Areas of the US economy have started to crack under the weight of persistently high inflation and a string of 10 consecutive rate hikes from the Federal Reserve.
But despite all that, the labor market has kept humming right along. And that’s largely expected to be the case, again, in Friday’s monthly jobs report from the Bureau of Labor Statistics.
Economists are forecasting a net gain of 190,000 jobs for May, according to Refinitiv. While that would mark a significant retreat from April’s surprisingly strong 253,000 jobs added, it would land slightly above the average monthly gains seen during the strong labor market in the years leading up to the pandemic.
Economists are also expecting the unemployment rate to tick back up to 3.5%. The US jobless rate has hovered at decade-lows for more than a year, with the current 3.4% rate matching a 53-year low hit in January.
Private sector employment increased by 278,000 jobs in May, according to ADP’s monthly National Employment Report, frequently seen as a proxy for the government’s official number. That’s significantly higher than estimates of 170,000 jobs added but slightly below the previous month’s revised total of 291,000.
Additional labor market data released Thursday showed that initial weekly jobless claims for the week ended May 27 totaled 232,000, almost no change from the previous week’s revised total of 230,000 applications.
“In the last few months, the job market has continued to defy gravity, adding a steady clip of jobs and holding unemployment at historically low levels despite a backdrop of rising interest rates, banking turmoil, tech layoffs and debt ceiling negotiations,” Daniel Zhao, lead economist at employment review and search site Glassdoor, wrote in a note this week. “After a healthy April jobs report, May is likely to repeat with an equally strong performance.”
Consumer spending and the labor market — two ares of strength in the economy — have, in a way, continued to feed on themselves.
Last week, a Commerce Department report showed that not only did the Fed’s preferred inflation gauge heat up in April but so did consumer spending. Economists largely attributed consumers’ resilience to the healthy labor market as well as ample dry powder stockpiled from home refinances and from the temporary pause in student loan payments.
In turn, that’s kept businesses busy.
“With demand for goods and services holding up, employers who have been cautious and have been very nervous about over-hiring are — when push comes to shove — having to keep hiring just to keep pace with business activity,” Julia Pollak, chief economist for online employment marketplace ZipRecruiter, told CNN. “They’re very worried about a recession later this year, but they need to keep hiring today to provide the pizzas that people are demanding and to prevent flights being canceled.”
She added: “Companies have also learned the hard way how costly staffing shortages can be.”
But labor shortages are becoming far less acute: This past Memorial Day weekend, 1% of flights were canceled, Pollak said, noting that cancellations were fivefold higher a year before.
“And while that’s a good news story — the end of shortages and disruptions during the pandemic is good for most consumers and good for businesses — it does come at some cost, which is a measurable decline in worker and job seeker leverage,” she said.
Job openings bounced up to 10.1 million positions, bucking economists’ predictions for a fourth-consecutive monthly decline, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey report. The jump brought the ratio of vacancies to unemployed to almost 1.8, which is well above a range of 1.0 to 1.2 that is considered consistent with a balanced labor market, according to Michael Feroli, JPMorgan chief US economist.
Although the April JOLTS data showed that fewer people were voluntarily quitting their jobs, the amount of layoffs and discharges dropped during the month, suggesting that employers are continuing to hoard workers, noted economist Matthew Martin of Oxford Economics.
While monthly job gains haven’t tailed off as much as anticipated to this point, there is a notable slowdown that’s occurred from the blockbuster job gains of the past three years.
But whether the softening is a sign of a return to pre-pandemic form or perhaps of a downswing into a downturn, remains to be seen.
Some of the traditional recession indicators have been flashing red. Layoff announcements have quadrupled so far this year to 417,500, which — excluding 2020 — is the highest January to May total since 2009, according to a report from Challenger, Gray & Christmas released Thursday. Falling consumer confidence, monthly declines in the Conference Board’s Leading Economic Index, and drops in temporary help employment are also signaling that a downturn is just ahead. However, that long-predicted recession isn’t here just yet.
“We were in such an unusual place during the pandemic with some of those indicators at completely extraordinary heights that they have experienced extraordinary declines,” Pollak said. “But those declines were just a return to normal, not a contraction, and it’s not a recession.”
The government’s May jobs report is scheduled for Friday at 8:30 a.m. ET.
WASHINGTON — Even with the new spending restraints in the debt limit deal that cut borrowing by $1.5 trillion, the U.S. government’s deficits are still on course to keep climbing to record levels over the next few decades.
The projections are a sign that the two-year truce between President Joe Biden and House Speaker Kevin McCarthy, R-Calif., might be only a pause before a far more wrenching set of showdowns over the federal budget. The Congressional Budget Office said Tuesday that the agreement would reduce spending by $1.3 trillion and interest payments by $188 billion over 10 years. But that sum is too modest to fully offset the growing costs of Social Security, Medicare and Medicaid.
Both Biden and McCarthy ruled out any cuts to Social Security and Medicare, two programs that benefit older voters, before their teams even began their budget talks. That omission reflects the politics around two popular programs as Democrats and Republicans prepare for next year’s presidential election.
It also means the agreement finalized on Sunday keeps the risk of ever-escalating debt on the table, setting up the possibility of another bruising battle when the debt limit needs to be raised again in 2025.
“You should think of this as one step,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. “The question is, can they take the next step after that?”
Lawmakers know there are difficult choices ahead and that the only way through them likely involves some combination of deep spending cuts, broad tax hikes and major changes to the retirement income and health care programs that consume an ever-growing share of federal spending.
Mandatory spending — which includes Social Security, Medicare and Medicaid — already account for the majority of government spending. That category is equal in size to 14% of U.S. gross domestic product, and the CBO expects it will grow to 15.6% by 2023. By contrast, discretionary spending was 6.5% of gross domestic product last year and was already projected to fall to 6% within 10 years.
Goldwein said he’s optimistic that leaders in both parties will find ways to reduce the growth in spending for health care programs. Social Security will also face a reckoning as its trust fund will be unable to pay out full benefits within a decade.
But some budget experts saw the deal as more focused on optics than sustainability.
“This debt limit agreement is shaking out to be a political face-saving deal without much substance in terms of changing the U.S. debt trajectory,” said Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute.
The agreement, which still has to be approved by Congress, would hold discretionary spending essentially flat for the coming year, while allowing increases for military and veterans accounts. Spending growth would be capped at 1% for 2025, essentially a cut given the likely rate of inflation.
Some Democratic allies see the deal as problematic because it cedes ground to Republicans who want to use the debt limit fight as an opportunity to press their policy aims, despite the risk of a default.
“Looking forward, we must find a path to abolish the debt ceiling and end the absurd debt ceiling hostage-taking that Republicans engage in when they can use it as a bludgeon against a Democratic president,” said Sharon Parrott, president of the Center on Budget and Policy Priorities, a liberal think tank.
Other economic analysts took issue with GOP suggestions that the U.S. was already hamstrung by debt, even though investors continue, for the moment, to buy Treasury notes. While total federal debt — including money the government owes itself — exceeds $31 trillion, the U.S. economy possesses more than $143 trillion worth of non-financial assets in a sign that the current debt loads are manageable.
“It is simply not true that the United States is broke and on the verge of a debt and deficit crisis,” said Joe Brusuelas, chief economist at the consultancy RSM U.S.
But even if there isn’t an immediate reckoning over debt, there is a long-term problem that the talks purposefully ignored. The president challenged Republicans to shield Social Security and Medicare from cuts at his State of the Union address in February. GOP lawmakers jeered him for suggesting they would dare to cut the programs, leading Biden to declare, “We’ve got unanimity.”
Biden specifically hailed the bipartisan agreement on Sunday for protecting Social Security and Medicare, while saying the agreement that must pass the House and Senate would prevent a possibly catastrophic default that could occur on June 5.
“This is a deal that’s good news,” the president said, “for the American people.”
Yet House members received a specific briefing in March indicating that entitlement programs would drive up the debt. CBO director Phillip Swagel gave a presentation showing that publicly held debt would more than double to 195% of gross domestic product in 2053. The key challenge is that an aging population means that programs for older people have costs that exceed tax revenues.
Swagel provided 17 policy options for reducing the debt, six of which were tax hikes that could raise trillions of dollars over 10 years. Tax increases have been a nonstarter with Republicans, while Democrats have generally shied away from reductions to benefits.
His slide deck included this warning: “The longer action is delayed, the larger the policy changes would need to be.”
US oil prices dropped below $70 a barrel Tuesday on concerns about whether the debt ceiling deal will make it through Congress and on reports of tensions between Saudi Arabia and Russia ahead of a key OPEC+ meeting.
Crude slumped 4.4% to close at $69.46 a barrel, the lowest settlement price in nearly four weeks.
Oil market veterans blamed Tuesday’s decline in part on worries about whether conservatives in the House of Representatives will try to block the bipartisan deal to raise the debt ceiling forged over the weekend by President Joe Biden and House Speaker Kevin McCarthy.
“It’s not a layup that the debt deal is going to get done. That’s spooking the market, no doubt about that,” said Robert Yawger, vice president of energy futures at Mizuho Securities.
Patrick De Haan, head of petroleum analysis at GasBuddy, also pointed to “growing skepticism” about the debt ceiling agreement and the risk that a failure to raise the borrowing limit sets off a “deep recession” that curbs demand for oil.
Treasury Secretary Janet Yellen has warned the government will not have enough funds to meet all of the nation’s obligations if Congress does not address the debt ceiling by June 5.
Brent crude, the world benchmark, dropped by more than 4%, slipping below $74 a barrel.
Meanwhile, there are new questions about the relationship between OPEC leader Saudi Arabia and Russia ahead of this weekend’s meeting of oil producers in Vienna.
Saudi Arabia has expressed anger to Russia for failing to follow through on Moscow’s promise to cut production in response to Western sanctions, the Wall Street Journal reported, citing sources. The apparent tensions raises uncertainty about the status of OPEC+, the alliance between OPEC members like Saudi Arabia, the United Arab Emirates and Kuwait and non-OPEC nations led by Russia.
“There is starting to be chatter about the Russian and Saudis not being the best of friends,” said Yawger.
Brits woke up to yet more grim news on inflation Tuesday, with new data showing prices in UK stores are rising at a record pace. It’s the latest sign of a seemingly intractable cost-of-living crisis that has Prime Minster Rishi Sunak considering drastic measures, includingprice controls, to keep inflation in check.
The cost of store items, known as shop price inflation, rose 9% through the year to May, a fresh high for an index thatdates back to 2005, according to the British Retail Consortium. Food inflation dipped slightly to 15.4% in May, but that’s still the second-highest rate on record.
Lower energy and commodity costs helped reduce prices of some staples, including butter, milk, fruit and fish. But chocolate and coffee prices are rising as global commodity prices soar, British Retail Consortium CEO Helen Dickinson said.
The slight drop in food prices will give cold comfort to consumers, and piles the pressure on Sunak, who has promised to halve inflation this year as one of his five pledges to voters.
The British public “are still wincing when their total comes up at the checkout… a weekly shop that cost £100 last year is now clocking in at £115,” Laura Suter, head of personal finance at stockbroker AJ Bell wrote in a note.
Poor households are being hit the hardest because they spend more of their disposable income on food. More people are using food banks in the United Kingdom than ever before, eclipsing even the peak of the pandemic.
The Trussell Trust, the UK’s biggest food bank network, handed out close to 3 million emergency food parcels over the 12 months to March 2023 — a 37% increase on the previous year.
Even the Bank of England, tasked with keeping inflation at 2%, has been caught off guard by stubbornly high food prices, which seem to have barely responded to 12 successive interest rate hikes.
Food prices have contributed to keeping inflation “higher than we expected it to be,” Bank of England Governor Andrew Bailey told a Treasury committee hearing last week. “We have a lot to learn about operating monetary policy in a world of big shocks,” he admitted.
The United Kingdom’s inflation problem is now so dire that Sunak isconsidering asking retailers to cap the price of essential food items, in a throwback to the 1970s. Back then, governments in the United States and United Kingdom imposed wage and price controls to tame inflation, although the policies weren’t very effective at bringing inflation down and were later dropped.
Economists say that capping prices encourages companies to produce less of a product, while making it more attractive to consumers. Supply goes down, and demand goes up, with shortages being the inevitable result.
Price controls distort markets and should only be used “in extreme circumstances,” Neal Shearing, group chief economist at Capital Economics, wrote in a note Tuesday. “The current food price shock does not warrant such an intervention,” he added.
The Sunday Telegraph was first to report the government’s proposal, which was quickly rejected by retailers.
Andrew Opie, director of food and sustainability at the British Retail Consortium said controls would not make a “jot of difference” to high food prices, which are the result of soaring energy, transport and labor costs.
“As commodity prices drop, many of the costs keeping inflation high are now arising from the muddle of new regulation coming from government,” Opie added in a statement. These include tighter rules onrecycling and full border controls on food imports from the European Union, due to be implemented by the end of this year.
According to a government spokesperson, any price caps would not be mandatory. “Any scheme to help bring down food prices for consumers would be voluntary and at retailers’ discretion,” the spokesperson said in a statement shared with CNN.
Sunak and Finance Minister Jeremy Hunt “have been meeting with the food sector to see what more can be done,” the spokesperson added.
For Sunak, the pressure is on — particularly ahead of a general election widely expected to be held next year. Inflation was hovering above 10% when he made the promise to halve it in January. It dropped back to 8.7% in April, still well above his target. The Bank of England expects it to fall to “around 5%” by the end of this year, leaving little margin for error.
According to Opie of the British Retail Consortium, the government should focus on “cutting red tape” rather than “recreating 1970s-style price controls.”
At the top of the list of burdensome regulations are those introduced as a result of the country’s exit from the European Union, which is its main source of food imports.
Brexit is responsible for about a third of UK food price inflation since 2019, according to researchers at the London School of Economics.
New regulatory checks and other border controls added nearly £7 billion ($8.7 billion) to Britain’s domestic grocery bill between December 2019 and March 2023, or £250 ($310) per household, economists at the LSE’s Centre for Economic Performance wrote in a recent paper.
Food prices rose by almost 25 percentage points over this period. “Our analysis suggests that in the absence of Brexit this figure would be 8 percentage points (30%) lower,” the researchers wrote.
Imports of meat and cheese from the European Union were now subject to high “non-tariff barriers.”
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN
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Will the Federal Reserve hike interest rates at its next meeting in June — for the 11th time in a row — or pause? Wall Street seems to be betting on the latter, but it was a topsy-turvy journey to that consensus last week.
What happened: The Fed’s meeting earlier this month fueled hopes that it was done with rate hikes, at least for now. Then,a slate of economic data last week came in stronger than expected.
Retail spending rebounded in April after two months of declines, suggesting that consumers are still spending despite tightening their purse strings. Jobless claims declined more than expected for the week ended May 13, staying below historical averages.
Traders saw a roughly 36% chance last Thursday that the Fed will raise rates by another quarter point in June, up from around 15.5% on May 12, according to the CME FedWatch Tool.
Then, Fed Chair Jerome Powell weighed in mid-morning Friday. In a panel with former Fed head Ben Bernanke, Powell said that uncertainty remains surrounding how much demand will decline from tighter credit conditions and the lagged effects of hiking rates. Traders pared down their expectations to about a 18.6% chance that the central bank will raise rates next month, as of Friday evening.
Experts seem to agree that the Fed is unlikely to raise rates again in June. “The absence of any such preparation [for a raise] is the signal and gives us additional confidence that the Fed is not going to hike in June absent a very big surprise in the remaining data, though we should expect a hawkish pause,” Evercore ISI strategists said in a May 19 note.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, also expects the Fed to hold rates steady in June. But that decision isn’t set in stone, and the Fed will likely monitor three key factors in making its decision, he said. Those are:
The debt ceiling. President Joe Biden and congressional leaders have maintained that the US will likely not default on its debt. But if such a scenario were to happen, it could have catastrophic consequences for the economy and financial markets that would require the Fed wait for the crisis to be resolved before taking action.
Evolving financial conditions. The collapses of regional lenders Silicon Valley Bank, Signature Bank and First Republic have accelerated the tightening of credit conditions. While that has complicated the Fed’s plan to stabilize prices, it also could benefit the central bank by doing some of its work for it by slowing spending.
Delayed impact. The Fed’s interest rate hikes flow through the economy with a lag. So, it will take some months for the full effect of its aggressive tightening cycle to show up in the economy. That means the Fed could want to take a pause to monitor the continuing impact of what it has already done.
The Fed has also maintained that its actions are data dependent, meaning it will keep close watch on economic data that comes in before it’s due to announce its next rate decision on June 14.
Some key data points set for release before then include the April Personal Consumption Expenditures price index (that’s the Fed’s preferred inflation metric), May jobs report, the May Consumer Price Index and May Producer Price Index. (The latter two reports are due on the two days the Fed meets.)
If these data points show considerable weakening in the labor market or continued declines in inflation, that helps make the case for a pause. But signs of a robust economy with little to no signs of slowing down could mean the Fed has more room to tighten — and that it could take that opportunity.
Morgan Stanley chief executive James Gorman, 64, will step down from his role within the next 12 months, he said Friday at the bank’s annual meeting.
“The specific timing of the CEO transition has not been determined, but it is the Board’s and my expectation that it will occur at some point in the next 12 months. That is the current expectation in the absence of a major change in the external environment,” Gorman said.
Gorman, who is one of the longest-serving heads of a US bank and largely responsible for helping lead a sweeping transformation of the company after the 2008 financial crisis, became CEO in January 2010.
He will assume the role of executive chairman for “a period of time,” Gorman said, adding that the board of directors has three senior internal candidates in the pipeline to potentially take over as the next chief executive.
The June 1 ‘X-date’ — the estimated point at which the US Treasury could run out of cash — is fast approaching. For JPMorgan Chase’s Jamie Dimon, another key date is already here.
The chief executive told Bloomberg earlier this month that he has held a so-called “war room” weekly to prepare the bank for the possibility the United States defaults on its debt. He plans to meet more often as the X-date approaches, and then meet every day by May 21, he said, adding that the meetings will eventually ramp up to take place three times a day.
“I don’t think [a default] is going to happen, because it gets catastrophic,” Dimon said. “The closer you get to it, you will have panic.”
Debt ceiling negotiations appeared to be going in a positive direction for most of last week. Both President Joe Biden and House Speaker Kevin McCarthy said that the United States is unlikely to default on its debt and seemed optimistic about the path to a deal.
But debt ceiling talks between the White House and McCarthy’s office have hit a snag, and negotiators put a pause on the talks, multiple sources told CNN Friday.
While that doesn’t mean the negotiations are falling completely apart, or that the country is headed for a default, it does pose more challenges for the stock market, which has stayed relatively resilient despite debt ceiling worries starting to slowly creep in.
Dimon said in the same Bloomberg interview that he’d “love to get rid of the debt ceiling thing” altogether.
The debt ceiling situation “is very unfortunate,” he said. “It should never happen this way.”
Monday: JPMorgan Chase investor day.
Tuesday: April new home sales. Earnings from Lowe’s (LOW).
Wednesday: May Fed meeting minutes.
Thursday: GDP Q1 second read, April pending home sales, mortgage rates and weekly jobless claims. Earnings from Costco (COST), Dollar Tree (DLTR) and Best Buy (BBY).
Friday: April Personal Consumption Expenditures and May University of Michigan final consumer sentiment reading.
TOKYO — Global shares were trading mixed Wednesday as Japan’s benchmark jumped on the news of solid economic growth data, while the rest of Asia was mired in uncertainty.
In Europe, France’s CAC 40 declined nearly 0.1% in early trading to 7,399.51, while Germany’s DAX added 0.3% to 15,950.96. Britain’s FTSE 100 was slightly higher, inching up less than 0.1% to 7,755.25. U.S. shares were set to drift higher with Dow futures up 0.3% at 33,150.00. S&P 500 futures rose 0.2% to 4,132.00.
Japan’s benchmark Nikkei 225 gained 0.8% to finish at 30,093.59. Australia’s S&P/ASX 200 dipped 0.5% to 7,199.20 after a better-than-expected wage increase report. The wage price index rose 3.7% year on year. But that could mean an interest rate hike in coming months, according to some analysts.
South Korea’s Kospi gained 0.6% to 2,494.66. Hong Kong’s Hang Seng lost 2.1% to 19,560.57, while the Shanghai Composite slipped 0.2% to 3,284.23.
Japan’s encouraging GDP data released earlier in the day showed consumption was rebounding after COVID-19-related restrictions were eased and borders opened to tourists.
Japan’s economy, the world’s third largest, grew at an annual pace of 1.6% in the quarter through March, according to the Cabinet Office. That was the strongest GDP growth pace since April-June 2022 marked a 1.1% growth. The main negative came from declining exports due to sluggish global demand.
“Sluggish external demand remains a concern over the near term,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence, adding that the growth may taper off.
“As real compensation of employees declined at a faster pace, weaker purchasing power will continue to make consumers selective,” she said.
Concerns about the Chinese and United States economies weighed on investor sentiments. Oil prices declined.
“Recent Chinese economic data pointing to a slower-than-expected recovery, falling short of consensus estimates, are adding to these concerns. Despite some rebound in consumer spending, there are mounting concerns that the bulk of China’s recovery may already be in the rearview mirror,” said Anderson Alves at ActivTrades.
In the U.S., big retailers including Target and Walmart are scheduled to report their results later this week. They’re under the microscope because resilient spending by U.S. households has been one of the main positives keeping the economy from sliding into a recession.
If it buckles, a recession may be assured. The pressure is on because measures of confidence among shoppers have been on the decline. Manufacturing and other areas of the economy have already cracked under the weight of much higher interest rates meant to bring down inflation.
In energy trading, benchmark U.S. crude fell 13 cents to $70.73 a barrel. Brent crude, the international standard, edged down 18 cents to $74.73 a barrel.
In currency trading, the U.S. dollar edged up to 137.00 Japanese yen from 136.36 yen. The euro cost $1.0839, down from $1.0868.
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Yuri Kageyama is on Twitter: https://twitter.com/yurikageyama
TOKYO — Asian shares were trading mixed Wednesday as Japan’s benchmark jumped on the news of solid economic growth data, while the rest of the region was mired in uncertainty.
Japan’s benchmark Nikkei 225 gained 0.8% to finish at 30,093.59. Australia’s S&P/ASX 200 dipped 0.5% to 7,199.20, after a better-than-expected wage increase report. The wage price index rose 3.7% year on year. But that could mean an interest rate hike in coming months, according to some analysts.
South Korea’s Kospi gained 0.6% to 2,494.02. Hong Kong’s Hang Seng lost 1.2% to 19,745.68, while the Shanghai Composite slipped 0.4% to 3,277.07.
Japan’s encouraging GDP data released earlier in the day showed consumption was rebounding after COVID-19-related restrictions were eased and borders opened to tourists.
Japan’s economy, the world’s third largest, grew at an annual pace of 1.6% in the quarter through March, according to the Cabinet Office. That was the strongest GDP growth pace since April-June 2022 marked a 1.1% growth. The main negative came from declining exports due to sluggish global demand.
Concerns about the Chinese and United States economies weighed on investor sentiments.
“Recent Chinese economic data pointing to a slower-than-expected recovery, falling short of consensus estimates, are adding to these concerns. Despite some rebound in consumer spending, there are mounting concerns that the bulk of China’s recovery may already be in the rearview mirror,” said Anderson Alves at ActivTrades.
On Wall Street, the S&P 500 fell 26.38 points, or 0.6%, to 4,109.90. The Dow Jones Industrial Average dropped 336.46, or 1%, to 33,012.14, and the Nasdaq composite slipped 22.16, or 0.2%, to 12,343.05.
Energy producers were some of the heaviest weights on the market Tuesday as Exxon Mobil dropped 2.4% and Chevron fell 2.3%. Home Depot also fell 2.2% after saying its revenue weakened by more in the latest quarter than expected. Other big retailers are scheduled to report their results later this week, including Target and Walmart.
They’re under the microscope because resilient spending by U.S. households has been one of the main positives keeping the economy from sliding into a recession. If it buckles, a recession may be assured. The pressure is on because measures of confidence among shoppers have been on the decline.
Manufacturing and other areas of the economy have already cracked under the weight of much higher interest rates meant to bring down inflation.
A separate report Tuesday said that spending at U.S. retailers broadly rose last month, but not by as much as economists expected.
“There’s often a gap between how people say they feel and how they spend their money, but the retail sales report shows people are beginning to cut back on big-ticket items and discretionary categories like sporting goods,” said Brian Jacobsen, chief economist at Annex Wealth Management.
Treasury yields in the bond market rose following the reports. The yield on the 10-year Treasury climbed to 3.54% Tuesday, from 3.51% late Monday. It helps set rates for mortgages and other important loans.
The two-year Treasury yield, which moves more on expectations for action by the Federal Reserve, rose to 4.07% from 4.01%.
In energy trading, benchmark U.S. crude fell 67 cents to $70.19 a barrel. Brent crude, the international standard, edged down 64 cents to $74.27 a barrel.
In currency trading, the U.S. dollar edged up to 136.71 Japanese yen from 136.36 yen. The euro cost $1.0866, little changed from $1.0868.
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Yuri Kageyama is on Twitter: https://twitter.com/yurikageyama
Questions swirl about the strength of China’s recovery from Covid lockdowns, and there’s talk of recession in the United States. Yet Europe’s economic prospects have brightenedin recent months, according to the European Commission.
The EU’s executive arm on Monday upgraded its growth outlook for 2023 and 2024. It now expects the EU economy to expand 1% this year, up from an estimate of 0.8% in February. Growth next year is pegged at 1.7%, an upward revision of 0.1 percentage points.
The improved forecast for Europe — which narrowly dodged a recession this winter — still represents a marked slowdown on last year, when the bloc’s economy grew 3.5%.
But it reflects sharply lower energy prices, which are reducing costs for businesses and easing the strain on households. A strong job market and ongoing government stimulus are also providing a lift.
Even so, the Commission acknowledged that higher borrowing costs aimed at taming rising prices will weigh on growth in the months to come. The European Central Bank raised interest rates by a quarter of a percentage point this month, the smallest increase since it started hiking in July, but hinted at further rate hikes to come given stubbornly high inflation.
“The key factors underpinning this forecast go in opposite directions: on the one hand, declining energy prices and a resilient labor market and, on the other hand, tightening financial conditions,” Paolo Gentiloni, the European Commission’s economy minister, said at a press conference.
“Heightened risk perception” among banks after recent tumult in the sector is making it harder to access credit, while rising rates are eating into loan demand, Gentiloni noted.
Significant divergence is also expected among countries in the European Union. Growth in Germany, the bloc’s biggest economy, is expected to slow sharply to 0.2% in 2023. Meanwhile, Italy’s output could increase by 1.2%, and Portugal’s economy could expand by 2.4%.
Separately, industrial production data for Europe published Monday showed signs of weakness. Production fell 4.1% in March among the 20 countries that use the euro, worse than economists had expected.
“With the tailwinds from lower energy prices and easing semiconductor shortages apparently exhausted and the economy struggling with tighter monetary policy, we expect industrial output to contract slightly over the rest of the year,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a note to clients.
Wholesale annual inflation slowed in April, adding to signs that price pressures are easing.
The Producer Price Index, a keymeasure of price changes at the wholesale level, slowed to 2.3% for the 12 months ended in April, the Bureau of Labor Statistics reported Thursday.
That was below the annual increase of 2.7% in March and economists’ expectations of a 2.4% increase. It’s also the slowest annual increase since 2021.
On a monthly basis, prices ticked up 0.2%. During the previous month, they fell by 0.4%.
Deflationary pressure in China is worsening as consumer prices increased at the slowest pace in two years, suggesting weakness in domestic demand and a long road ahead to full economic recovery.
The consumer price index rose by just 0.1% in April from a year ago, the lowest rate since February 2021, according to the National Bureau of Statistics on Thursday. In March and February, it increased 0.7% and 1% respectively.
The producer price index, which measures factory-gate prices, declined by 3.6%, marking the biggest contraction in three years. It’s the seventh straight month the figure has fallen.
Prices are stagnating or falling in the country despite the fact that the People’s Bank of China, the central bank, has been cutting interest rates and pumping cash into the financial system to bolster the economy.
WASHINGTON — Despite surging interest rates, punishing inflation and global turbulence, the U.S. economy stood firm last year. From employers to consumers, the picture was one of surprising resilience.
This year may be shaping up as a more downbeat story. The economy is widely expected to decelerate steadily and to slip into a recession sometime this year.
Some early such signs could begin to emerge Thursday, when the Commerce Department will issue its first estimate of the economy’s performance in the first three months of 2023.
Forecasters have predicted that the gross domestic product — the broadest measure of economic output — grew at a 1.9% annual rate from January through March, according to a survey by the data firm FactSet. That would mark a significant slowdown from the 3.2% growth rate from July through September and the 2.6% rate from October through December.
The obstacles the economy faces are growing more troublesome. The biggest among them is the dramatically higher cost of borrowing. The Federal Reserve, in its fight against an inflation rate that last year hit a four-decade high, has raised its benchmark rate nine times in just over a year.
As those higher rates spread through the economy, it is becoming steadily more expensive for consumers and businesses to borrow and spend. The cost of a loan to buy a house or a car or to expand a business can become prohibitively expensive.
Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt. Yet the central bank’s policymakers are aiming for a so-called soft landing: Cooling growth enough to curb inflation yet not so much as to send the world’s largest economy tumbling into a recession.
There is widespread skepticism that the Fed will succeed. An economic model used by the Conference Board, a business research group, puts the probability of a U.S. recession over the next year at 99%.
The Conference Board’s recession-probability gauge had hung around zero from September 2020, as the economy rebounded explosively from the COVID-19 recession, until March 2022, when the Fed started raising rates to fight inflation.
Already, higher rates have clobbered the housing market, which depends on the ability of buyers to take out long-term mortgages. Investment in housing plummeted at an annual rate of 27% from July through September and 25% from October through December.
Consumers, whose spending accounts for roughly 70% of U.S. economic output, seem to be starting to feel the chill. Retail sales had enjoyed a strong start in January, aided by warmer-than-expected weather and bigger Social Security checks. But in February and again in March, retail sales tumbled.
“The U.S. economy is unwell, and it’s starting to show,’’ said Gregory Daco, chief economist at the consulting firm EY.
Tumult in the banking sector — the United States endured its second- and third-biggest bank failures ever last month — poses another threat. After depositors yanked money out of troubled Silicon Valley Bank and Signature Bank, forcing regulators to shut them down, many banks are cutting back on lending to conserve money to handle potential bank runs.
The worst fears of a 2008-style financial crisis have eased over the past month. But lingering credit cutbacks, which were mentioned in the Fed’s survey this month of regional economies, is likely to hobble growth.
“We place a roughly 55%-60% chance of a mild recession in the U.S.,” Tony Roth, Wilmington Trust’s chief investment officer, said in a research note. “Recent bank stress has subsided, but the risk of tighter financial conditions increases these recession risks.’’
Political risks are growing, too. Congressional Republicans are threatening to let the federal government default on its debts, by refusing to raise the statutory limit on what it can borrow, if Democrats and President Joe Biden fail to agree to spending restrictions and cuts. A first-ever default on the federal debt would shatter the market for U.S. Treasurys — the world’s biggest — and possibly cause a global financial crisis.
The global backdrop is looking bleaker, too. The International Monetary Fund this month downgraded its forecast for worldwide economic growth, citing rising interest rates around the world, financial uncertainty and chronic inflation. American exporters could suffer as a consequence.
Still, the U.S. economy has surprised before. Recession fears rose early last year after GDP had shrunk for two straight quarters. But the economy roared back in the second half of 2022, powered by surprisingly sturdy consumer spending.
A strong job market has given Americans the confidence and financial wherewithal to keep shopping: 2021 and 2022 were the two best years for job creation on record. And hiring has remained strong so far this year, though it has decelerated from January to February and then to March.
The jobs report for April, which the government will issue on May 5, is expected to show that employers added a decent but still-lower total of 185,000 jobs this month, according to a survey of forecasters by FactSet.
Ohio’s govenor said Friday evening that he wants Norfolk Southern to pay East Palestine residents for the long-term impacts the February 3 toxic train derailment may have caused on the community.
The rail operator should pay residents selling their house the difference of what their home value used to be in comparison to what it’s worth now, nearly three months since the accident, Gov. Mike DeWine told CNN’s Jake Tapper. Norfolk Southern should also set up a fund specifically for impacts on residents that may arise in the future, including medical issues, that could be connected to the derailment, he added.
Since the accident, officials have said tests showed the air and municipal water were safe and allowed residents to return to their homes after a brief evacuation order. But those living in East Palestine have for months expressed concerns and frustration about both the economic impacts the crash had on their community and health problems, including rashes and nausea, they worry are linked to the derailment.
Norfolk Southern has vowed to help East Palestine fully recover and has said it will remain in the community for “as long as it takes.”
DeWine said Friday he has met with Norfolk Southern CEO Alan Shaw and discussed those issues recently.
“One of the things that I said to him is, if people sell their house and they do not get what that house was worth before the train wreck, I think you owe them the difference,” DeWine said. “I fully expect them to pay for that.”
CNN reported on Friday about East Palestine residents who were concerned with their home values, including one woman whose home is just about a mile away from the derailment site and proved to be a “nightmare” to sell in the past few weeks.
When asked for comment on that report, Norfolk Southern directed CNN to a statement from mid-March: “We are committed to working with the community to provide tailored protection for home sellers if their property loses value due to the impact of the derailment.”
While the company has said it will work with the community to address concerns about losses in home values, details on the issue have been slow to materialize.
“Everything we’ve asked (Norfolk Southern) to pay for so far, they’ve paid for,” DeWine said Friday. “And we expect them to continue to do that.”
The governor said he also told Shaw he expects to see a fund set up “fairly quickly” for residents affected by the derailment, including those who may have health problems connected to the accident in the future.
“(Residents) need to be reassured,” DeWine said. “I think that’s another thing that we can do to help assure the people in the community that we’re going to do everything and that we’re not going away.”
Officials are continuing to conduct air, water and soil testing and have worked to set up a full-time clinic in the community in the aftermath to the derailment to address health concerns and to improve “the quality of life in the community,” the governor said.
High speed trains have proved their worth across the world over the past 50 years.
It’s not just in reducing journey times, but more importantly, it’s in driving economic growth, creating jobs and bringing communities closer together. China, Japan and Europe lead the way.
So why doesn’t the United States have a high-speed rail network like those?
For the richest and most economically successful nation on the planet, with an increasingly urbanized population of more than 300 million, it’s a position that is becoming more difficult to justify.
Although Japan started the trend with its Shinkansen “Bullet Trains” in 1964, it was the advent of France’s TGV in the early 1980s that really kick-started a global high-speed train revolution that continues to gather pace.
But it’s a revolution that has so far bypassed the United States. Americans are still almost entirely reliant on congested highways or the headache-inducing stress of an airport and airline network prone to meltdowns.
China has built around 26,000 miles (42,000 kilometers) of dedicated high-speed railways since 2008 and plans to top 43,000 miles (70,000 kilometers) by 2035.
“Many Americans have no concept of high-speed rail and fail to see its value. They are hopelessly stuck with a highway and airline mindset,” says William C. Vantuono, editor-in-chief of Railway Age, North America’s oldest railroad industry publication.
Cars and airliners have dominated long-distance travel in the United States since the 1950s, rapidly usurping a network of luxurious passenger trains with evocative names such as “The Empire Builder,” “Super Chief” and “Silver Comet.”
Deserted by Hollywood movie stars and business travelers, famous railroads such as the New York Central were largely bankrupt by the early 1970s, handing over their loss-making trains to Amtrak, the national passenger train operator founded in 1971.
In the decades since that traumatic retrenchment, US freight railroads have largely flourished. Passenger rail seems to have been a very low priority for US lawmakers.
Powerful airline, oil and auto industry lobbies in Washington have spent millions maintaining that superiority, but their position is weakening in the face of environmental concerns and worsening congestion.
Some of this will be invested in repairing Amtrak’s crumbling Northeast Corridor (NEC) linking Boston, New York and Washington.
There are also big plans to bring passenger trains back to many more cities across the nation – providing fast, sustainable travel to cities and regions that have not seen a passenger train for decades.
Add to this the success of the privately funded Brightline operation in Florida, which has been given the green light to build a $10 billion high-speed rail link between Los Angeles and Las Vegas by 2027, plus schemes in California, Texas and the proposed Cascadia route linking Portland, Oregon, with Seattle and Vancouver, and the United States at last appears to be on the cusp of a passenger rail revolution.
“Every president since Ronald Reagan has talked about the pressing need to improve infrastructure across the USA, but they’ve always had other, bigger priorities to deal with,” says Scott Sherin, chief commercial officer of train builder Alstom’s US division.
“But now there’s a huge impetus to get things moving – it’s a time of optimism. If we build it, they will come. As an industry, we’re maturing, and we’re ready to take the next step. It’s time to focus on passenger rail.”
Sherin points out that other public services such as highways and airports are “massively subsidized,” so there shouldn’t be an issue with doing the same for rail.
“We need to do a better job of articulating the benefits of high-speed rail – high-quality jobs, economic stimulus, better connectivity than airlines – and that will help us to build bipartisan support,” he adds. “High-speed rail is not the solution for everything, but it has its place.”
Only Amtrak’s Northeast Corridor has trains that can travel at speeds approaching those of the 300 kilometers per hour (186 mph) TGV and Shinkansen.
Even here, Amtrak Acela trains currently max out at 150 mph – and only in short bursts. Maximum speeds elsewhere are closer to 100 mph on congested tracks shared with commuter and freight trains.
This year, Amtrak plans to introduce its new generation Avelia Liberty trains to replace the life-expired Acelas on the NEC.
Capable of reaching 220 mph (although they’ll be limited to 160 mph on the NEC), the trains will bring Alstom’s latest high-speed rail technology to North America.
The locomotives at each end – known as power cars – are close relatives of the next generation TGV-M trains, scheduled to debut in France in 2024.
Sitting between the power cars are the passenger vehicles, which use Alstom’s Tiltronix technology to run faster through curves by tilting their bodies, much like a MotoGP rider does. And it’s not just travelers who will benefit.
“When Amtrak awarded the contract to Alstom in 2015 to 2016, the company had around 200 employees in Hornell,” says Shawn D. Hogan, former mayor of the city of Hornell in New York state.
“That figure is now nearer 900, with hiring continuing at a fast pace. I calculate that there has been a total public/private investment of more than $269 million in our city since 2016, including a new hotel, a state-of-the-art hospital and housing developments.
“It is a transformative economic development project that is basically unheard of in rural America and if it can happen here, it can happen throughout the United States.”
Alstom has spent almost $600 million on building a US supply chain for its high-speed trains – more than 80% of the train is made in the United States, with 170 suppliers across 27 states.
“High-speed rail is already here. Avelia Liberty was designed jointly with our European colleagues, so we have what we need for ‘TGV-USA’,” adds Sherin.
“It’s all proven tech from existing trains. We’re ready to go when the infrastructure arrives.”
And those new lines could arrive sooner than you might think.
In March, Brightline confirmed plans to begin construction on a 218-mile (351-kilometer) high-speed line between Rancho Cucamonga, near Los Angeles, and Las Vegas, carving a path through the San Bernardino Mountains and across the desert, following the Interstate 15 corridor.
The 200 mph line will slash times to little more than one hour – a massive advantage over the four-hour average by car or five to seven hours by bus – when it opens in 2027.
Mike Reininger, CEO of Brightline Holdings, says: “As the most shovel-ready high-speed rail project in the United States, we are one step closer to leveling the playing field against transit and infrastructure projects around the world, and we are proud to be using America’s most skilled workers to get there.”
Brightline West expects to inject around $10 billion worth of benefits into the region’s economy, creating about 35,000 construction jobs, as well as 1,000 permanent jobs in maintenance, operations and customer service in Southern California and Nevada.
It will also mark the return of passenger trains to Las Vegas after a 30-year hiatus – Amtrak canceled its “Desert Wind” route in 1997.
Meanwhile, construction is progressing on another high-speed line through the San Joaquin Valley.
Set to open around 2030, California High Speed Rail (CHSR) will run from Merced to Bakersfield (171 miles) at speeds of up to 220 mph.
Coupled with proposed upgrades to commuter rail lines at either end, this project could eventually allow high-speed trains to run the 350 miles (560 kilometers) between Los Angeles to San Francisco metropolitan areas in just two hours and 40 minutes.
CHSR has been on the table as far back as 1996, but its implementation has been controversial.
Disagreements over the route, management issues, delays in land acquisition and construction, cost over-runs and inadequate funding for completing the entire system have plagued the project – despite the economic benefits it will deliver as well as reducing pollution and congestion. Around 10,000 people are already employed on the project.
Costing $63 billion to $98 billion, depending on the final extent of the scheme, CHSR is to connect six of the 10 largest cities in the state and provide the same capacity as 4,200 miles of new highway lanes, 91 additional airport gates and two new airport runways costing between $122 billion and $199 billion.
With California’s population expected to grow to more than 45 million by 2050, high-speed rail offers the best value solution to keep the state from grinding to a smoggy halt.
Brightline West and CHSR offer templates for the future expansion of high-speed rail in North America.
By focusing on pairs of cities or regions that are too close for air travel and too far apart for car drivers, transportation planners can predict which corridors offer the greatest potential.
“It’s logical that the US hasn’t yet developed a nationwide high-speed network,” says Sherin. “For decades, traveling by car wasn’t a hardship, but as highway congestion gets worse, we’ve reached a stage where we should start looking more seriously at the alternatives.
“The magic numbers are centers of population with around three million people that are 200 to 500 miles apart, giving a trip time of less than three hours – preferably two hours.
“Where those conditions apply in Europe and Asia, high-speed rail reduces air’s share of the market from 100% to near zero. The model would work just as well in the USA as it does globally.”
Sherin points to the success of the original generation of Acela trains as evidence of this.
“When the first generation Acela trains started running between New York City and Washington in 2000, Amtrak attracted so many travelers that the airlines stopped running their frequent ‘shuttles’ between the two cities,” he adds.
However, industry observer Vantuono is more pessimistic.
“A US high-speed rail network is a pipe dream,” he says. “A lack of political support and federal financial support combined with the kind of fierce landowner opposition that CHSR has faced in California means that the challenges for new high-speed projects are enormous.”
According to the International Energy Agency (IEA), urban and high-speed rail hold “major promise to unlock substantial benefits” in reducing global transport emissions.
Dr. Fatih Birol, the IEA’s executive director, argues that rail transport is “often neglected” in public debates about future transport systems – and this is especially true in North America.
“Despite the advent of cars and airplanes, rail of all types has continued to evolve and thrive,” adds Birol.
Globally, around three-quarters of rail passenger movements are made on electric-powered vehicles, putting the mode in a unique position to take advantage of the rise in renewable energy over the coming decades.
Here, too, the United States lags far behind the rest of the world, with electrification almost unheard of away from the NEC.
Rail networks in SouthKorea, Japan, Europe, China and Russia are more than 60% electrified, according to IEA figures, the highest share of track electrification being South Korea at around 85%.
In North America, on the other hand, less than 5% of rail routes are electrified.
The enormous size of the United States and its widely dispersed population mitigates against the creation of a single, unified network of the type being built in China and proposed for Europe.
Air travel is likely to remain the preferred option for transcontinental journeys that can be more than 3,000 miles (around 4,828 kilometers).
But there are many shorter inter-city travel corridors where high-speed rail, or a combination of new infrastructure and upgraded railroad tracks or tilting trains, could eventually provide an unbeatable alternative to air travel and highways.
China’s economy got off to a solid start in 2023, as consumers went on a spending spree after three years of strict pandemic restrictions ended.
Gross domestic product grew by 4.5% in the first quarter from a year ago, according to the National Bureau of Statistics on Tuesday. That beat the estimate of 4% growth from a Reuters poll of economists.
But private investment barely budged and youth unemployment surged to the second highest level on record, indicating the country’s private sector employers are still wary aboutlonger term prospects.
Consumption posted the strongest rebound. Retail sales jumped 10.6% in March from a year earlier, the highest level of growth since June 2021. In the January to March months, retail sales grew 5.8%, mainly lifted by a surge in revenue from the catering service industry.
“The combination of a steady uptick in consumer confidence as well as the still-incomplete release of pent-up demand suggest to us that the consumer-led recovery still has room to run,” said Louise Loo, China lead economist for Oxford Economics.
Industrial production also showed a steady increase.It was up 3.9% in March, compared with 2.4% in the January-to-February period. (China usually combines its economic data for January and February to account for the impact of the Lunar New Year holiday.)
Last year, GDP expanded byjust3%, badly missing the official growth target of “around 5.5%,” as Beijing’s approach to stamping out the coronavirus wreaked havoc on supply chains and hammered consumer spending.
After mass street protests gripped the country and local governments ran out of cash to pay huge Covid bills, authorities finally scrapped the zero-Covid policy in December. Following a brief period of disruption due to a Covid surge, the economy has started showing signs of recovery.
Last month, an official gauge of non-manufacturing activity jumped to its highest level in more than a decade, suggesting the country’s crucial services sector was benefiting from a resurgence in consumer spending after the end of pandemic restrictions.
As the economic recovery gains traction, investment banks and international organizations have upgraded China’s growth forecasts for this year. In its World Economic Outlook released last week, the International Monetary Fund said China is “rebounding strongly” following the reopening of its economy. The country’s GDP will grow 5.2% this year and 5.1% in 2024, it predicted.
However, some analysts believe the strong growth reported in the first quarter was the product of “backloading” of economic activity from the fourth quarter of 2022, which was weighed down by pandemic restrictions and then a chaotic reopening.
“Our core view is that China’s economy is deflationary,” said Raymond Yeung, chief economist for Greater China at ANZ Research, in a Tuesday research report.
If adjustments are made to account for the impact of delayed economic activity, GDP growth in the first quarter could have been just 2.6%, he said.
Some key data released on Tuesday support this idea. For example, private investment was extremely weak.
Fixed asset investment by the private sector increased a mere 0.6% from January to March, indicating a lack of confidence among entrepreneurs. (State-led investment, meanwhile, advanced 10%.) That’s even worse than the 0.8% growth recorded in the January-to-February period.
The Chinese government has resorted to surprising measures to restore confidence among private entrepreneurs, but the campaign has inspired more nervousness than optimism.
The all-important property industry is also mired in a deep downturn. Investment in property declined 5.8% in the first quarter. Property sales by floor area decreased by 1.8%.
“The domestic economy is recovering well, but the constraints of insufficient demand are still obvious,” said Fu Linghui, a spokesman for the NBS, at a news conference in Beijing on Tuesday. “Prices of industrial products are still falling, and enterprises are facing many difficulties in their profitability.”
Unemployment continued to surgeamong the youth.
The jobless rate for 16- to 24-year-olds hit 19.6% in March, up for a third straight month. It was the second highest on record, only behind the 19.9% level reached in July 2022.
The high jobless rate among the youth suggests “slack in the economy,” Yeung said.
“By June, there will be a new batch of graduates looking for jobs. The jobless condition could worsen further if China’s economic momentum falters,” he added.
China’s education ministry has previously estimated that a record 11.6 million college graduates will be looking for jobs this year.
At last month’s meeting of the National People’s Congress, the country’s rubber-stamp parliament, the government set a cautious growth plan for this year, with a GDP target of around 5% and a job creation target of 12 million.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN
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Wall Street has been hit with a barrage of complex signals about the economy’s health over the past month. From banking turmoil to weakening jobs data to slowing inflation, and now the start of earnings season, investors have remained largely resilient.
But the Federal Reserve’s March meeting minutes revealed last week that officials believe the economy will enter a recession later this year. While that’s not new news to investors who have worried that a recession is on the horizon for the past year, it does mean that markets could take a turn for the worse.
So, how should investors protect their portfolios? Investors say there isn’t one asset that Wall Street should pile all their bets on, but there are fundamentals that should underlie their investment strategies.
Jimmy Chang, chief investment officer at Rockefeller Global Family Office, says he advises clients to be patient, defensive and selective when navigating the market.
In other words, investors should make decisions based on logic, not a fear of missing out.
“You chase these rallies and then it fizzles out — you’re left holding the bag,” he said.
Chang also recommends that investors stay defensive by investing in high-quality blue chip stocks with solid balance sheets and keep dry powder.
Doug Fincher, portfolio manager at Ionic Capital Management, says investors should brace their portfolios against inflation.
The Personal Consumption Expenditures price index rose 5% for the 12 months ended in February, showing that inflation remains much higher than the Fed’s 2% target.
Coupled with the fact that the central bank has signaled that it plans to pause interest rate hikes sometime this year, it’s possible inflation could prove stickier than Wall Street expects.
“It is the boogeyman of traditional investments,” Fincher said.
He manages the Ionic Inflation Protection exchange-traded fund, which seeks to specifically perform well during periods of high inflation. The portfolio’s core exposure is inflation swaps, which are transactions in which one investor agrees to swap fixed payments for floating payments tied to the inflation rate. The fund also invests in short-duration Treasury Inflation Protected Securities.
Megan Horneman, chief investment officer at Verdence Capital Advisors, says that her firm has hedged its portfolio in cash. A well-known haven, cash is a better alternative to other perceived safe spots like gold, which tends to be volatile and run up too fast, she said.
Investors have rushed into money market funds in recent weeks after the banking turmoil both shook their confidence in the banking system and sent ripples through the market.
“Cash is actually earning you something at this point,” Horneman said. “You have to look long term.”
Earnings season kicked off Friday with a bonanza of earnings from the nation’s largest banks.
Perhaps most noteworthy out of the bunch was JPMorgan Chase, which reported record revenue and an earnings beat for its latest quarter.
The bank has $3.67 trillion in assets, making it the largest bank in the country and a bellwether for the economy. Strong earnings reports from the New York-based bank and its peers including Wells Fargo, Citigroup and PNC Financial Services have shown a promising start to the earnings season.
Charles Schwab, Goldman Sachs, Bank of America and Morgan Stanley report next week.
Here are some key takeaways from JPMorgan Chase’s first-quarter earnings:
The company guided net interest income to be about $81 billion in 2023, up $7 billion from its previous estimate. That’s especially important because this earnings season is all about guidance, as investors try to gauge whether the economy is headed for a recession and which companies will be able to weather a potential downturn.
CEO Jamie Dimon said in the post-earnings conference call that while financial conditions are a bit tighter after the collapse of Silicon Valley Bank and Signature Bank, he doesn’t see a credit crunch. But chances of a recession are now higher, he said.
The company said that its portfolio’s exposure to the office sector is less than 10%, addressing concerns that the $20 trillion commercial real estate industry could be the next space to see turmoil.
Monday: Empire State manufacturing index and homebuilder confidence index. Earnings report from Charles Schwab (SCHW).
Tuesday: Earnings reports from Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), Netflix (NFLX), United Airlines (UAL) and Western Alliance Bancorp (WAL).
Wednesday: Earnings reports from Citizens Financial Group (CFG), Morgan Stanley (MS), Tesla (TSLA) and International Business Machines (IBM). Speech from NY Federal Reserve President John Williams.
Thursday: Philadelphia Fed manufacturing index, jobless claims, mortgage rates, US leading economic indicators and existing home sales. Earnings reports from AutoNation (AN) and American Express (AXP).
Friday: Manufacturing PMI and services PMI. Earnings report from Procter & Gamble (PG).
Spending at US retailers fell in March as consumers pulled back after the banking crisis fueled recession fears.
Retail sales, which are adjusted for seasonality but not for inflation, fell by 1% in March from the prior month, the Commerce Department reported on Friday. That was steeper than an expected 0.4% decline, according to Refinitiv, and above the revised 0.2% decline in the prior month.
Investors chalk up some of the weakness to a lack of tax returns and concerns about a slowing labor market. The IRS issued $84 billion in tax refunds this March, about $25 billion less than they issued in March of 2022, according to BofA analysts.
That led consumers to pull back in spending at department stores and on durable goods, such as appliances and furniture. Spending at general merchandise stores fell 3% in March from the prior month and spending at gas stations declined 5.5% during the same period. Excluding gas station sales, retail spending retreated 0.6% in March from February.
However, retail spending rose 2.9% year-over-year.
Smaller tax returns likely played a role in last month’s decline in retail sales, along with the expiration of enhanced food assistance benefits, economists say.
“March is a really important month for refunds. Some folks might have been expecting something similar to last year,” Aditya Bhave, senior US economist at BofA Global Research, told CNN.
Credit and debit card spending per household tracked by Bank of America researchers moderated in March to its slowest pace in more than two years, which was likely the result of smaller returns and expired benefits, coupled with slowing wage growth.
Enhanced pandemic-era benefits provided through the Supplemental Nutrition Assistance Program expired in February, which might have also held back spending in March, according to a Bank of America Institute report.
Average hourly earnings grew 4.2% in March from a year earlier, down from the prior month’s annualized 4.6% increase and the smallest annual rise since June 2021, according to figures from the Bureau of Labor Statistics. The Employment Cost Index, a more comprehensive measure of wages, has also shown that worker pay gains have moderated this past year. ECI data for the first quarter of this year will be released later this month.
Still, the US labor market remains solid, even though it has lost momentum recently. That could hold up consumer spending in the coming months, said Michelle Meyer, North America chief economist at Mastercard Economics Institute.
“The big picture is still favorable for the consumer when you think about their income growth, their balance sheet and the health of the labor market,” Meyer said.
Employers added 236,000 jobs in March, a robust gain by historical standards but smaller than the average monthly pace of job growth in the prior six months, according to the Bureau of Labor Statistics. The latest monthly Job Openings and Labor Turnover Survey, or JOLTS report, showed that the number of available jobs remained elevated in February — but was down more than 17% from its peak of 12 million in March 2022, and revised data showed that weekly claims for US unemployment benefits were higher than previously reported.
The job market could cool further in the coming months. Economists at the Federal Reserve expect the US economy to head into a recession later in the year as the lagged effects of higher interest rates take a deeper hold. Fed economists had forecast subdued growth, with risks of a recession, prior to the collapses of Silicon Valley Bank and Signature Bank.
For consumers, the effects of last month’s turbulence in the banking industry have been limited so far. Consumer sentiment tracked by the University of Michigan worsened slightly in March during the bank failures, but it had already shown signs of deteriorating before then.
The latest consumer sentiment reading, released Friday morning, showed that sentiment held steady in April despite the banking crisis, but that higher gas prices helped push up year-ahead inflation expectations by a full percentage point, rising from 3.6% in March to 4.6% in April.
“On net, consumers did not perceive material changes in the economic environment in April,” Joanne Hsu, director of the surveys of consumers at the University of Michigan, said in a news release.
“Consumers are expecting a downturn, they’re not feeling as dismal as they were last summer, but they’re waiting for the other shoe to drop,” Hsu told Bloomberg TV in an interview Friday morning.
This story has been updated with context and more details.
At the start of the year, economists and corporate leaders expressed optimism that global economic growth might not slow down as much asthey had feared. Positive developments included China’s reopening, signs of resilience in Europe and falling energy prices.
But a crisis in the banking sector that emerged last monthhas changed the calculus. The International Monetary Fund downgraded its forecasts for the global economy Tuesday, noting “the recent increase in financial market volatility.”
The IMF now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. Its estimate in January had been for 2.9% growth this year.
“Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the organization said in its latest report.
Fears about the economicoutlook have increased following the failures in March of Silicon Valley Bank and Signature Bank, two regional US lenders, and the loss of confidence in the much-larger Credit Suisse
(CS), which was sold to rival UBS in a government-backed rescuedeal.
Already, the global economy was grappling with the consequences of high and persistent inflation, the rapid rise in interest rates to fight it, elevated debt levels and Russia’s war in Ukraine.
Now, concerns about the health of the banking industry join the list.
“These forces are now overlaid by, and interacting with, new financial stability concerns,” the IMF said, noting that policymakers trying to tame inflation while averting a “hard landing,” or a painful recession, “may face difficult trade-offs.”
Global inflation, which the IMF said was proving “much stickier than anticipated,” is expected to fall from 8.7% in 2022 to 7% this year and to 4.9% in 2024.
Investors are looking for additional pockets of vulnerability in the financial sector. Meanwhile, lenders may turn more conservative to preserve cash they may need to deal with an unpredictable environment.
That would make it harder for businesses and households to access loans, weighing on economic output over time.
“Financial conditions have tightened, which is likely to entail lower lending and activity if they persist,” said the IMF, which hosts its spring meeting alongside the World Bank this week.
If another shock to the world’s financial system results in a “sharp” deterioration in financial conditions, global growth could slow to 1% this year, the IMF warned. That would mean “near-stagnant income per capita.” The groupput the probably of this happening at about 15%.
The IMF acknowledged forecasting was difficult in this climate. The “fog around the world economic outlook has thickened,” it said.
And it warned that weak growth would likely persist for years. Looking ahead to 2028, global growth is estimated at 3%, the lowest medium-term forecast since 1990.
The IMF said this sluggishness was attributable in part to scarring from the pandemic, aging workforces and geopolitical fragmentation, pointing to Britain’s decision to leave the European Union, economic tensions between the United States and China and Russia’s invasion of Ukraine.
Interest rates in advanced economies are likely to revert to their pre-pandemic levels once the current spell of high inflation has passed, the IMF also said.
The body’s forecast for global growth this year is now closer to that of the World Bank.David Malpass, the outgoing World Bank president, told reporters Monday that the group now saw a 2% expansion in output in 2023, up from 1.7% predicted in January, Reuters has reported.
In a separate report published Tuesday, the IMF said that while the rapid increase in interest rates was straining banks and other financial firms, there were fundamental differences from the 2008 global financial crisis.
Banks now have much more capital to be able to withstand shocks. They also have curbed risky lending due to stricter regulations.
Instead, the IMF pointed to similarities between the latest banking turmoil and the US savings and loan crisis in the 1980s, when trouble at smaller institutions hurt confidence in the broader financial system.
So far, investors are “pricing a fairly optimistic scenario,” the IMF noted in a blog based on the report, adding that access to credit was actually greater now than it had been in October.
“While market participants see recession probabilities as high, they also expect the depth of the recession to be modest,” the IMF said.
Yet those expectations could be quickly upended. If inflation rises further, for example, investors could judge that interest rates will stay higher for longer, the group wrote in the blog.
“Stresses could then reemerge in the financial system,” it noted.
That bolsters the need for decisive action by policymakers, the IMF said. It called for gaps in supervision and regulation to “be addressed at once,” citing the need in many countries for stronger plans to wind down failed banks and forimprovements to deposit insurance programs.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN
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In an unusual coincidence, the US jobs report was released on a holiday Friday — meaning stock markets were closed when the closely-watched economic data came out.
It was the first monthly payroll report since Silicon Valley Bank and Signature Bank collapsed. It also marked a full year of jobs data since the Federal Reserve began hiking interest rates in March 2022.
While inflation has come down and other economic data point to a cooling economy, the labor market has remained remarkably resilient.
Investors have had a long weekend to chew over the details of the report and will likely skip the typical gut-reaction to headline numbers.
What happened: The US economy added 236,000 jobs in March, showing that hiring remained robust though the pace was slower than in previous months. The unemployment rate currently stands at 3.5%.
Wages increased by 0.3% on the month and 4.2% from a year ago. The three-month wage growth average has dropped to 3.8%. That’s moving closer to what Fed policymakers “believe to be in line with stable wage and inflation expectations,” wrote Joseph Brusuelas, chief economist at RSM in a note.
“That wage data tends to suggest that the risk of a wage price spiral is easing and that will create space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability,” he added.
The March jobs report was the last before the Fed’s next policy meeting and announcement in early May. The labor market is cooling but not rapidly or significantly, and further rate hikes can’t be ruled out.
At the same time Wall Street is beginning to see bad news as bad news. A slowing economy could mean a recession is forthcoming.
Markets are still largely expecting the Fed to raise rates by another quarter point. So how will they react to Friday’s report?
Before the Bell spoke with Michael Arone, State Street Global Advisors chief investment strategist, to find out.
This interview has been edited for length and clarity.
Before the Bell: How do you expect markets to react to this report on Monday?
Michael Arone: I think that this has been a nice counterbalance to the weaker labor data earlier last week and all the recession fears. This data suggests that the economy is still in pretty good shape, 10-year Treasury yields increased on Friday indicating there’s less fear about an imminent recession.
There’s this delicate balance between slower job growth and a weaker labor market without economic devastation. I think this report helps that.
As it relates to the stock market, I would expect the cyclical sectors to do well — your industrials, your materials, your energy companies. If interest rates are rising, that’s going to weigh on growth stocks — technology and communication services sectors, for example. Less recession fears will mean investors won’t be as defensively positioned in classic staples like healthcare and utilities.
Could this lead to a reverse in the current trend where tech companies are bolstering markets?
Yes, exactly. It’s difficult to make too much out of any singular data point, but I think this report will hopefully lead to broader participation in the stock market. If those recession fears begin to abate somewhat, and investors recognize that recession isn’t imminent, there will be more investment.
What else are investors looking at in this report?
We’ve seen weakness in the interest rate sensitive parts of the market — areas that are typically the first to weaken as the economy slows down. So things like manufacturing, things like construction. That’s where the weakness in this jobs report is. And the services areas continue to remain strong. That’s where the shortage of qualified skilled workers remains. I think that you’re seeing continued job strength in those areas.
What does this mean for this week’s inflation reports? It seems like the jobs report just pushed the tension forward.
it did. I expect that inflation figures will continue to decelerate — or grow at a slower rate. But I do think that the sticky part of inflation continues to be on the wage front. And so I think, if anything, this helps alleviate some of those inflation pressures, but we’ll see how it flows through into the CPI report next week. And also the PPI report.
Is the Federal Reserve addressing real structural changes to the labor market?
The Fed was confused in February 2020 when we were in full employment and there was no inflation. They’re equally confused today, after raising rates from zero to 5%, that we haven’t had more job losses.
I’m not sure why, but from my perspective, the Fed hasn’t taken into consideration the structural changes in the labor force, and they’re still confused by it. I think the risk here is that they’ll continue to focus on raising rates to stabilize prices, perhaps underestimating the kind of structural changes in the labor economy that haven’t resulted in the type of weakness that they’ve been anticipating. I think that’s a risk for the economy and markets.
A few weeks ago, Before the Bell wrote about big problems brewing in the $20 trillion commercial real estate industry.
After decades of thriving growth bolstered by low interest rates and easy credit, commercial real estate has hit a wall. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates and changes in where people work and how they shop. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry.
Recent banking stress will likely add to those woes. Lending to commercial real estate developers and managers largely comes from small and mid-sized banks, where the pressure on liquidity has been most severe. About 80% of all bank loans for commercial properties come from regional banks, according to Goldman Sachs economists.
Since then, things have gotten worse, CNN’s Julia Horowitz reports.
In a worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession.
“We’re watching it pretty closely,” said Michael Reynolds, vice president of investment strategy at Glenmede, a wealth manager. While he doesn’t expect office loans to become a problem for all banks, “one or two” institutions could find themselves “caught offside.”
Signs of strain are increasing. The proportion of commercial office mortgages where borrowers are behind with payments is rising, according to Trepp, which provides data on commercial real estate.
High-profile defaults are making headlines. Earlier this year, a landlord owned by asset manager PIMCO defaulted on nearly $2 billion in debt for seven office buildings in San Francisco, New York City, Boston and Jersey City.
Tech stocks led market losses in 2022, but seemed to rebound quickly at the start of this year. So as we enter earnings season, what should we expect from Big Tech?
Daniel Ives, an analyst at Wedbush Securities, says that he has high hopes.
“Tech stocks have held up very well so far in 2023 and comfortably outpaced the overall market as we believe the tech sector has become the new ‘safety trade’ in this overall uncertain market,” he wrote in a note on Sunday evening.
Even the recent spate of layoffs in Big Tech has upside, he wrote.
“Significant cost cutting underway in the Valley led by Meta, Microsoft, Amazon, Google and others, conservative guidance already given in the January earnings season ‘rip the band- aid off moment’, and tech fundamentals that are holding up in a shaky macro[environment] are setting up for a green light for tech stocks.”
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN
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There’s been a seismic shift in investor perspective: Bad news is no longer good news.
For the past year, Wall Street has hoped for cool monthly economic data that would encourage the Federal Reserve to haltits aggressive pace of interest rate hikes to tame inflation.
But at its March meeting — just days after a series of bank failures raised concerns about the economy’s stability — the central bank signaled that it plans to pause raising rates sometime this year. With an end to interest rate hikes in sight, investors have stopped attempting to guess the Fed’s next move and have turned instead to the health of the economy.
This means that,whereas softening economic data used to signal good news — that the Fed could potentially stop raising rates — now, cooling economic prints simply suggest the economy is weakening. That makes investors worried that the slowing economy could fall into a recession.
What happened last week? Markets teetered after a slew of economic reports signaled that the red-hot labor market is finally cooling (more on that later), flashing warning signals across Wall Street.
Investors accordingly shed high-growth, large-cap stocks that have surged recently to rush into defensive stocks in industries like health care and consumer staples.
While tech stocks recovered somewhat by the end of the short trading week — markets were closed in observance of Good Friday — the Nasdaq Composite still slid 1.1%. The broad-based S&P 500 fell 0.1% and the blue-chip Dow Jones Industrial Average gained 0.6%.
What does this mean for markets? Now that Wall Street is in “bad news is bad news and good news is good news” mode, it will be looking for signs that the economy remains resilient.
What hasn’t changed is that investors still want to see cooling inflation data. While the central bank has signaled that it will pause hiking rates this year, its actions so far haveonly somewhat stabilized prices. The Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, rose 5% for the 12 months ended in February — far above its 2% inflation target.
Moreover, Wall Street might be overly optimistic about how the Fed will act going forward: Some investors expect the central bank to cut rates several times this year, even though the central bank indicated last month that it does not intend tolower rates in 2023.
It’s unclear how markets will react if the Fed doesn’t cut rates this year. But there likely won’t be a notable rally unless the central bank pivots or at least indicates that it plans to soon, said George Cipolloni, portfolio manager at Penn Mutual Asset Management.
Commentary that’s hawkish or reveals inflation worries could hurt markets, he adds. “It keeps that boiling point and that temperature a little high.”
What comes next? The Fed holds its next meeting in early May. Before then, it will have to parse through several economic reports to get a sense of how the economy is doing, and what it will be able to handle. Markets currently expect the Fed to raise interest rates by a quarter point, accordingto the CME FedWatch tool.
The labor market appears to be cooling somewhat, at least according to the slew of data released last week. But it’s still far too early to assume that the job market has lost its strength.
President Joe Biden said in a statement Friday that the March data is “a good jobs report for hard-working Americans.”
The March jobs report revealed that US employers added a lower-than-expected 236,000 jobs last month. Economists expected a net gain of 239,000 jobs for the month, according to Refinitiv.
The unemployment rate dropped to 3.5%, according to the Bureau of Labor Statistics. That’s below expectations of holding steady at3.6%.
The jobs report was also the first one in 12 months that came in below expectations.
But that doesn’t mean that the job market isn’t strong anymore.
“The labor market is showing signs of cooling off, but it remains very tight,” Bank of America researchers wrote in a note Friday.
Still, other data released last week help make the case that cracks are finally starting to form in the labor market. The Job Openings and Labor Turnover Survey for February revealed last week that the number of available jobs in the United States tumbled to its lowest level since May 2021. ADP’s private-sector payroll report fell far short of expectations.
What this means for the Fed is that the cooldown in the latest jobs report likely won’t be enough for the central bank to pause rates at its next meeting.
“The Fed will more than likely raise rates in May as the labor market continues to defy the cumulative effects of the rate hikes that began over a year ago,” said Quincy Krosby, chief global strategist at LPL Financial.
A slowing economy may lead to a decline in sales of pricey beef cuts, but don’t look for any bargains just yet.
Market forces that have been building for a long time, including devastating droughts, will likely keep hamburger and steak prices steady — and relatively expensive.
In part, that’s because there’s less beef. A contraction in beef supplies “has been coming for a while,” said David Anderson, a professor in Texas A&M University’s agricultural economics department. “We’re starting to see the effects that we knew were going to be coming for a couple of years.”
When extreme drought hit the United States in recent years, farmers started to rapidly sell cattle because the dry conditions, along with higher feed costs, made it expensive or impossible to maintain their herds. That wave of sales, particularly of cows used to breed, has led to supply constraints this year.
“Tightening cattle supplies are expected to cause a significant year-over-year decrease in beef production, the first decline since 2015,” a March market outlook from the US Department of Agriculture noted.
“If we produce less beef, the pressure’s on for higher prices,” said Anderson. The “big unknown is going to be consumer demand.”
The beef supply tends to grow and shrink in roughly 10-year cycles, said Lance Zimmerman, senior beef analyst for the North American market with Rabobank. When supply shrinks, consumer prices tend to go up. But with people nervous about the economy, this year’s more complicated.
“The biggest thing that looms large, in all of our minds as market analysts right now, is do we have recession risk that we need to price into the market for next year,” Zimmerman said. “If that’s the case, beef prices may be steadier.”
Tyson
(TSN), which processes about a fifth of the country’s beef, poultry and pork, noted a sales dip in beef in the three months ending December 31, 2022.
Beef sales “were down 5.6% compared to record high sales in the prior year,” said CFO John Tyson during a February analyst call discussing the quarterly results, noting that prices were down in the quarter due to “softer domestic demand for beef.” The company said that it expects its beef margins to fall this year because of the smaller domestic supply.
“Retailers through last year continued to push price on the consumer,” said Adam Speck, senior livestock analyst at Gro Intelligence. Now they have to answer a question as they plan for the year: Will demand be high enough to warrant raising prices even more?
“The answer is probably no,” said Speck. That may not be a huge relief, as beef prices are still relatively high. In 2022, fresh choice beef retailed for $7.59 per pound, according to March data from the USDA. That’s up from $7.25 per pound the previous year.
Stores may try to test the waters during barbecue season.
In the spring, “we’re at the bottom of our traditional seasonal demand,” said Bernt Nelson, an economist with American Farm Bureau Federation. Demand for beef typically dips after the holidays, and picks up when people fire up their grills in the summer, he noted. If demand remains strong, “we may see some higher beef prices,” towards the fall and later, Bernt said.
