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By Xavier Fontdegloria
Switzerland’s National Bank on Thursday increased interest rates for a third consecutive time in as many meetings, but slowed the pace of rises as inflation pressures moderated.
The Swiss central bank increased its policy rate by 50 basis points, to 1.0%, after a larger increase of 75 basis points at its September meeting.
…
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The last 12 months was a year of fast-rising inflation, fast-rising interest rates and fast-rising questions about a future recession.
Prices went up while stock markets and savings account balances went down, leaving consumers and investors dizzy and their wallets hurting.
There may be more financial pain, that’s pretty sure — but it might not be as bad as feared, according to Vanguard’s look ahead to 2023.
The likely recession will not send jobless rates charging sharply higher, sticker shock will fade for the price of goods, and the rise in rent and mortgages will also ease, Vanguard said.
“On Tuesday, inflation data for November showed prices are continuing to cool. Analysts say that makes a 50-basis point increase, rather than a 75-basis-point increase, more likely.”
The good news: This opens up chances for stocks to rebound, the asset-manager added.
The outlook, released this week, comes as Americans are trying to guess what 2023 holds for their finances while they manage their holiday shopping budgets, and 2022 investments.
On Tuesday, inflation data for November showed prices are continuing to cool. From October to November, the cost of living nudged up 0.1%, lower than the 0.3% forecast, the Consumer Price Index showed. Year over year, the inflation rate receded to 7.1% from 7.7% in October, according to the CPI data.
On Wednesday, the Federal Reserve will announce its latest decision on interest rate increases. A 50-basis point increase is widely expected after four jumbo-sized 75-basis point hikes from the central bank.
Here’s one roadmap for what’s next, as far as Vanguard’s researchers and experts can see.
Inflation rates during 2022 climbed to four-decade highs. There have been signs of easing, such as smaller-than-expected price increases in October.
“As we step into 2023, early signs of a recovery in goods supply and softening demand could help balance supply and demand for consumption goods and bring prices lower,” the authors noted ahead of Tuesday’s CPI numbers.
But the cost and demand of services are going to prevent a quick fall, they noted. Signs of slowing price increases are already emerging in rents and mortgages, but they will take longer to ease than prices of consumer goods, the authors said.
That echoes the view from Treasury Secretary Janet Yellen, who said Sunday there will be “much lower inflation,” absent any unanticipated shocks to the economy.
But while hot inflation will cool, it will still be warm to the touch. The Fed says 2% inflation is its target goal; Vanguard sees 3% inflation by the end of 2023.
As “generationally high inflation” slowed economies across the world, the Fed and other central banks have countered with interest-rate increases to tame price increases. That “will ultimately succeed, but at a cost of a global recession in 2023,” according to Vanguard’s report. Vanguard sees a 90% chance of a recession in the United States by the end of next year.
Vanguard is hardly alone in the recession call, so the question is how bad could the big picture look?
In Vanguard’s view, it’s not so bad. “Households, businesses, and financial institutions are in a much better position to handle the eventual downturn, such that drawing parallels with the 1970s, 1980s, 2008, or 2020 seems misplaced,” the authors wrote.
For now, the jobless rate in a tight labor market is 3.7%, which is just a little above the lowest levels in five decades. That stands against the headline-grabbing list of companies where layoffs are mounting, notably in the tech sector.
When a recession, in all likelihood, lands next year, “unemployment may peak around 5%, a historically low rate for a recession,” the Vanguard outlook said. As interest rates climb, the job losses “should be most concentrated in the technology and real estate sectors, which were among the strongest beneficiaries of the zero-rate environment.”
The unemployment rate going from 3.7% to the 5% vicinity is “a sizable move,” Roger Aliaga-Díaz, Americas chief economist for Vanguard, said in a Monday press conference on the report. “But it is less dramatic of a rise than compared to past recessions perhaps.”
When interest rates go up, bond prices go down. So it’s been difficult for bonds with lower returns and “near-term pain” for investors this year, the Vanguard outlook said.
“However the bright side of higher rates is higher interest payments. These have led our return expectations for U.S. and international bonds to increase by more than twofold,” the report said.
Vanguard said U.S. bond return projections could be 4.1% – 5.1% annually over the next year versus its 1.4% – 2.4% return estimate last year. For U.S. stocks, the forecast could be 4.7% – 6.7% annually, while returns in emerging market equities could be between 7% and 9%.
On Tuesday morning, stock markets are soaring higher on the cooler than expected inflation data, igniting hopes of an end of year Santa Claus rally.
“‘There’s one silver lining of our outlook for a modest global recession. And it’s the clear silver lining of higher expected returns for investors.’”
Still, the Dow Jones Industrial Average
DJIA,
is down nearly 5% year to date. The S&P 500
SPX,
is off 14% in that time and for the Nasdaq Composite
COMP,
is down more than 26%.
When the market hits bottom is impossible to know, the outlook said — but it noted “valuations and yields are clearly more attractive than they were a year ago.”
“There’s one silver lining of our outlook for a modest global recession. And it’s the clear silver lining of higher expected returns for investors,” said Joseph Davis, Vanguard’s chief global economist.
“We’re long concerned that the low rate environment was both unsustainable and ultimately a tax and a headwind for savers and long term investors,” Davis said.
But even with all the turbulence this year, “we certainly are starting to see the dividends to higher real interest rates around the world in the higher projected returns that we anticipate for investors over the coming decade.”
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The numbers: The University of Michigan’s gauge of consumer sentiment rose to a preliminary December reading of 59.1 from a November reading of 56.8.
Economists polled by the Wall Street Journal had expected a December reading of 56.5.
Inflation expectations over the next year fell to 4.6% from 4.9% last month. It is the lowest since September 2021. Five-year inflation expectations remained steady at 3%.
Key details: A gauge of consumer’s views of current conditions rose to 60.2 in December from 58.8 in November, while an indicator of expectations for the next six months rose to 58.4 from 55.6 last month.
Big picture: Economists think falling gasoline prices are behind the improvement in confidence.
The national average retail price for a gallon of gas is now $3.33, down $1.69 from June, according to White House data.
Still, high inflation has consumers remain in a relatively dour mood. The index is only marginally above the record low of 50 in June. By comparison, the consumer sentiment index was 101 in February of 2020.
Looking ahead: “High prices coupled with ongoing aggressive rate hikes will be a headwind for consumers and sentiment going forward,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Market reaction: Stocks
DJIA,
SPX,
were higher on Friday on the back of hotter-than-expected wholesale inflation in November. The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.54%.
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The number: U.S. wholesale prices rose 0.3% in November, the Labor Department said Friday.
Economists polled by The Wall Street Journal has forecast a 0.2% gain.
This is the third straight 0.3% monthly gain in the PPI index. Inflation in October and September was also revised up from the prior estimate of a 0.2% gain.
The core producer price index, which excludes volatile food, energy and trade prices, also rose 0.3% in November, up from a 0.2% gain in the prior month.
The increase in producer prices over the past 12 months slowed to 7.4% gain from 8.1% in the prior month. This is down from the peak of 11.7% in March.
Over the past year, core prices rose 4.9%, down from 5.4% in October.
Key details: The cost of energy fell 3.3% in November after a 2.3% gain in the prior month.
Food prices jumped 3.3% after a 0.8% increase in the prior month.
The cost of trade services jumped 0.7% in November after two straight monthly declines.
Big picture: Although hotter than expected in November, inflation at the wholesale level is showing steady deceleration from the peak in March.
The market is more focused on consumer price inflation report, which will be released next Tuesday, one day before the Fed’s decision on interest rates.
Market reaction: Stock futures
DJIA,
turned lower on the upside surprise to the monthly gain. The yield on the 10-year Treasury note
TMUBMUSD10Y,
jumped to 3.5%.
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The numbers: The number of Americans who applied for unemployment benefits in early December rose slightly to 230,000, pointing to a slow but steady increase in layoffs as the U.S. economy slows.
Economists polled by the Wall Street Journal had forecast new claims to total 230,000 in the seven days ended Dec 3. The figures are seasonally adjusted.
The number of people applying for jobless benefits is one of the best barometers of whether the economy is getting better or worse. New unemployment filings have gradually risen from a 54-year low of 166,000 last spring , but they are still extremely low.
Economists predict layoffs will rise, however, as rising interest rates orchestrated by the Federal Reserve choke off U.S. growth. The tech sector has already suffered a wave of layoffs and manufacturers are also scaling back.
Big picture: The strongest U.S labor market in decades has now become a double-edged sword.
Rising wages and low unemployment have allowed Americans to meet their needs and spend enough to keep the economy growing.
Yet the fastest wage growth in four decades is now adding to high U.S. inflation and putting more pressure on the Fed to get prices back under control.
The Fed could tip the economy into recession if it raises rates high enough to cool off a hot labor market.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to rise in Thursday trades.
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U.S. stock indexes are wavering between small gains and losses on Wall Street Wednesday, struggling to gain ground after a four-day losing streak amid worries about the chances of an economic downturn in coming months.
On Tuesday, the Dow Jones Industrial Average fell 351 points, or 1.03%, to 33596, the S&P 500 declined 58 points, or 1.44%, to 3,941, and the Nasdaq Composite dropped 225 points, or 2%, to 11,015.
A four-day losing streak, during which the S&P 500 index has lost 3.4%, showed little sign of being snapped Wednesday as investors continued to assess the potential economic damage inflicted by high inflation and the Federal Reserve’s campaign to damp it by raising interest rates. U.S. stock indexes extended losses in midday trade despite regaining some ground in the morning session.
MarketWatch Live: S&P 500 on pace for 5-day losing streak as stocks turn negative heading into midday
“The recent run of macro data points in the U.S. continues to underscore relatively solid economic trends. And combined with the recent easing in financial conditions, it may trigger a need for the Fed to push back in December. Put another way, the dove camp is feeling some pain,” said Stephen Innes, managing partner at SPI Asset Management.
Jim Reid, strategist at Deutsche Bank , noted that the S&P 500 had now lost ground in the last seven out of eight sessions. “In fact, the latest moves for the S&P mean it’s now unwound the entirety of the rally following Fed Chair Powell’s [supposedly dovish] speech last week, which makes sense on one level given he didn’t actually say anything particularly new.”
The S&P 500 has fallen 17.2% in 2022 as the Federal Reserve has driven borrowing costs sharply higher in an effort to tame inflation that has been running at the fastest pace in 40 years.
See: BNP Paribas studied 100 years of market crashes — here’s what it says is coming next
The Fed’s monetary tightening alongside stubborn inflation may deliver a marked economic slowdown, senior bankers such as JPMorgan’s Jamie Dimon and Goldman Sachs’s David Solomon warned this week.
“Fears are growing that economies are in for a rough time ahead as feverish inflation and the bitter interest rate medicine being used to bring it down take effect,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
“Worries deepened amid warnings from U.S. banking and media sectors that navigating through the storm would not be easy, while the latest data has shown China’s trade has been sideswiped by a drop in global demand and zero-COVID policies. Despite today’s easing of restrictions it’s clear China’s COVID nightmare is not at an end,” Streeter added.
China on Wednesday announced a series of measures rolling back some of its most draconian anti-COVID-19 restrictions. People who test positive for the virus will be able to isolate at home rather than in overcrowded and unsanitary field hospitals, and schools where there have been no outbreaks must return to in-class teaching, according to the National Health Commission.
The Hang Seng index
HSI,
in Hong Kong fell 3.2%, while the CSI 300
000300,
dropped 0.2%, suggesting investors had already discounted Beijing’s more relaxed COVID stance.
See: A speedy reversal of China COVID-19 restrictions could cause 1 million winter deaths: report
However, long time bull Tom Lee, head of research at Fundstrat, reckons equities will benefit in coming weeks as investors start to get greater clarity on when the Fed may stop tightening policy.
“We don’t think the end of the inflation war in 2022 is the Fed cutting rates. It is when Fed and markets see sufficient progress in inflation to remove the upside risks to higher rates. We think this could happen as early as the November CPI report. This will be released on 12/13,” Lee wrote in a note.
“And if November CPI is soft, we think this will support a strong year-end rally. Admittedly, a 10% move between now and [year end] seems a stretch given the S&P 500 is around 4,000 but… the broader point is we see stocks having positive skew given the cautious positioning of investors and the possibility of very favorable incoming inflation reports,” Lee added.
On the U.S. economic front, nonfarm productivity, which measures hourly output change per worker, rose at a 0.8% annualized rate last quarter, the Labor Department said on Wednesday. Unit labor costs, the price of labor per single unit of output, climbed by a smaller 2.4% annual pace in the third quarter, compared to the preliminary 3.5% increase.
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The S&P 500 and Nasdaq Composite indexes recorded their worst day in almost a month on Monday, after a hotter-than-expected U.S. services-sector reading fueled concerns that the Federal Reserve may need to be even more aggressive in its inflation battle.
Stocks finished mixed on Friday, although they clinched gains last week, following a robust November jobs report, which stoked fears that inflation might not be so easily defeated.
Strong wage growth numbers released Friday were followed up on Monday by a robust reading for the U.S. services sector — both of which helped to stoke fears that the Fed’s interest-rate hikes, along with the central bank’s modest balance-sheet unwind, haven’t had much of an impact on the tight labor market.
The ISM barometer of U.S. business conditions in the service sector came in stronger than expected, rising to 56.5% in November, a healthy showing that signals the U.S. economy is still expanding at a steady pace.
“If nothing else, the ISM services report is being interpreted as very strong, and thus the economy is overheating and that means more Fed tightening,” said Will Compernolle, a senior economist at FHN Financial in New York. “Consumer resilience has proven to be more intense than I would have expected. In the two most interest-rate sensitive sectors — housing and autos — tightening has channeled into markets in meaningful ways.”
But there has been so much pent-up demand, that higher interest rates haven’t been cooling overall spending as much as the Fed would like because companies are still having to fill a backlog of orders, he said via phone.
In other economic data, the final November S&P Global U.S. services PMI edged up to 46.2 from 46.1, but remained in contractionary territory.
November jobs data released on Friday showed average hourly wages grew over the past year by more than 5% as of November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, market strategists said.
Worries about a more-aggressive Fed also helped to drive Treasury yields higher, adding to the pressure on stocks. The yield on the 10-year note rose 9.6 basis points to 3.6% on Monday. Treasury yields move inversely to prices, and yields had fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.
Monday’s ISM services figure “surprised to the upside, suggesting that the economy is still running above its long-run sustainable path and that the Fed is going to have to slow the economy more than expected in 2023,” Bill Adams, the Dallas-based chief economist for Comerica Inc. CMA, said via phone.
In other markets news, signs that China’s government is easing its COVID restrictions helped Hong Kong’s Hang Seng Index
HSI,
finish with a 4.5% gain.
See also: Chinese ADRs and casino operators rally on signs of easing COVID
Meanwhile, oil futures ended lower on Monday, a day after Sunday’s decision by OPEC and its allies to keep production quotas unchanged.
Falling equity prices helped drive the CBOE Volatility Index
VIX,
also known as the VIX, back above 20 on Monday. The volatility gauge had fallen sharply in recent weeks as stocks rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.
––Jamie Chisholm contributed reporting to this article.
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An obscure and arcane economic indicator suggests that Federal Reserve Chairman Jerome Powell was wrong when he said at his Nov. 30 news conference that “There is a path to a soft, a softish landing” for the U.S. economy.
This indicator traces to the large divergence between consumers’ views about the economy in general and their immediate personal financial circumstances in particular. A recession has occurred each time over the past four decades in which this divergence even approached its current level.
To measure this divergence, this indicator focuses on the Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Survey (UMI). While there is some overlap between what these two indices measure, there is a significant difference in emphasis, according to James Stack of InvesTech Research, from whom I first heard about this indicator. The CCI more heavily reflects consumers’ attitudes towards the overall economy, according to Stack, while the UMI is more heavily weighted towards their immediate personal circumstances.
Perhaps not surprisingly, the CCI currently is higher than the UMI. Even as American consumers’ attitudes towards their immediate financial situations continue to sour, due to everything from inflation to higher mortgage rates to a softening housing market, the overall economy has proven to be remarkably resilient. Yet more evidence of this resilience was the Dec. 2 jobs report, in which the Labor Department reported the creation of a much-higher-than-expected number of new jobs.
What is more surprising is the magnitude of the current divergence. According to the latest data releases from the Conference Board and the University of Michigan in late November, the CCI is 43.4 percentage points higher than the UMI. That’s close to a record; the latest reading stands at the 98th percentile of all monthly readings of the past four decades.
Furthermore, as you can see from the chart above, a recession was in the economy’s not-too-distant future (shadowed bars) the past four times this difference rose to even 25 percentage points.
Stark as this chart’s correlations are, it’s difficult for a sample with just four observations to be statistically significant. To test this indicator’s potential, I next measured its ability to predict the S&P 500’s
SPX,
inflation-adjusted total return over the subsequent one- and five-year periods. The table below reflects data since 1979, which is when monthly data for both of these consumer indices first began to be reported.
| When divergence between CCI and UMI was… | S&P 500’s average total real return over subsequent 12 months | S&P 500’s average total real return over subsequent 5 years (annualized) |
| In the highest 10% of monthly readings since 1979 | -0.4% | -3.1% |
| In the lowest 10% of monthly readings since 1979 | +14.3% | +14.8% |
The differences shown in this table are statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
The bottom line? It’s not good news, for the economy in general or the U.S. stock market in particular, that consumers are so much more upbeat about the overall economy than they are about their immediate financial circumstances.
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
Also read: Bigger paychecks are good news for America’s working families. Why does it freak out the Fed?
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We want to hear from readers who have stories to share about the effects of increasing costs and a changing economy. If you’d like to share your experience, write to readerstories@marketwatch.com. Please include your name and the best way to reach you. A reporter may be in touch.
For many people living in the U.S., these are tough — and confusing — times.
On Friday, the Labor Department reported 263,000 new jobs in November, while the unemployment rate held steady at 3.7%. Layoffs remain low, despite mass job cuts in the tech sector. Average hourly wages have also risen 5.1% in the past year, but still lag behind inflation for many workers. And there were 10.3 million job openings in October — slightly down from the previous month’s 10.7 million.
Some people might see the latest economic data as both challenging and confusing.
After all, the cost of living rose 7.7% on the year in October. The once red-hot housing market is finally cooling, thanks to mortgage rates that have more than doubled over the last year amid the Federal Reserve’s attempts to rein in inflation, and rents, while moderating, have surged from pre-pandemic levels. Borrowing money to cover increased precarity is becoming more expensive too, with the average credit-card APR at 19.2% as of Nov. 30, according to Bankrate.
“‘It’s just mind-boggling, the disconnect that we’ve seen.’”
Given all the conflicting signals, economists say it can be difficult for consumers to know exactly how to feel about the economy right now. “It’s not new, this disparity between the actual facts on the ground about what’s going on in the economy and the sentiment,” said Heidi Shierholz, president of the Economic Policy Institute, a left-leaning think tank.
“I remember this summer it was just unambiguously the strongest jobs recovery we’ve had in decades,” she added. “There’s just absolutely zero chance that we were in a recession — not only were we not in a recession, we were in just an extraordinarily fast recovery — and the polling, a huge share of people actually thought we were in a recession. It’s just mind-boggling, the disconnect that we’ve seen.”
Still, the fact that inflation is eating into people’s savings — and that essential goods like food, energy and housing have spiked in cost — is bound to make many people unhappy.
“Going into the pandemic, more than seven out of every 10 extremely low-income renters were already spending more than half of their income on rent. And then the pandemic hits; we saw a lot of low-wage workers lose their jobs and see an income decline,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition. “Then in 2021, we see this huge spike in prices. For a variety of reasons, they’ve struggled for a long time, and since the pandemic, it’s gotten even worse.”
Moderate-income Americans are struggling too. Maybe you can’t afford your favorite family meals, as the price of grocery store and supermarket purchases has jumped by 12.4% from last year. Or maybe you’re putting off a trip to see family this holiday season thanks to the higher cost of airfare, or you’re worried about losing your job as some business leaders warn of a recession. Perhaps you’re forced to rely on credit cards and personal loans, as credit-card debt is up 15% from a year ago.
MarketWatch has chronicled many of these changes, detailing renters’ frustrations, families’ tough choices at the grocery store, and the reality faced by would-be home buyers sidelined by higher rates and dwindling affordability.
But we would like your help telling an ongoing story about the American economy, centering the experiences of everyday people. Our readers know better than anyone about how today’s economic conditions have impacted their daily lives.
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The November U.S. jobs report on Friday showed the U.S. economy gained 261,000 jobs last month, with the unemployment rate holding steady at 3.7%.
Economists polled by the Wall Street Journal had expected an addition of 200,000 jobs.
Wages jumped 0.6% in November, double the expected pace.
Below are some initial reactions from economists and other analysts as U.S. stocks
DJIA,
SPX,
traded lower and the yield on the 10-year Treasury note
TMUBMUSD10Y,
jumped following the data on nonfarm payrolls.
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The numbers: The U.S. created a robust 263,000 new jobs in November, a historically strong pace of hiring that’s good for workers but that also threatens to prolong a bout of high U.S. inflation.
The continued rapid gains in hiring have become a big source of angst at the Federal Reserve. Senior central bank officials worry that wage growth stemming from a tight labor market is adding upward pressure to already high U.S. inflation.
The Fed is expected to keep raising interest rates — and pushing the economy closer to recession — until hiring slows, labor shortages ease and wage growth drops off.
U.S. stocks fell in premarket trades and bond yields rose after the report. Economists polled by The Wall Street Journal had forecast a smaller increase in new jobs of 200,000.
Justin Sullivan/Getty Images
The unemployment rate was unchanged at 3.7%, the government said Friday, remaining close to a half-century low.
Hourly pay, meanwhile, rose by a sharp 0.6% last month to an average of $32.82. That’s the biggest advance in 13 months and was far stronger than Wall Street expected.
The increase in wages over the past year climbed to 5.1%, from 4.9% in the prior month. Wages are still rising much faster than they were before the pandemic, when they rose about 2% to 3% a year.
The demand for labor is still strong,” said chief economist Steve Blitz of TS Lombard. “It’s still putting upward pressure on wages.”
The Fed has embarked on a series of increases in U.S. interest rates to try to slow the economy just enough to tame inflation without tipping it into recession.
The bank is trying to bring inflation back down to prepandemic levels of 2% from the current rate of 6%, based on the PCE price index.
“The level of [hiring] is not conducive to getting the base inflation rate back to 2%,” Blitz said.
The tough medicine, senior Fed officials figure, is likely to lift the unemployment rate to as high as 5% by 2023. Some Wall Street analysts believe the jobless rate will go even higher if a recession takes hold, as many are forecasting.
Higher borrowing costs slow growth by depressing consumer spending and business investment, the two key pillars of the economy.
Another potential pressure valve for the economy is also not offering any relief. The share of working-age people in the labor force — known as the labor-force participation rate — fell a tick to 62.1%, marking the third drop in a row.
The lack of people looking for work is another big factor contributing to the labor shortage.
Key details: The increase in employment last month was concentrated in hotels, restaurants and healthcare businesses. Americans have gone back to seeing their doctors and are spending more on travel and entertainment.
Hiring also rose in construction and manufacturing, two areas of the economy that are under more duress, while government employment increased by 42,000.
There were some signs of labor-market softness in the report. Retail employment shrank for the third month in a row, and warehouse and transportation jobs also declined.
Hiring at professional businesses, a leader in employment, rose by a meager 6,000. That’s the smallest increase since April 2021.
Hiring in October and September were little changed after government revisions. The economy added 284,000 jobs in October and 269,000 in September.
Big picture: The economy is slowing, but the labor force is still an oasis of strength.
For the Fed, it’s too much of a good thing. The central bank wants the demand and supply of labor to become more balanced to ease the pressure on wages.
The ongoing labor shortage, however, might be a saving grace for the economy. Many businesses have told the Fed they plan to hold onto more workers than usual even if the economy slows, because it’s been so hard to hire people in the first place.
If that’s the case, the economy might escape a recession altogether or only suffer a short and shallow downturn, some economists say.
Looking ahead: “Job creation continues to top expectations, holding the unemployment rate near half-century lows,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
“The Fed may be closing in on a point that the pace of rate hikes could be stepped down, but the combination of tight labor markets and stubbornly elevated inflation leaves policymakers with a clear directive: keep tightening.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to decline sharply in Friday trades.
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The numbers: U.S. pending home sales fell 4.6% in October, the fifth straight monthly decline, the National Association of Realtors said Wednesday.
Economists polled by the Wall Street Journal expected pending home sales to fall 5.5%.
The index captures transactions where a contract has been signed, but the home sale has not yet closed.
Key details: On a year-on-year basis, pending home sales were down a sharp 37%.
Sales fell in three of the four regions, with the Midwest registering an increase.
Big picture: Sales have stalled as mortgage rates have jumped, making houses less affordable. Pending home sales are a leading indicator for the sector. Some economists think that buyers might return to the market as mortgage rates have plateaued.
Market reaction: Stocks
DJIA,
SPX,
opened slightly higher on Wednesday. The yield on the 10-year Treasury note jumped to 3.78%.
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Business confidence in Germany increased in November, beating expectations, as companies foresee a less severe recession than previously expected.
The Ifo business-climate index rose to 86.3 points in November from a revised reading of 84.5 points in October, data from the Ifo Institute showed Thursday. Economists polled by The Wall Street Journal had expected the index to come in at 85.0.
While companies were somewhat less satisfied with their current business, pessimism regarding the coming months reduced sharply, Ifo President Clemens Fuest said in the report.
The index of the current situation fell to 93.1 in November from 94.2 in October, while the gauge assessing companies’ expectations rose to 80.0 from 75.9.
The Ifo index is based on a poll of about 9,000 companies in manufacturing, services, trade and construction.
Write to Maria Martinez at maria.martinez@wsj.com
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Senior officials at the Federal Reserve expect smaller increases in interest rates will “soon be appropriate” as the threat of recession grows.
Although the Fed still expects rates to rise higher than previously forecast, senior officials are unsure just how much further they will go. Slower rate hikes, they say, would give them more time to evaluate the “lagging” effects on the economy amid the rising threat of a recession.
“Short of some wild inflation report before the next meeting, 50 basis points sounds very reasonable in December. But the Fed is clearly not finished yet.”
The Fed’s economic staff for the first time said a recession was possible in the next year, according to a detailed summary of the bank’s last strategy session in early November.
The bank’s previous minutes have not mentioned the possibility of a recession.
The main U.S. stock gauges
SPX,
DJIA,
extended gains after the release of the Fed minutes.
The Fed has quickly raised a key U.S. interest rate to a top range of 4% from near zero last spring in an effort to tame high inflation. Rising rates tend to reduce inflation by slowing the economy and depressing demand for goods and labor.
Yet some economists and senior officials at the Fed also worry the central bank could spark a recession or a period of prolonged economic weakness if rates go too high.
Some members said there was an increasing risk that the Fed’s actions “would exceed what was required” to bring inflation down to acceptable levels.
In recent speeches, a few have suggested a “pause” in rate hikes might be warranted by early next year to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their case.
The rate of inflation exploded earlier this year to a 40-year high of 9.1% from almost zero during the early stages of the pandemic. It has since slowed to 7.7%.
Earlier this month, the bank lifted the so-called fed funds rate by three-quarters of a point to a range of 3.75% to 4% — the third big rate increase in a row. Most U..S. loans such as mortgages and car loans are tied to the fed fund rate.
In December, the Fed is likely to raise rates again, but markets are betting on a smaller 1/2-point increase. The minutes also suggest a smaller rate hike is likely.
“Short of some wild inflation report before the next meeting, 50 bps sounds very reasonable in December,” senior economist Jennifer Lee of BMO Capital Markets said. “But the Fed is clearly not finished yet.”
Senior Fed officials have repeatedly said they plan is to further raise rates in 2023 and then keep them high for an unspecified period of time to make sure inflation declines.
Officials are less unified on just how high rates will go. Some want to stop at around 5% while others suggest they might need to go higher.
Wall Street expects the Fed to raise its benchmark rate to 5% by next year.
The Fed’s aggressive posture stems from the biggest surge in prices since the early 1980s.
The Fed is aiming to bring down inflation to pre-pandemic levels of 2% or so, but they acknowledge it could take a while.
Several Fed members also expressed worries that non-traditional financial institutions could amplify the problems for the U.S. economy if higher rates exposed them to greater instability.
The troubles at the crypto-currency firm FTX were emerging just as the Fed meeting took place.
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The numbers: Business conditions at U.S. companies deteriorated again in November and pointed to a slowing economy.
The “flash” U.S. services sector index drop to a three-month low of 46.1 this month from 47.8 in October, keeping it near the lowest level of the pandemic era. The service side of the economy employs most Americans.
The S&P Global U.S. manufacturing sector index, meanwhile, slid to a 2 1/2-year low of 47.6 from 50.4.
Any number below 50 reflects a contracting economy.
Key details: New orders, a sign of future sales, fell in November at the fastest pace since early in the pandemic in 2020, S&P Global found. Exports also declined.
The cost of supplies, a measure of inflation, eased again in a sign that intense inflationary pressures are on the wane. Companies also raised prices at the slowest rate in more than two years.
Shortages of supplies, a big problem during the pandemic, also continued to diminish.
These shortages were one of the biggest contributors to the U.S. and global surge in inflation. While they are fading, they remain a big problem.
Big picture: Businesses are still expanding by some measures, but they are also preparing for slower economic growth.
Rising interest rates orchestrated by the Federal Reserve have dampened sales in the U.S. while a strong dollar has hurt exports by making American products more expensive.
Looking ahead: “Inflationary pressures should continue to cool in the months ahead, potentially markedly, but the economy meanwhile continues to head deeper into a likely recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Wednesday trades.
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The numbers: Orders at American factories for long-lasting goods such as autos and computers jumped 1% in October, marking a strong showing that probably isn’t sustainable because of a slowing U.S. economy.
Economists polled by the Wall Street Journal had forecast a 0.5% increase. Durable goods are items such as autos, appliances and computers meant to last at least three years.
A key measure of business spending, meanwhile, also rose a solid 0.7% last month.
Orders tend to rise steadily in an expanding economy and shrink when it weakens. Yet the results in October don’t look quite as strong after inflation is taken into account. The consumer price index rose 0.4% last month.
Big picture: Manufacturers are able to produce more of what their customers want after two years of chronic shortages, but mostly because demand has softened. Rising U.S. interest rates have curbed sales at home while a strong dollar has dented exports.
The situation could get worse. The Federal Reserve is jacking up interest rates to bring down high inflation, but higher borrowing costs are expected to slow the economy even further.
Key details: Orders for new cars climbed 0.6% in October. Orders for aircraft rose a sharper 7.4%. The transportation segment is a large and volatile category that often exaggerates the swings in industrial production.
Outside of transportation, new orders rose a still-decent 0.5%. Bookings increased in every major category except for primary metals.
The rate of growth in business investment, or core orders, has slowed considerably. however. The figure excludes military spending and the auto and aerospace industries.
Looking ahead: “Business equipment investment continues to hold up reasonably well in the face of higher borrowing costs,” said senior U.S. economist Andrew Hunter of Capital Economics, but “we doubt that resilience will continue indefinitely.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open slightly higher in Wednesday trades.
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November saw business activity fall across the eurozone for the fifth consecutive month, adding to fears of a recession, the latest flash purchasing managers indexes showed.
The S&P Global eurozone composite PMI rose to 47.8 in November from 47.3 in October, according to the preliminary reading. This is above the forecast of 47.0 of economists polled by The Wall Street Journal.
“The PMI data for the fourth quarter so far put the eurozone economy on course for its steepest quarterly contraction since late-2012, excluding pandemic lockdown months,” S&P Global said in the report.
Manufacturing continued to lead the downturn, with factory output dropping for a sixth consecutive month, although the rate of decline eased, the report said. Service sector output also fell, down for the fourth consecutive month.
The November PMI data also bring some tentative good news, Chris Williamson, chief business economist at S&P Global Market Intelligence, said. The economist pointed out that the overall rate of decline has eased compared to October thanks to some easing in supply constraints and the warm weather easing fears regarding energy shortages.
Price pressures are showing signs of cooling, which should contain inflation. However, both manufacturing and services sectors are still under severe pressure, the economist said in the report.
“A recession therefore looks likely, though the latest data provide hope that the scale of the downturn may not be as severe as previously feared,” Mr. Williamson said.
Write to Maria Martinez at maria.martinez@wsj.com
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The U.S. leading economic index fell 0.8% in October, the Conference Board said Friday.
Economists polled by The Wall Street Journal had expected a 0.4% fall.
This is the eighth straight decline in the leading index.
The long period of declines suggests “the economy is possibly in a recession,” said Ataman Ozyildirim, senior director of economic research at the Conference Board. He said the data show a recession is likely to start around the end of the year and last through mid-2023.
The coincident index, which measures current conditions, rose 0.2% in October after a 0.1% gain in the prior month. The lagging index increased by 0.1%, matching the September gain.
The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys.
Stocks
DJIA,
SPX,
were trading higher on Friday morning and the yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.8%.
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The numbers: Existing-home sales fell 5.9% to a seasonally adjusted annual rate of 4.43 million in October, the National Association of Realtors said Friday. Compared with October 2021, home sales were down 28.4%.
Economists polled by the Wall Street Journal had expected an decrease to 4.37 million units.
The level of sales is the lowest since December 2011 excluding the 2020 pandemic.
This is also the ninth straight monthly decline in sales, the longest streak on record.
Key details: The median price for an existing home was $379,100 up 6.6% from October 2021.
But price gains are decelerating. Prices were up over 20% on a year-on-year basis earlier this year.
Housing inventory fell 0.8% to 1.22 million units in October. Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 3.1 months in September and 2.4 months a year ago.
A 6-month supply of homes is generally viewed as indicative of a balanced market.
Sales declined in all regions of the country.
Big picture: Home sales have dropped as mortgage rates have risen sharply and affordability has dropped.
Softer inflation data in October have led to a drop in mortgage rates, which could lead for a floor on sales.
At the same time, Federal Reserve officials may pencil in a “peak” interest rate above 5% at the policy meeting next month.
Economists see home prices have further to fall in this market.
What the NAR is saying: Home sales have been very low and the softness could continue for a few months. But sales could pick up early next year if the mortgage rate has peaked, said Lawrence Yun, chief economist at the NAR.
Market reaction: Stocks
DJIA,
SPX,
opened lower on Friday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.79%.
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