

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A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year — and there may be plenty of it.

But first, why would good news be bad news? Investors have spent 2022 largely focused on the Federal Reserve and its rapid series of large rate hikes aimed at bringing inflation to heel. Economic news pointing to slower growth and less fuel for inflation could serve to lift stocks on the idea that the Fed could begin to slow the pace or even begin entertaining future rate cuts.

Conversely, good news on the economy could be bad news for stocks.

So what’s changed? The past week saw a softer-than-expected November consumer-price index reading. While still running mighty hot, with prices rising more than 7% year over year, investors are increasingly confident that inflation likely peaked at a roughly four-decade high above 9% in June.

See: Why November’s CPI data are seen as a ‘game-changer’ for financial markets

But the Federal Reserve and other major central banks indicated they intend to keep lifting rates, albeit at a slower pace, into 2023 and likely keep them elevated longer than investors had anticipated. That’s stoking fears that a recession is becoming more likely.

Meanwhile, markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors.

That sentiment was reinforced by manufacturing data Wednesday and a weaker-than-expected retail sales reading on Thursday, Baird said, in a phone interview.

Markets are “probably headed back to a period where bad news is bad news not because rates will be driving concerns for investors, but because earnings growth will falter,” Baird said.

A ‘reverse Tepper trade’

Keith Lerner, co-chief investment officer at Truist, argued that a mirror image of the backdrop that produced what became known as the “Tepper trade,” inspired by hedge-fund titan David Tepper in September 2010, may be forming.

Unfortunately, while Tepper’s prescient call was for a “win/win scenario.” the “reverse Tepper trade” is shaping up as a lose/lose proposition, Lerner said, in a Friday note.

Tepper’s argument was that the economy was either going to get better, which would be positive for stocks and asset prices. Or, the economy would weaken, with the Fed stepping in to support the market, which would also be positive for asset prices.

The current setup is one in which the economy is going to weaken, taming inflation but also denting corporate profits and challenging asset prices, Lerner said. Or, instead, the economy remains strong, along with inflation, with the Fed and other central banks continuing to tighten policy, and challenging asset prices.

“In either case, there’s a potential headwind for investors. To be fair, there is a third path, where inflation comes down, and the economy avoids recession, the so-called soft landing. It’s possible,” Lerner wrote, but noted the path to a soft landing looks increasingly narrow.

Recession jitters were on display Thursday, when November retail sales showed a 0.6% fall, exceeding forecasts for a 0.3% decline and the biggest drop in almost a year. Also, the Philadelphia Fed’s manufacturing index rose, but remained in negative territory, disappointing expectations, while the New York Fed’s Empire State index fell.

Read: Still a bear market: S&P 500 slump signals stocks never reached ‘escape velocity’

Stocks, which had posted moderate losses after the Fed a day earlier lifted interest rates by half a percentage point, tumbled sharply. Equities extended their decline Friday, with the S&P 500
SPX,
-1.11%
logging a 2.1% weekly loss, while the Dow Jones Industrial Average
DJIA,
-0.85%
shed 1.7% and the Nasdaq Composite
COMP,
-0.97%
dropped 2.7%.

“As we move into 2023, economic data will become more of an influence over stocks because the data will tell us the answer to a very important question: How bad will the economic slowdown get? That’s the key question as we begin the new year, because with the Fed on relative policy ‘auto pilot’ (more hikes to start 2023) the key now is growth, and the potential damage from slowing growth,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.

Recession watch

No one can say with complete certainty that a recession will occur in 2023, but it seems there’s no question corporate earnings will come under pressure, and that will be a key driver for markets, said Plante Moran’s Baird. And that means earnings have the potential to be a significant source of volatility in the year ahead.

“If in 2022 the story was inflation and rates, for 2023 it’s going to be earnings and recession risk,” he said.

It’s no longer an environment that favors high-growth, high risk equities, while cyclical factors could be setting up nicely for value-oriented stocks and small caps, he said.

Truist’s Lerner said that until the weight of the evidence shifts, “we maintain our overweight in fixed income, where we are focused on high quality bonds, and a relative underweight in equities.”

Within equities, Truist favors the U.S., a value tilt, and sees “better opportunities below the market’s surface,” such as the equal-weighted S&P 500, a proxy for the average stock.

Highlights of the economic calendar for the week ahead include a revised look at third-quarter gross domestic product on Thursday, along with the November index of leading economic indicators. On Friday, November personal consumption and spending data, including the Fed’s preferred inflation gauge are set for release.

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Business

Stocks Waver After Producer Prices Rise More Than Expected

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Stocks wavered after producer-price data came in hotter than expected, disappointing investors who had hoped for signs of easing inflation before the Federal Reserve’s meeting next week.

The S&P 500 was flat on Friday morning, while the Dow Jones Industrial Average lost 0.1%. The technology-focused Nasdaq Composite rose 0.2%.

The producer-price index, which measures what suppliers are charging businesses and other customers, climbed 0.3% in November compared with the previous month, the Labor Department said Friday morning, the same as October’s revised 0.3% increase. Economists surveyed by The Wall Street Journal had expected U.S. supplier prices to increase 0.2% for November.

Investors had been hopeful that the inflation reading would offer evidence that price pressures in the U.S. are abating and would help solidify a smaller interest-rate increase next week. The Fed will make its next interest-rate decision on Wednesday, and the PPI data—combined with consumer-price data Tuesday—are expected to factor heavily into the trajectory of interest rates over the coming months.

Stock futures, which had traded higher throughout the morning, turned lower after the data’s release. Yields on U.S. government bonds rose, also reversing their performance earlier in the day.

In recent days, investors have grown increasingly worried that elevated inflation will force the Fed to keep lifting rates to higher levels than once expected, potentially pushing the U.S. economy into a recession.

“Even though the market sometimes seems to ignore Powell, thinking he’s bluffing, he keeps reiterating that he will put this economy into a recession if he has to,” said Eric Sterner, referring to Fed chairman

Jerome Powell.

Mr. Sterner, chief investment officer at Apollon Wealth Management, said he expects markets could retest their recent lows in the first and second quarter of next year.

“We’re stuck in this rut right now waiting for inflation to normalize and it may take all of next year for that to happen,” he said.

Those concerns about how high interest rates might go—and how they will affect the economy—have led to choppy trading in U.S. stocks recently and interrupted a rally that began in October. All three major U.S. indexes are on pace to end the week with losses, breaking a two-week winning streak. As of Thursday, the S&P 500 had fallen 2.7% for the week.

“The markets are so sensitive to this right now,” said Susannah Streeter, senior investment and markets analyst at

Hargreaves Lansdown.

“Although supersized rate hikes are probably in the rearview mirror, it’s about how long more gradual rate increases will continue for, and that’s why you’ve got these twin evils looming: recession and high inflation. That’s the real concern—that we’ll get a stagflation scenario.” 

The S&P 500 on Thursday snapped a five-day losing streak.



Photo:

BRENDAN MCDERMID/REUTERS

Yields on government bonds rose, with the yield on the benchmark 10-year U.S. Treasury note climbing to 3.525%, from 3.492% Thursday. The yield on the two-year note, which is more sensitive to near-term interest-rate expectations, rose to 4.332%. Yields rise when bond prices fall.

Brent crude, the international benchmark for oil prices, climbed 1.1% to $77 a barrel, on pace to possibly break a six-session losing streak that amounted to its longest since August 2021. Oil prices have slumped recently amid concerns that slowing economic growth will impede demand for fuel. Both Brent and its U.S. counterpart WTI—both of which reached eye-popping heights this year—are now trading lower on a year-to-date basis.

Outsize market moves have followed the release of inflation data in recent months.

“When CPI comes out slightly above or slightly below, you get massive market action,” said Brandon Pizzurro, director of public investments at GuideStone Capital Management. “Those of us that are defensively positioned are either going to really benefit from next Tuesday and Wednesday, or feel some short term pain if this Santa Claus rally is kickstarted.”

In China, major indexes climbed amid a sharp rise in property stocks. Hong Kong’s Hang Seng rose 2.3%. In mainland China, the Shanghai Composite added 0.3%, helping it notch its sixth consecutive week of gains. Japan’s Nikkei 225 gained 1.2%.

In Europe, the pan-continental Stoxx Europe 600 rose 0.4%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Jack Pitcher at jack.pitcher@wsj.com 

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Business

Jobs Report Keeps Federal Reserve on Track for 0.5-Point Rate Rise

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Fed officials have warned in recent days that they are likely to lift rates to and hold them at levels high enough to slow economic activity and hiring to bring inflation down from 40-year highs.

The employment report showed continued strong hiring and brisk wage growth, which is a source of concern to Fed officials because they are trying to slow both trends to prevent higher prices and wages from growing embedded across the economy.

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Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%. But revised wage data released Friday could concern Fed officials because it points to an acceleration in pay gains in recent months.

For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday. That is up from an initially reported 3.9% annualized rate for the three months ended October.

At the same time, senior Fed officials have clearly signaled their expectation that they can cool the pace of rate rises at their Dec. 13-14 meeting, ending an unprecedented string of 0.75-point rate rises at their past four meetings.

The Fed raised its benchmark federal-funds rate last month to a range between 3.75% and 4%, and officials have signaled they are on track to continue raising it to at least around 5% by next spring.

Federal Reserve Chair Jerome Powell said at a Brookings Institution event that the central bank is prepared to slow the pace of rate rises as soon as its December meeting. Photo: Valerie Plesch/Bloomberg News

The Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, rose 6% in October from a year ago. Excluding volatile food and energy categories, the so-called core PCE index rose 5%. Economists often look at core inflation as a better gauge of underlying price pressures. The Fed targets 2% inflation over time.

Current pay gains are around 1.5 to 2 percentage points above what would be consistent with the Fed’s 2% target, Fed Chair

Jerome Powell

said during a moderated discussion on Wednesday. 

“We want wages to go up. We want wages to go up strongly,” he said. “But they’ve got to go up at a level that is consistent with 2% inflation over time.”

Mr. Powell said it was possible prices that rose sharply over the last two years, including housing costs and goods such as used cars, could decline in the coming year. But he signaled concern that inflation might ease to levels that are still too high. “Despite some promising developments, we have a long way to go” in bringing down inflation.

Mr. Powell and several of his colleagues have said they don’t believe wage growth played the primary role in driving up prices. But they are concerned that strong demand for labor and high inflation could create conditions that lead paychecks and prices to move higher in lockstep, which economists sometimes call a wage-price spiral.

“When you get to that point, you’re in serious trouble,” Mr. Powell said Wednesday. “We don’t think we’re at that point. But it can’t be that we can go on for five years at very high levels of inflation and that doesn’t work its way into the wage- and price-setting process pretty quickly.”

Fed officials have signaled they are entering a new phase of raising interest rates after having lifted them at the fastest pace since the early 1980s. Now, they are trying to determine more carefully how high rates will need to go and for how long to lower inflation.

Mr. Powell outlined two possible strategies. One would be to quickly raise interest rates well above the 4.5% to 5% level that many officials thought in September would be appropriate. Another would be to “go slower and feel your way a little bit to what we think is the right level” and “to hold on longer at a high level and not loosen policy too early.”

Mr. Powell indicated he and his colleagues were more comfortable with the second strategy because they don’t want to cause unnecessary damage to the economy. “We do not want to over tighten because cutting rates is not something we want to do soon,” he said. “So that’s why we’re slowing down and going to find our way to what the right level is.”

Write to Nick Timiraos at Nick.Timiraos@wsj.com

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Business

Fed’s Waller says market has overreacted to consumer inflation data: ‘We’ve got a long, long way to go’

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Federal Reserve Gov. Christopher Waller said Sunday that financial markets seem to have overreacted to the softer-than-expected October consumer price inflation data last week.

“It was just one data point,” Waller said, in a conversation in Sydney, Australia, sponsored by UBS.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go ” Waller said.

Investors cheered the soft CPI print, released Thursday, driving stocks up to their best week since June. The S&P 500 index
SPX,
+0.92%
closed 5.9% higher for the week.

The data showed that the yearly rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.

Waller said it was good there was some evidence that inflation was coming down, but noted that there were other times over the past year where it looked like inflation was turning lower.

“We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.

“We’ve got a long, long way to go to get inflation down. Rates are going keep going up and they are going to stay high for awhile until we see this inflation get down closer to our target,” he added.

The Fed is focused on how high rates need to get to bring inflation down, and that will depend solely on inflation, he said.

Waller said “the worst thing” the Fed could do was stop raising rates only to have inflation explode.

The 7.7% inflation rate seen in October “is enormous,” he added.

The Fed signaled at its last meeting earlier this month that it might slow down the pace of its rate hikes in coming meetings.

The central bank has boosted rates by almost 400 basis points since March, including four straight 0.75-percentage-point hikes that had been almost unheard of prior to this year.

“We’re looking at moving in paces of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.

The Fed will hold its next meeting on Dec. 13-14, and then again on Jan. 31-Feb. 1.

At the same time, Powell said the Fed was likely to raise rates above the 4.5%-4.75% terminal rate that they had previously expected.

“The signal was ‘quit paying attention to the pace and start paying attention to where the endpoint is going to be,’” Waller said.

In the wake of the CPI report, investors who trade fed funds futures contracts see the Fed’s terminal rate at 5%-5.25% next spring and then quickly falling back to 4.25%-4.5% by November. That’s well below the levels prior to the CPI data.

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World

China’s Exports Drop Sharply as Global Economy Slows

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SINGAPORE—China’s exports to the rest of the world shrank unexpectedly in October, a sign that global trade is in sharp retreat as consumers and businesses cut back spending in response to central banks’ aggressive moves to tame inflation.

The slide in exports from the world’s factory floor adds to the gloom surrounding the global economy as leaders from the Group of 20 advanced and developing countries prepare to gather in Indonesia next week.

A buoyant U.S. labor market is showing signs of cooling as the Federal Reserve jacks up interest rates to tame high inflation. Many economists expect a recession in the U.S. within the next 12 months.

Europe is bracing for a difficult winter after Russia decided to throttle energy supplies in response to sanctions over the war in Ukraine. The European Central Bank raised interest rates by three-quarters of a percentage point for the second time in a row last month, but signaled mounting concerns about economic growth, prompting speculation among investors that it may soon dial back the pace of rate increases.

For China, the world’s second-largest economy, the sharp pullback in demand for its goods abroad removes a key prop for growth at a time when its economy is pressured by the government’s zero-tolerance approach to Covid-19 and a severe real-estate slump.

“It’s almost like it doesn’t have a leg to stand on,” said Steve Cochrane, chief economist for Asia Pacific at Moody’s Analytics in Singapore.

Chinese health officials said Saturday that China would stick to its tough Covid-prevention strategy, dashing hopes that had built up in recent days for an easing of strict pandemic measures following a closely watched Communist Party congress last month.

With growth slowing in the U.S., Europe and China, economists are downbeat about the global economy’s prospects this year and next. The International Monetary Fund warned last month that “the worst is yet to come,” saying it expects global gross domestic product to expand 3.2% this year, before slowing to 2.7% in 2023.

The China export slowdown “is a worrying sign for global growth,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics in London.

Exports from China declined 0.3% last month compared with a year earlier, China’s General Administration of Customs said Monday, the weakest pace of growth since May 2020, when trade was hobbled by countries’ early efforts to contain a worsening global pandemic. That was well below the expectations of economists polled by The Wall Street Journal, who had expected exports to increase 4% year over year.

Monday’s data showed exports to the U.S. fell 13% on the year in October, the third month of decline, while sales to the European Union fell 9%.

The data showed big falls in exports of products including home appliances and medical supplies, and weakening growth in exports of mobile phones and automobiles.

Other bellwether exporters in Asia, such as South Korea and Taiwan, have also reported faltering overseas sales, pointing to a broad slowdown in trade as the global economy loses momentum.

South Korea’s trade ministry said Nov. 1 that exports fell 5.7% in October compared with a year earlier, led by sinking exports of memory chips, petrochemicals and computers.

The cost of shipping containers full of goods around the world has fallen in recent months, as consumers retrench following a splurge on gadgets and home improvements while stuck at home during the depths of the pandemic. Prices for moving goods from Asia to the U.S. West Coast last week were 87% lower than the same time last year, according to data from online freight marketplace Freightos. Ocean carriers are canceling dozens of sailings on the world’s busiest routes during what is normally peak season.

The data showed weakening growth in Chinese exports of mobile phones and automobiles.



Photo:

Cfoto/Zuma Press

The decline in Chinese exports in October followed several months of slowing growth. Exports in September rose at an annual 5.7% rate, down from the double-digit pace Chinese exports posted around the middle of the year.

China’s imports from the rest of the world dropped 0.7% in October from a year earlier, underscoring weak domestic spending in China’s economy.

That was also weaker than the flat import performance expected by economists, which meant China’s trade surplus widened in October to $85.15 billion, from $84.7 billion in September.

Zichun Huang, an economist at Capital Economics, said in a note to clients Monday that he expects Chinese exports to fall further in the months ahead as the global economy slides closer to recession.

Weakening exports aren’t the only headwind facing the world’s second-largest economy.

Lockdowns have hurt economic activity throughout the year, and the threat of further measures to snuff out even the tiniest Covid-19 outbreaks means consumers are reluctant to spend and businesses hesitant to invest, compounding the drag from a deflating property bubble.

Economists say China is poised to fall well short of officials’ earlier goal of expanding 5.5% this year, and will likely record its worst 12 months for growth—aside from the first year of the pandemic—in decades.

Xiao Xiao in Beijing contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Why stock-market investors fear ‘something else will break’ as Fed attacks inflation

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Some investors are on edge that the Federal Reserve may be overtightening monetary policy in its bid to tame hot inflation, as markets look ahead to a reading this coming week from the Fed’s preferred gauge of the cost of living in the U.S.  

“Fed officials have been scrambling to scare investors almost every day recently in speeches declaring that they will continue to raise the federal funds rate,” the central bank’s benchmark interest rate, “until inflation breaks,” said Yardeni Research in a note Friday. The note suggests they went “trick-or-treating” before Halloween as they’ve now entered their “blackout period” ending the day after the conclusion of their November 1-2 policy meeting.

“The mounting fear is that something else will break along the way, like the entire U.S. Treasury bond market,” Yardeni said.

Treasury yields have recently soared as the Fed lifts its benchmark interest rate, pressuring the stock market. On Friday, their rapid ascent paused, as investors digested reports suggesting the Fed may debate slightly slowing aggressive rate hikes late this year.

Stocks jumped sharply Friday while the market weighed what was seen as a potential start of a shift in Fed policy, even as the central bank appeared set to continue a path of large rate increases this year to curb soaring inflation. 

The stock market’s reaction to The Wall Street Journal’s report that the central bank appears set to raise the fed funds rate by three-quarters of a percentage point next month – and that Fed officials may debate whether to hike by a half percentage point  in December — seemed overly enthusiastic to Anthony Saglimbene, chief market strategist at Ameriprise Financial. 

“It’s wishful thinking” that the Fed is heading toward a pause in rate hikes, as they’ll probably leave future rate hikes “on the table,” he said in a phone interview. 

“I think they painted themselves into a corner when they left interest rates at zero all last year” while buying bonds under so-called quantitative easing, said Saglimbene. As long as high inflation remains sticky, the Fed will probably keep raising rates while recognizing those hikes operate with a lag — and could do “more damage than they want to” in trying to cool the economy.

“Something in the economy may break in the process,” he said. “That’s the risk that we find ourselves in.”

‘Debacle’

Higher interest rates mean it costs more for companies and consumers to borrow, slowing economic growth amid heightened fears the U.S. faces a potential recession next year, according to Saglimbene. Unemployment may rise as a result of the Fed’s aggressive rate hikes, he said, while “dislocations in currency and bond markets” could emerge.

U.S. investors have seen such financial-market cracks abroad.

The Bank of England recently made a surprise intervention in the U.K. bond market after yields on its government debt spiked and the British pound sank amid concerns over a tax cut plan that surfaced as Britain’s central bank was tightening monetary policy to curb high inflation. Prime minister Liz Truss stepped down in the wake of the chaos, just weeks after taking the top job, saying she would leave as soon as the Conservative party holds a contest to replace her. 

“The experiment’s over, if you will,” said JJ Kinahan, chief executive officer of IG Group North America, the parent of online brokerage tastyworks, in a phone interview. “So now we’re going to get a different leader,” he said. “Normally, you wouldn’t be happy about that, but since the day she came, her policies have been pretty poorly received.”

Meanwhile, the U.S. Treasury market is “fragile” and “vulnerable to shock,” strategists at Bank of America warned in a BofA Global Research report dated Oct. 20. They expressed concern that the Treasury market “may be one shock away from market functioning challenges,” pointing to deteriorated liquidity amid weak demand and “elevated investor risk aversion.” 

Read: ‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown, BofA says

“The fear is that a debacle like the recent one in the U.K. bond market could happen in the U.S.,” Yardeni said, in its note Friday. 

“While anything seems possible these days, especially scary scenarios, we would like to point out that even as the Fed is withdrawing liquidity” by raising the fed funds rate and continuing quantitative tightening, the U.S. is a safe haven amid challenging times globally, the firm said.  In other words, the notion that “there is no alternative country” in which to invest other than the U.S., may provide liquidity to the domestic bond market, according to its note.


YARDENI RESEARCH NOTE DATED OCT. 21, 2022

“I just don’t think this economy works” if the yield on the 10-year Treasury
TMUBMUSD10Y,
4.228%
note starts to approach anywhere close to 5%, said Rhys Williams, chief strategist at Spouting Rock Asset Management, by phone.

Ten-year Treasury yields dipped slightly more than one basis point to 4.212% on Friday, after climbing Thursday to their highest rate since June 17, 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.

Williams said he worries that rising financing rates in the housing and auto markets will pinch consumers, leading to slower sales in those markets.

Read: Why the housing market should brace for double-digit mortgage rates in 2023

“The market has more or less priced in a mild recession,” said Williams. If the Fed were to keep tightening, “without paying any attention to what’s going on in the real world” while being “maniacally focused on unemployment rates,” there’d be “a very big recession,” he said.

Investors are anticipating that the Fed’s path of unusually large rate hikes this year will eventually lead to a softer labor market, dampening demand in the economy under its effort to curb soaring inflation. But the labor market has so far remained strong, with an historically low unemployment rate of 3.5%.

George Catrambone, head of Americas trading at DWS Group, said in a phone interview that he’s “fairly worried” about the Fed potentially overtightening monetary policy, or raising rates too much too fast.

The central bank “has told us that they are data dependent,” he said, but expressed concerns it’s relying on data that’s “backward-looking by at least a month,” he said.

The unemployment rate, for example, is a lagging economic indicator. The shelter component of the consumer-price index, a measure of U.S. inflation, is “sticky, but also particularly lagging,” said Catrambone.

At the end of this upcoming week, investors will get a reading from the  personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge, for September. The so-called PCE data will be released before the U.S. stock market opens on Oct. 28.

Meanwhile, corporate earnings results, which have started being reported for the third quarter, are also “backward-looking,” said Catrambone. And the U.S. dollar, which has soared as the Fed raises rates, is creating “headwinds” for U.S. companies with multinational businesses.

Read: Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.

“Because of the lag that the Fed is operating under, you’re not going to know until it’s too late that you’ve gone too far,” said Catrambone. “This is what happens when you’re moving with such speed but also such size,  he said, referencing the central bank’s string of large rate hikes in 2022.

“It’s a lot easier to tiptoe around when you’re raising rates at 25 basis points at a time,” said Catrambone.

‘Tightrope’

In the U.S., the Fed is on a “tightrope” as it risks over tightening monetary policy, according to IG’s Kinahan. “We haven’t seen the full effect of what the Fed has done,” he said.

While the labor market appears strong for now, the Fed is tightening into a slowing economy. For example, existing home sales have fallen as mortgage rates climb, while the Institute for Supply Management’s manufacturing survey, a barometer of American factories, fell to a 28-month low of 50.9% in September.

Also, trouble in financial markets may show up unexpectedly as a ripple effect of the Fed’s monetary tightening, warned Spouting Rock’s Williams. “Anytime the Fed raises rates this quickly, that’s when the water goes out and you find out who’s got the bathing suit” — or not, he said.

“You just don’t know who is overlevered,” he said, raising concern over the potential for illiquidity blowups. “You only know that when you get that margin call.” 

U.S. stocks ended sharply higher Friday, with the S&P 500
SPX,
+2.37%,
Dow Jones Industrial Average
DJIA,
+2.47%
and Nasdaq Composite each scoring their biggest weekly percentage gains since June, according to Dow Jones Market Data. 

Still, U.S. equities are in a bear market. 

“We’ve been advising our advisors and clients to remain cautious through the rest of this year,” leaning on quality assets while staying focused on the U.S. and considering defensive areas such as healthcare that can help mitigate risk, said Ameriprise’s Saglimbene. “I think volatility is going to be high.”

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Business

Stocks Slip After Fed Minutes and Inflation Data

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U.S. stocks slipped Wednesday in the wake of new inflation data and the release of the minutes of the September meeting of the Federal Reserve’s rate-setting board.

The S&P 500 edged down 11.81 points, or 0.3%, to 3577.03, a nearly two-year low. The Dow Jones Industrial Average lost 28.34 points, or 0.1%, closing at 29210.85. The Nasdaq Composite dropped 9.09 points, or 0.1%, to 10417.10, a day after the tech-heavy index entered its second bear market of 2022, marking a drop of more than 20% from its recent high on Aug. 15.

Investors have been on edge this week ahead of the release of Thursday’s report on consumer prices in the U.S. that will shed light on how much work the Fed has left to do in containing decades-high price rises. In recent months, inflation gauges have shown widespread pricing pressures on categories such as food and housing, while energy prices have eased.

U.S. suppliers increased the prices they charge customers by 0.4% in September from a month earlier, according to data released Wednesday. Economists polled by The Wall Street Journal had expected a 0.2% increase.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

“Inflation certainly broadened out and entered into areas that were more sticky,” said

Kiran Ganesh,

a multiasset strategist at

UBS.

“That’s why there’s been an increase in expectations…that the Fed needs to keep rates at a higher level for longer to get inflation down.”

The Fed released Wednesday afternoon the minutes of its September meeting, which showed officials concerned over the persistence of high inflation and expecting that bringing prices and wages down would likely require the labor market to weaken.

The Fed’s stance has heightened the risk of a recession, but it doesn’t appear the economy is in one now, said Merk Investments strategist Nicholas Reece. A recession may in fact come as late as the second half of next year, he said. That, however, likely means the market may churn along for several more months before finally hitting a cycle low. “That’s one of the things hanging over this market,” he said.

Corporate earnings over the next several weeks will also provide insight into how businesses are dealing with price pressures.

PepsiCo

on Wednesday again lifted its sales outlook for the year as it continues to push through price increases on its snacks and drinks, sending shares up $6.80, or 4.2%, to $169.39.

Traders working on the floor of the New York Stock Exchange last week.



Photo:

BRENDAN MCDERMID/REUTERS

The coming days will bring updates from a range of companies including

Delta Air Lines

and banks such as JPMorgan Chase and Citigroup.

Mr. Ganesh said earnings estimates for the remainder of the year and 2023 are too optimistic, posing another risk for stocks in the months ahead.

“If you look at market performance so far this year, it’s pretty much fully explained by the move in rates and bond yields,” said Mr. Ganesh. “Higher rates should mean lower expectations for growth and earnings, and that’s not priced into the market yet.”

Investors also continue to watch turmoil in U.K. government-bond markets, which have been highly volatile since the government set plans for large, debt-funded tax cuts last month. The Bank of England’s attempt to prevent broader market dysfunction that had hit pension funds particularly hard has had mixed results. 

On Tuesday, BOE Gov. Andrew Bailey confirmed the central bank plans to wind down its bond-market intervention program by Friday as planned, sparking a selloff in the British pound. The message was reiterated by BOE officials on Wednesday.

U.K. markets were mixed. The pound rebounded 1.2% to $1.1099, but U.K. government bonds, known as gilts, remained under pressure. The 30-year U.K. gilt yield briefly topped 5%, a level last seen before the central bank’s intervention. Yields rise as prices fall.

The U.S. 10-year Treasury note was down slightly at 3.901%.

“Bond markets think the BOE isn’t doing enough,” said

Viraj Patel,

a global macro strategist at Vanda Research. Despite the BOE’s pledge to wind down bond-buying, Mr. Patel still believes the central bank would step in with support if volatility again threatens financial stability.

“They won’t let this get to some sort of chaos that spirals out of control,” he said.

The U.K.’s FTSE 100 fell 0.9% to 6826.15, while the pan-European Stoxx Europe 600 lost 0.5% to 385.88.

Asian stocks were mixed. China’s benchmark Shanghai Composite gained 1.5% to 3025.51, while Hong Kong’s Hang Seng declined 0.8% to 16701.03 and Japan’s Nikkei 225 index was little changed at 26396.83.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com and Paul Vigna at Paul.Vigna@wsj.com

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Business

Fed’s Mester says there’s been no progress on inflation, so interest rates need to move higher

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With little or no progress made on bringing inflation down, the Federal Reserve needs to continue raising interest rates, Cleveland Fed President Loretta Mester said Tuesday.

“At some point, you know, as inflation comes down, them my risk calculation will shift as well and we will want to either slow the rate increases, hold for some time and assess the cumulative impact on what we’ve done,” Mester told reporters after a speech to the Economic Club of New York.

“But at this point, my concerns lie more on – we haven’t seen progress on inflation , we have seen some moderation- but to my mind it means we still have to go a little bit further,” Mester said.

In her speech, the Cleveland Fed president said the central bank needed to be wary of wishful thinking about inflation that would lead the central bank to pause or reverse course prematurely.

“Given current economic conditions and the outlook, in my view, at the point the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy,” Mester said.

She said she thinks inflation will be more persistent than some of her colleagues.

As a result, her preferred path for the Fed’s benchmark rate is slightly higher than the median forecast of the Fed’s “dot-plot,” which points to rates getting to a range of 4.5%-4.75% by next year.

Mester, who is a voting member of the Fed’s interest-rate committee this year, repeated she doesn’t expect any cuts in the Fed’s benchmark rate next year. She stressed that this forecast is based  on her current reading of the economy and she will adjust her views based on the economic and financial information for the outlook and the risks around the outlook.

Opinion: Fed is missing signals from leading inflation indicators

Mester said she doesn’t rely solely on government data on inflation because some of it was backward looking. She said supplements her research with talks with business contacts about their price-setting plans and uses some economic models.

The Fed is also helped by some real-time data, she added.

“I don’t see the signs I’d like to see on the inflation,” she added,

Mester said she didn’t see any “big, pending risks” in terms of financial stability concerns.

“There is no evidence that there is disorderly market functioning going on at present,” she said.

U.S. stocks were mixed on Tuesday afternoon with the Dow Jones Industrial Average
DJIA,
+0.12%
up a bit but the S&P 500 in negative territory. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.936%
inched up to 3.9%

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