U.K. inflation accelerated in October, reaching a fresh four-decade high, as higher wholesale energy prices fed through households’ utility bills.
The U.K.’s Office for National Statistics said Wednesday that consumer prices were 11.1% higher in October than a year earlier, more than the 10.1% rise registered in September.
This is the highest rate of inflation since February 1982, and beats the 10.9% consensus forecast from economists in a poll by The Wall Street Journal.
The jump in inflation was mainly due to higher energy prices, which increased for most households even as the U.K. government implemented an energy price cap from Oct. 1. Electricity prices rose 65.7% on year, up from the 54% increase registered in September. Gas prices soared 128.9% compared to a year earlier, outstripping the 95.7% the prior month.
The core price index–which excludes volatile categories such as food and energy–increased 6.5% in October on year, unchanged from September.
The Bank of England expects inflation to remain around 11% in the fourth quarter, and to moderate slightly toward 10% in 2023’s first quarter.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
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.
The numbers: Consumer sentiment soured in November, hitting its lowest level since July as Americans contended with continued inflation and a worsening economic outlook.
The University of Michigan’s gauge of the U.S. consumer’s outlook fell 5.2 index points from 59.9 in October.
Economists were expecting a reading of 59.5, according to a Wall Street Journal poll.
Inflation expectations for the next year rose to 5.1% from 5% in the prior month, while five-year inflation expectations rose to 3% from 2.9% in October.
Big picture: Inflation eased somewhat in October, but prices for a typical basket of consumer goods are still rising a historically rapid pace even as rising interests rates are weighing on many sectors of the economy.
Fears of a coming recession also weighed on Americans’ confidence about the economy.
“Declines in sentiment were observed across the distribution of age, education, income, geography, and political affiliation, showing that the recent improvements in sentiment were tentative,” wrote Joanne Hsu, director of the survey, in a statement. “Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election.”
Key details: A gauge of consumer’s views of current conditions fell in November to 57.8 from 65.6 in October, while an indicator of expectations for the next six months fell to 52.7 from 56.2 last month.
Market reaction: U.S. stocks were trading mixed Friday morning, with the S&P 500 SPX, +0.92%
posting gains and the Dow Jones Industrial Average DJIA, +0.10%
edging lower.
That means a full day of trading for stocks, which appear poised to book a robust week of gains, despite continued fears of a potential U.S. economic recession as the Federal Reserve works to tame stubbornly high costs of living.
While Friday marks the start of a three-day weekend for the bond market, Treasury yields already have climbed dramatically this year with the Fed’s sharp rate hikes. The central bank aims to temper demand for goods and services by making borrowing costs more restrictive.
Consumers may feel certain effects of inflation in their everyday lives, like when they go to the grocery store. But it can also impact our savings and investments. Here’s what to know.
The benchmark 10-year Treasury rate TMUBMUSD10Y, 3.819%
fell to about 3.8% on Thursday, but was up from a 1.3% low last December. Bond yields move in the opposite direction of prices.
The fresh rally on Wall Street followed the consumer-price index reading for October showing a 7.7% annual rate, down from a 9.1% high in June. The Dow remains down more than 8% from its January peak, the S&P 500 is 17.5% lower and the Nasdaq is 31% below its last record close, according to Dow Jones Market Data.
Walt Disney Co. wrapped up its fiscal year with record sales and its best revenue growth in more than 25 years, but executives predicted much slower sales increases in the year ahead while missing expectations for fourth-quarter earnings and sales, sending shares down more than 10% Tuesday afternoon.
Disney DIS, -0.53% reported fiscal fourth-quarter net income of $162 million, or 9 cents a share, on sales of $20.15 billion, up from $18.53 billion a year ago but more than $1 billion short of expectations. After adjusting for amortization and certain investment changes, Disney reported earnings of 30 cents a share, down from 37 cents a share a year ago.
Analysts surveyed by FactSet had on average expected adjusted earnings of 56 cents a share on revenue of $21.27 billion.
Disney executives blamed a number of factors for the revenue miss, including lower content sales because they had fewer theatrical films on the calendar; underperformance of the parks and media divisions; and seasonality of its fourth quarter, which tends to be the lowest for margins.
For the full fiscal year, Disney reported record sales of $82.72 billion, more than 22% higher than the previous year, the strongest annual sales growth for Disney since the 1996 fiscal year, according to FactSet records. Profit grew to $3.19 billion from $2.02 billion the year before, but is nowhere close to prepandemic Disney earnings, which hit eight figures in both 2019 and 2018.
In a conference call Tuesday afternoon, though, Chief Financial Officer Christine McCarthy suggested that revenue and profit growth will slow to single digits on a percentage basis in the current fiscal year, missing Wall Street’s expectations. Analysts’ average revenue projection for Disney in the new fiscal year suggested revenue growth of about 13.9% and operating-income growth of roughly 17.4%, according to FactSet.
“Putting this all together, assuming we do not see a meaningful shift in the macroeconomic climate, we currently expect total company fiscal 2023 revenue and segment operating income to both grow at a high-single-digit percentage rate versus fiscal 2022,” McCarthy said.
Disney shares initially fell more than 6% in after-hours trading following the release of the results, but plunged anew to a decline of more than 10% after closing with a 0.5% decline at $99.94.
Disney has been helped by the return of visitors to its theme parks in the third year of the COVID-19 pandemic, as well as a recovering movie business. The main attraction for investors, though, has been growing Disney’s streaming efforts — total streaming subscribers topped Netflix Inc.’s NFLX, +1.88%
subscriber total last quarter, and grew its lead in Tuesday’s report, with Disney adding 12.1 million net new subscribers, while analysts on average expected 10.4 million.
Disney’s streaming growth has hampered its profitability, however, as the company spends to add content to its streaming services in order to compete with Netflix. Those days appear to be coming to an end as Disney struggles with profit.
“The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate,” Disney Chief Executive Bob Chapek said in a statement announcing the results. “By realigning our costs and realizing the benefits of price increases and our Disney+ ad-supported tier coming December 8, we believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future.”
Disney’s largest business segment, media and entertainment distribution, reported sales of $12.73 billion in the quarter, down from $13.08 billion a year ago; analysts on average predicted $13.86 billion. Direct-to-consumer sales, which includes streaming services as well as some international products, hauled in $4.9 billion, compared with analysts’ forecast of $5.4 billion on average.
The trajectory of Disney’ meteoric rise as video-streaming market leader is likely to continue once its advertising-supported service debuts in the U.S. next month, according to Wall Street analysts, after Netflix launched its rival offering on Nov. 3. Disney has leaned heavily on its stable of mega-franchises such as “Star Wars” and the Marvel Cinematic Universe to outpace Netflix Inc. NFLX, +1.88%,
Apple Inc. AAPL, +0.42%,
Comcast Corp. CMCSA, +0.95%,
Warner Bros. Discover Inc. WBD, -2.04%,
Amazon.com Inc. AMZN, -0.61%,
Paramount Global PARA, +1.28%
and others.
Disney’s television networks generated sales of $6.34 billion, while analysts’ average estimates called for $6.64 billion. Content sales and licensing, a category that includes Disney’s film business, registered revenue of $1.74 billion vs. analysts’ expectations of $2.08 billion.
The company’s signature theme parks and product sales business increased to $7.43 billion in revenue from $5.45 billion a year ago. The average analyst estimate was $7.46 billion.
Shares of Disney are down 35.5% this year, while the broader S&P 500 index SPX, +0.56%
has dropped 20%.
The numbers: The economy gained surprisingly strong 261,000 new jobs in October, underscoring the persistent strength of a labor market that the Federal Reserve worries will exacerbate high inflation.
Economists polled by The Wall Street Journal had forecast 205,000 new jobs.
The unemployment rate, meanwhile, rose to 3.7% from 3.5%, the government said Friday, as more people lost jobs and the size of the labor force shrank a little bit.
Fed Chairman Jerome Powell said on Wednesday the labor market is “out of balance” because there’s too many job openings and too few people to fill them.
Fed officials worry the labor shortage is driving up wages and making it harder for them to reduce inflation back to precrisis levels of 2% or so. The cost of living has risen 8.2% in the past year, one of the highest increases since the early 1980s.
Layoffs and unemployment are likely to increase, however, if the Fed keeps raising U.S. interest rates as expected. The central bank could push a key short-term rate to as high as 5% by next year from near zero just nine months ago.
Rising interest rates slow the economy and sometimes trigger recessions. Many economists predict a downturn is likely by next year. Powell himself admitted the odds of avoiding a recession have fallen due to persistently high inflation.
In October, wages grew 0.4%. Average hourly pay rose slightly in September to $32.58, lowering the increase over the past year to 4.7% from 5%.
It’s the first time in almost a year that the rate of wage growth has dropped below 5%. Before the pandemic, they were rising around 3% a year.
Another potential pressure valve for the economy showed little progress, however. The so-called participation rate — or share of working-age people in the labor force — dipped to 62.2% from 62.3%.
Big picture: The economy is slowing — almost every major indicator is much softer compared to earlier in the year.
The labor market is one of the few exceptions.
Normally that’s a good thing, but the Fed thinks the the labor market is too strong for its own good. The series of rate hikes undertaken by the central bank is bound to slow hiring even further and cause unemployment to rise in the months ahead.
The potential saving grace, Powell and some other economists say? Businesses have struggled so hard to hire people amid a labor shortage that they might not lay off as many people as they usually do when the economy goes sour.
Market reaction: The Dow Jones Industrial Average DJIA, -0.46%
and S&P 500 SPX, -1.06%
were set to open lower in Friday trades. The yield on the 10-year Treasury note TMUBMUSD10Y, 4.158%
rose to 4.19%.
New orders in Germany’s manufacturing sector fell sharply and by more than forecast in September reflecting weakening external demand for goods in a context of rising input costs and high energy prices.
Factory orders fell 4.0% on month, data from the German statistics office Destatis showed Friday. The decrease was considerably steeper than forecast by economists polled by The Wall Street Journal, who expected orders to fall by 0.5%.
The German statistics office revised new orders data for August. Following the revision, orders fell 2.0% on month, instead the 2.4% decline first estimates showed.
Domestic orders increased by 0.5% while foreign orders were down 7.0% on month. New orders from the eurozone decreased 8.0%, while new orders from other countries fell by 6.3% compared with August, Destatis’ data showed.
The producers of capital goods recorded a decrease of 6.0% month-on-month and producers of intermediate goods saw a fall in new orders of 3.4%. Regarding consumer goods, orders rose by 7.2% on month, Destatis said.
Compared with September 2021, new orders fell by 10.8%. The volume of new orders in September 2021 was exceptionally high, Destatis noted.
The Federal Reserve still has a chance to meet both of its main goals — strong economic growth and stable prices — but time is running out to achieve a soft landing.
The problem is that Fed officials are fixated on raising interest rates FF00, +0.00%
several more times, including another supersize increase at their meeting Tuesday and Wednesday. They don’t seem to notice that inflation is already retreating significantly, while growth is dangerously close to stalling out.
They have a blind spot because they are looking at the past.
Fed officials ought to reach out to another government agency that has had remarkable success in achieving soft landings: The National Aeronautics and Space Administration.
NASA’s scientists know something the Fed has forgotten: It takes a long time to send and receive messages from space, so they need to account for those delays when sending instructions to their spacecraft so they can land safely on Mars, or orbit Saturn or the moons of Jupiter.
Compounding errors
It’s the same way with the economy. The signals that the Fed receives from the economy are often delayed, sometimes by months. Unfortunately, one of the main signals the Fed is relying upon right now to decide how much to raise interest rates is delayed by a year or more.
I’m talking about inflation in the price of putting a roof over our heads. Shelter prices are now the leading contributor to increases in the consumer price index (CPI) and the personal consumption expenditure (PCE) price index. But because of the way the CPI for shelter is constructed — for very good reasons — the inflation reported today reflects conditions as they were 12 to 18 months ago.
The error is compounded because shelter prices are by far the largest component of the CPI, at more than 30%.
The Fed is disappointed that inflation hasn’t declined more since it began raising interest rates in March, but how could it when the signals about shelter prices were sent last summer and fall, long before the housing market began to cool in response to higher interest rates TMUBMUSD10Y, 4.049%
and the reductions in the Fed’s holdings of mortgage-backed securities?
According to real-time data, shelter prices are no longer rising at a near-10% annual rate as the CPI and PCE price index claim. Growth in rents and house prices has slowed since the first rate hikes in March. House prices are actually falling in most regions of the country, and private-sector measures of rents show that landlords are now dropping rents in many cities.
Just like a radio signal from Jupiter, it takes time for that message to be received by the CPI. It will be received and incorporated into the CPI eventually, but by then it may be too late for the Fed to react. The Fed might crash the spacecraft because it mistakenly believes the messages it gets are in real time.
Growth is slowing
The Fed’s blind spot puts the economy in peril. Recent data show that growth is naturally slowing from the breakneck pace following the pandemic shutdowns but also from the Fed’s relentless squeeze on financial conditions.
It’s very hard to argue that the economy is still overheating. Domestic demand has stalled out since the spring. Final sales to domestic purchasers — which covers consumer spending and business investment — has grown at a 0.3% annual pace over the past two quarters.
Real disposable incomes are growing at less than 1% annualized. Household wealth has fallen off a cliff, with the stock market SPX, -0.41%
DJIA, -0.24%
in a bear market and home equity beginning to fall. Wage growth is beginning to slow. Supply chains are improving.
And the CPI excluding shelter has gone from rising at a 14% annual pace in the spring when the tightening began, to falling at a 1% annual pace over the past three months. Rate hikes are working!
This benign picture on inflation may not persist. Inflation is still worrisome, particularly for essentials such as food, health care, new vehicles and utilities.
But the Fed should adopt a more balanced view of the economy, no matter what the signals from the past say. No one wants a hard landing.
The Chicago Business Barometer, also known as the Chicago PMI, dropped to 45.2 in October from 45.7 in the prior month, according to data released Monday.
Economists polled by the Wall Street Journal forecast a 47 reading.
Readings below 50 indicate contraction territory.
The index is produced by the ISM-Chicago with MNI. It is released to subscribers three minutes before its release to the public at 9:45 am Eastern.
The Chicago PMI is the last of the regional manufacturing indices before the national factory data for October is released on Tuesday.
Economist polled by the Wall Street Journal expect the closely-watched Institute for Supply Management’s factory index to barely remain above the 50 breakeven level in October.
Inflation in the eurozone accelerated in October, reaching double digits, with increasing signs that price pressures are broadening beyond food and energy.
The consumer price index–a measure of what consumers pay for goods and services–increased 10.7% in October on year, accelerating from 9.9% in September, preliminary data from the European Union’s statistics agency Eurostat showed Monday.
Economists polled by The Wall Street Journal expected inflation to come in at 10.0%.
The acceleration in inflation was led by higher energy prices, which rose 41.9% on year in October compared with the 40.7% gain registered in September. Food, alcohol and tobacco prices also gained pace, increasing 13.1% on year from an 11.8% rise in September. Price of non-energy industrial goods and of services also accelerated, the data showed.
The core consumer price index–which excludes the more volatile categories of food and energy–increased 5% on year in October, up from 4.8% in September.
The European Central Bank raised interest rates by 75 basis points for the second time in a row on Thursday, but signaled mounting concerns about economic growth in the region.
Data released Friday showed the eurozone economy expanded by 0.2% in the third quarter, beating economists’ expectations but slowing from the 0.8% expansion registered in the previous three-month period.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
The numbers: Consumer sentiment improved slightly in October to 59.9, though Americans perceptions of the economy remained historically negative as a weak stock market and ongoing inflation weighed on their finances.
The University of Michigan’s gauge of consumer attitudes added 1.3 index points from 58.6 in September, and was up slightly from an initial reading of 59.8 earlier in the month.
Economists were expecting at a reading of 59.8, according to a Wall Street Journal poll.
Big picture: While the rate of inflation is no longer worsening, steady price increases for key items like food and shelter continue to weigh on the American mood.
“With sentiment sitting only 10 index points above the all-time low reached in June, the recent news of a slowdown in consumer spending in the third quarter comes as no surprise,’ wrote the survey’s director, Joanne Hsu, in a Friday note.
“While lower-income consumers reported sizable gains in overall sentiment, consumers with considerable stock market and housing wealth exhibited notable declines in sentiment, weighed down by tumult in those markets,” she added. “Given consumers’ ongoing unease over the economy, most notably this month among higher-income consumers, any continued weakening in incomes or wealth could lead to further pullbacks in spending that would reinforce other risks of recession.”
Key details: A gauge of consumer’s views of current conditions rose in October to 65.6 from 59.7 in September, while an indicator of expectations for the next six months fell to 56.2 from 58 last month.
Market reaction: U.S. stocks were trading mixed Friday morning, with the Dow Jones Industrial Average DJIA, +2.59%
TK and the S&P 500 TK SPX, +2.46%.
Heineken NV shares fell Wednesday after it said organic beer volumes rose in the third quarter by 8.9%, missing market consensus expectations of 12% as taken from its website, and that its outlook was cautious.
HEIO, -9.19%
said said that the weaker than expected results were driven by low-single-digit volume growth in Africa, the Middle East, Europe and the Americas, though the Asia-Pacific region delivered a strong recovery from pandemic-related restrictions with total beer volume growth of 89.6%.
Net revenue, which excludes excise tax expenses–rose to 7.79 billion euros ($7.76 billion) in the quarter from EUR6.03 billion last year. A company-compiled consensus forecast had seen net revenue at EUR7.88 billion.
In the nine-month period, net revenue rose 23% to EUR21.27 billion while net profit fell to EUR2.2 billion from EUR3.03 billion. Net profit last year was boosted by an exceptional gain of EUR1.27 billion from the revaluation of a stake in United Breweries in India
The company backed its guidance for 2022 of a stable-to-modest sequential improvement in adjusted operating profit margin, but didn’t reiterate its previously provided 2023 guidance of adjusted operating profit organic growth in the range of mid- to high-single digits.
“We increasingly see reasons to be cautious on the macroeconomic outlook, including some signs of softness in consumer demand. We remain vigilant and confident in our EverGreen strategy,” Chairman and Chief Executive Dolf van den Brink said.
The company said it maintains its efforts to offset input cost inflation with pricing.
Write to Dominic Chopping at dominic.chopping@wsj.com
Business confidence in Germany fell slightly in October, remaining at a very low level, as companies expect a challenging winter due to the energy crisis.
The Ifo business-climate index fell to 84.3 points in October from a revised reading of 84.4 points in September, data from the Ifo Institute showed Tuesday. This is its lowest value since May 2020. Economists polled by The Wall Street Journal had expected the index to come in at 83.6.
“The German economy is facing a difficult winter,” Ifo President Clemens Fuest said. Companies were less satisfied with their current business, while their expectations improved, he said.
The index of the current situation fell to 94.1 in October from 94.5 in September, while the gauge assessing companies’ expectations rose to 75.6 from 75.3.
The Ifo index is based on a poll of about 9,000 companies in manufacturing, services, trade and construction. The decline in confidence is affecting mainly manufacturing and construction, the report shows.
Might the bear market’s losses at its recent low have gotten so bad that it was actually good news?
Some eager stock bulls I monitor are advancing this convoluted rationale. The outline of their argument is that when things get bad enough, good times must be just around the corner.
But their argument tells us more about market sentiment than its prospects.
At the market’s recent closing low, the S&P 500 SPX, +1.19%
had dropped to 25% below its early-January high. According to one version of this “so-bad-it’s-good” argument, the stock market in the past was a good buy whenever bear markets fell to that threshold. Following those prior occasions, they contend, the market was almost always higher in a year’s time.
This is not an argument you’d normally expect to see if the recent low represented the final low of the bear market. On the contrary, it fits squarely within the third of the five-stage progression of bear market grief, about which I have written before: denial, anger, bargaining, depression and acceptance.
With their argument, the bulls are trying to convince themselves that they can survive the bear market, rationalizing that the market will be higher in a year’s time. As Swiss-American psychiatrist Elisabeth Kübler-Ross put it when creating this five-stage scheme, the key feature of the bargaining stage is that it is a defense against feeling pain. It is far different than the depression and eventual acceptance that typically come later in a bear market.
Though not all bear markets progress through these five stages, most do, as I’ve written before. Odds are that we have two more stages to go through. That suggests that the market’s rally over the past couple of weeks does not represent the beginning of a major new bull market.
Numbers don’t add up
Further support for this bearish assessment comes from the discovery that the bulls’ argument is not supported historically. Only in relatively recent decades was the market reliably higher in a year’s time following occasions in which a bear market had reached the 25% pain threshold. It’s not a good sign that the bulls are basing their optimism on such a flimsy foundation.
Consider what I found upon analyzing the 21 bear markets since 1900 in the Ned Davis Research calendar in which the Dow Jones Industrial Average DJIA, +1.34%
fell at least 25%. I measured the market’s one-year return subsequent to the day on which each of these 21 bear markets first fell to that loss threshold. In seven of the 21 cases, or 33%, the market was lower in a year’s time.
That’s the identical percentage that applies to all days in the stock market over the past century, regardless of whether those days came during bull or bear markets. So, based on the magnitude of the bear market’s losses to date, there’s no reason to believe that the market’s odds of rising are any higher now than at any other time.
This doesn’t mean that there aren’t good arguments for why the market might rise. But the 25%-loss concept isn’t one of them.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
Economists polled by the Wall Street Journal had expected manufacturing to rise to 51.8 in October and for the service sector to rise to 49.7.
Key details: In the service sector, the downturn was fueled by the rising cost of living and tightening financial conditions.
New orders in the manufacturing sector fell back into contraction territory in October. Output remained resilient due to firms eating into backlogs of previously placed orders, S&P Global said.
While price pressures picked up a bit in the service sector, the pace of the gain in inflation in the manufacturing sector was the slowest in almost two years.
Big picture: Talk of a recession sometime in 2023 has picked up in the last week. Many economists are sounding more bearish on the outlook, especially since the Federal Reserve is now seen raising its benchmark rate to 5%. However, on Monday, economists at Goldman Sachs said that talk over a recession was overblown.
What S&P Global said: “The US economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“Although price pressures picked up slightly in the service sector due to high food, energy and staff costs, as well as rising borrowing costs, increased competitive forces meant average prices charged for services grew at only a fractionally faster rate. Combined with the easing of price pressures in the goods-producing sector, this adds to evidence that consumer price inflation should cool in coming months,” he added.
America’s high inflation rate will produce a 7% increase in the size of the standard deduction when workers file their taxes on their 2023 income, according to new inflation adjustments from the Internal Revenue Service.
It’s also going to pump up tax brackets by 7% as well, according to the annual inflation adjustments the IRS announced this week.
Many tax code provisions — but not all — are indexed for inflation, so the announcements are a recurring event. But when inflation is persistently clinging to four-decade highs, these annual adjustments carry extra significance.
“When inflation is persistently clinging to four-decade highs, these annual adjustments of approximately 7% for the standard deduction carry extra significance.”
Start with the standard deduction, which is what most people use instead of itemizing deductions.
The standard deduction for individuals and married people filing separately will be $13,850 for the 2023 tax year. That’s a $900 increase from the $12,950 standard deduction for the upcoming tax season.
For married couples filing jointly, the payout climbs to $27,700 for the 2023 tax year. That’s a $1,800 increase from the $25,900 standard deduction set for the upcoming tax year.
The increases in the marginal tax rates reflect the same 7% rise. For example, the 22% tax bracket for this year is over $41,775 for single filers and over $83,550 for married couples filing jointly. Next year, the same 22% bracket applies to incomes over $44,725 and over $89,450 for married couples filing jointly.
MarketWatch/IRS
“The changes seem to be much larger than previous years because inflation is running much higher than it has in previous decades,” said Alex Durante, economist at the Tax Foundation, a right-leaning tax think tank.
The IRS arrives at its inflation adjustments by averaging a slightly different inflation gauge, the so-called “chained Consumer Price Index” instead of the widely-watched Consumer Price Index, Durante noted. That’s an outcome of the Trump-era Tax Cuts and Jobs Act of 2017, he added.
“The reason they do this is because the regular CPI is thought to overstate inflation because it doesn’t take into account the substitution that shoppers can make as cost rise,” Durante said. Shoppers substitute when they swap a more expensive item for cheaper one, and research shows many Americans are using the tactic.
The IRS inflation adjustments come after September CPI data last week showed inflation of 8.2% year-over-year, slightly off from 8.3% in August. Also last week, the Social Security Administration said next year’s payments would include an 8.7% cost of living adjustment.
“The payout on the earned income tax credit — geared at low- and moderate-income working families who have been hit hard by red-hot inflation — is also increasing. ”
The payout on the earned income tax credit is also increasing. The maximum payout for a qualifying taxpayer with at least three qualifying children climbs to $7,430, up from $6,935 for this tax year. The longstanding credit is geared at low- and moderate-income working families who have been hit hard by red-hot inflation.
More than 60 provisions are slated for an increase inline with inflation, but many portions of the tax code are not indexed for inflation. Depending on the circumstances, the taxes or the tax breaks kick in sooner.
Capital gains tax rules one example. The IRS lets a taxpayer use capital losses to offset capital gains taxes. If losses exceed gains, the IRS allows a taxpayer to deduct up to $3,000 in excess loses. They can then carry the remainder of the capital loses to future tax years. It’s been more than four decades since lawmakers last set the limit, according to Durante.
“While more than 60 provisions are slated for an increase inline with inflation, many portions of the tax code are not indexed for inflation. They include capital gains tax. ”
Given the stock market’s rocky downward slide this year, many investors might welcome a fast-approaching tax break — even if it only enables a $3,000 deduction.
At the same time, a married couple selling their home can exclude the first $500,000 of the sale from capital gains taxation, and it’s $250,000 for a single filer. It’s been that way since the exclusion’s 1997 establishment.
The once white-hot housing market may be cooling, but many sellers may still be facing the point when taxes kick in. The median home listing was over $367,000 as of early October, according to Redfin RDFN, +2.29%.
The child tax credit is another example. After the payout to parents last year jumped to $3,600 for children under age 6 and $3,000 per child age 6 to 17, it’s back to a maximum $2,000. The credit’s refundable portion climbs from $1,500 to $1,600 during tax year 2023, the IRS notes.
Proponents of the boosted payouts and some Congressional Democrats want to revive the larger payments in negotiations tied to corporate taxes. The high costs of living are a strong reason to bring back the boosted credit, they say.
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.”
“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.
“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.
“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.”
The numbers: The U.S. federal budget deficit fell to $1.37 trillion in the just-ended fiscal year, the Treasury Department said Friday, half the amount of last year’s shortfall.
Key details: The Treasury said the deficit fell by $1.4 trillion in fiscal 2022, the largest one-year decrease on record. Surging tax receipts totaling $4.9 trillion helped cut the deficit, as did falling outlays.
Spending was $6.3 trillion for the fiscal year, a drop of 8.1%. That partly reflects reductions in COVID-related spending.
The deficit would have been lower had student loan cancelation costs not been included. President Joe Biden in August announced $10,000 in federal debt cancelation for those with incomes less than $125,000 a year, or households making less than $250,000. Those who received federal Pell Grants are eligible for extra forgiveness.
The loan-cancelation costs contributed to a 562% increase in the monthly deficit for September. The government’s fiscal year runs October through September.
Big picture: Treasury Secretary Janet Yellen said in a statement that the report “provides further evidence of our historic economic recovery, driven by our vaccination effort and the American Rescue Plan.”
Meanwhile, a budget watchdog said the figure was no cause for celebration.
“We borrowed $1.4 trillion last year. That is not an accomplishment — it’s a reminder of how precarious our fiscal situation remains,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
U.K. inflation accelerated slightly in September, returning to the four-decade high reached in July, amid further signs that price pressures are broadening beyond the more-volatile categories of food and energy.
The consumer-price index–which measures what people pay for goods and services–increased 10.1% in September on year, up from 9.9% in August, according to data from the U.K.’s Office for National Statistics published Wednesday.
Economists polled by The Wall Street Journal expected inflation to come in at 10.0%.
The rise in inflation was driven by higher food and non-alcoholic beverage prices, which increased by 14.5% on year compared with 13.1% in August. Meanwhile, the continued fall in the price of motor fuels made the largest downward contribution, the ONS said.
Core consumer prices–a measure that excludes the volatile categories of food and energy–accelerated to 6.5% in September from 6.3% in August, signaling that inflation pressures are broadening and remain strong.
Inflation quickened in categories such as clothing and footwear, to 8.5% from 7.6%, furniture and household goods, to 10.7% from 10.1%, and hotels and restaurants, to 9.7% from 8.7%.
“[Wednesday’s] release highlights the danger that underlying inflation remains strong even as the economy weakens,” Capital Economics’ chief U.K. economist Paul Dales said in a note.
Economists expect U.K. inflation to remain high in the months ahead, even as the government’s cap on household energy bills is likely to prevent it from rising further.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
