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Tag: economic performance

  • Eurozone Industrial Production Unexpectedly Expands Amid Signs Recovery for Sector

    Eurozone Industrial Production Unexpectedly Expands Amid Signs Recovery for Sector

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    By Ed Frankl

    Eurozone manufacturing is showing signs of life again after industrial production jumped unexpectedly in December, further signaling that the recent slump in manufacturing in the bloc may be coming to a close.

    Total production rose on 2.6% on month in December, according to figures published Wednesday by European Union statistics…

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  • German Manufacturing Orders Unexpectedly Soar on Aircraft Purchases

    German Manufacturing Orders Unexpectedly Soar on Aircraft Purchases

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    By Ed Frankl

    German manufacturing orders jumped unexpectedly in December, driven by bumper aircraft purchases, although excluding larger orders they still fell, reflecting a difficult environment for the sector.
    

    Orders were 8.9% higher than the previous month, German statistics office Destatis said Tuesday, flipping expectations that they would fall 0.5%, according to a consensus of economists polled by The Wall Street Journal.
    

    

    It reverses many of the losses of previous months, including a 4% decline in October and a 11% dive in July, which were at the time seen as indicative of a manufacturing slump in Germany. On year, orders in December were 2.7% higher than the same month in 2022.
    

    However, the intake was swayed by large-scale orders, in particular of aircraft, likely swelled by Airbus orders, according to Destatis. The airline manufacturer received 807 orders in the month.
    

    For aircraft, ships and trains, incoming orders were more than twice as high in December as November. Metal products and electrical equipment orders also rose by double-digit percentages.
    

    However, in the country’s key car industry, orders fell 15%, while they also dipped in mechanical engineering and in the chemical industry, according to the data. Excluding major purchases, orders fell by 2.2% on month.
    

    Symbolizing Germany’s still-stuttering manufacturing base, orders were 5.9% lower in the whole of 2023 compared with 2022, Destatis said, amid a global slump in demand and tight financing conditions.
    

    Write to Ed Frankl at edward.frankl@wsj.com
    

    

    

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    Stock investors fear ‘no-landing’ economy could spell trouble. What’s next?.
    
			
    Stock investors fear ‘no-landing’ economy could spell trouble. What’s next?.
    
			
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    While the U.S. stock market has been pricing in a “soft-landing” scenario for the economy, a blowout January jobs report, relatively strong corporate earnings, and Federal Reserve Jerome Powell’s comments during the past week could point to the possibility of “no landing,” where the economy is resilient while inflation stays on target.  
    

    Such a scenario could still be positive for U.S. stocks, as long as inflation remains steady, according to Richard Flax, chief investment officer at Moneyfarm. However, if inflation reaccelerates, the Fed may be hesitant to cut its policy interest rate much, which could spell trouble, Flax said in a call. 
    

    

    What the past week tells us
    

    Investors have just gone through the busiest week so far this year for economic data and corporate earnings reports, with stocks ending at or near their record highs.
    

    The Dow Jones Industrial Average
    
        DJIA
    
       finished the week with its nineth record close of 2024, according to Dow Jones Market Data. The S&P 500 index
    
        SPX
    
       scored its seventh record close this year on Friday, while the Nasdaq Composite
    
        COMP
    
       is about 2.7% lower from its peak. 
    

    The Fed kept its policy interest rate unchanged in the range of 5.25% to 5.5% at its Wednesday meeting, as expected. However, in the subsequent press conference, Fed Chair Jerome Powell threw cold water on market expectations that the central bank may start cutting its key interest rate in March, and underscored that they want “greater confidence” in disinflation. 
    

    Roger Ferguson, former Fed vice chairman, said Powell introduced “a new kind of risk, the risk of no landing.” 
    

    In that scenario, inflation will stop falling, while the economy is strong, Ferguson said in an interview with CNBC on Thursday. However, Ferguson said he doesn’t think it is the likely outcome.   
    

    Traders were pricing in a 20.5% likelihood on Friday that the Fed will cut its interest rates in its March meeting, according to the CME FedWatch tool and that’s down from over 46% chance a week ago. The likelihood that the Fed will kick off its rate cutting program in May stood at 58.6% on Friday.  
    

    The stronger-than-expected January jobs data released on Friday further eliminates the chance of a rate cut in March, said Flax. 
    

    The U.S. economy added a whopping 353,000 new jobs in January while economists polled by The Wall Street Journal had forecast a 185,000 increase in new jobs. Hourly wages rose a sharp 0.6% in January, the biggest increase in almost two years.
    

    The past week has also been heavy with earnings reports, as several tech giants including Microsoft
    
        MSFT,
    
        +1.84%    ,
    
       Apple
    
        AAPL,
    
        -0.54%    ,
    
       Meta
    
        META,
    
        +20.32%    ,
    
       and Amazon
    
        AMZN,
    
        +7.87%
    
       reported their financial results for the fourth quarter of 2023. 
    

    Among the 220 S&P 500 companies that have reported their earnings so far, 68% have beaten estimates, with their earnings exceeding the expectation by a median of 7%, analysts at Fundstrat wrote in a Friday note.  
    

    While the reported earnings by big tech companies have been “okay,” the guidance was not, said José Torres, senior economist at Interactive Brokers.
    

    What has been driving the tech stocks’ rally since last year was mostly the prospect of sales from artificial intelligence products, but tech companies are not able to monetize the trend yet, Torres said in a phone interview. 
    

    Adding to the headwinds is a comeback of concerns around regional banks. 
    

    On Thursday, New York Community Bancorp Inc.’s stock triggered the steepest drop in regional-bank stocks since the collapse of Silicon Valley Bank in March 2023. New York Community Bancorp on Wednesday posted a surprise loss and signaled challenges in the commercial real estate sector with troubled loans.
    

    Meanwhile, the Fed’s bank term funding program, which was launched in March last year to bolster the capacity of the banking system, will expire on March 11. 
    

    If the Fed could start cutting its key interest rate in March, it would be “sort of like the ambulance that was going to pick regional banks up and save them,” said Torres. “Now the ambulance is coming in May at the earliest, I think that we’re in a particularly risky period from now to May,” Torres said. 
    

    What should investors do 
    

    Investors should go risk-off before May, according to Torres. “Last year, goods and commodities helped a lot on the disinflationary front. This year for disinflation to continue, we’re going to need services to start contributing to that. Then we’re going to need to see an increase in the unemployment rate,” Torres said. 
    

    He said he prefers U.S. Treasurys with a tenor of four years or shorter, as the long-dated ones may be susceptible to risks around the fiscal deficit and government borrowing. For stocks, he prefers the healthcare, utilities, consumer staples and energy sectors, he said. 
    

    Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. The slowdown in inflation and the relatively strong economic data and earnings “don’t really paint a picture for a risk-off scenario,” he said. “The setup for risk assets still leans towards the bullish expectation,” Buchanan added. 
    

    In the week ahead, investors will be watching the ISM services sector data on Monday, the U.S. trade deficit on Wednesday and weekly initial jobless benefit claims numbers on Thursday. Several Fed officials will speak as well, potentially providing more clues on the possible trajectory of rate cuts.  
    

    

    

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    U.K. Shoppers Bring Little Christmas Cheer as Sales Plunge
    
			
    U.K. Shoppers Bring Little Christmas Cheer as Sales Plunge
    
			
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    By Joshua Kirby
    

    Retail sales fell more sharply than expected in the U.K. in December, offering little succor to a listless economy at the end of the year.
    

    Total trade volumes were 3.2% lower than a month earlier, according to figures published Friday by the Office for National Statistics.
    

    

    This was worse than the slight dip expected, according to a Wall Street Journal poll of economists. It reverses rising sales in November, boosted by Black Friday promotions as well as lower inflation. Retailers reported that many shoppers stocked up on Christmas food and gifts in November, weighing on December’s spending.
    

    For the quarter as a whole, retail sales were 0.9% lower than the previous three months, and will have a negative contribution to wider economic growth over the period, the ONS said.
    

    Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
    

    

    

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    Eurozone Industrial Production Slumped for Third-Straight Month
    
			
    Eurozone Industrial Production Slumped for Third-Straight Month
    
			
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    By Ed Frankl
    

    Industrial output in the eurozone contracted for the third month in a row November, reflecting the continued downturn in the sector.
    

    Total production fell 0.3% on month in November, according to figures published Monday by European Union statistics agency Eurostat, after a 0.7% decline recorded in October. It matched expectations of economists polled by The Wall Street Journal.
    

    

    Durable consumer goods led the decline, with output falling 2.0%. Production of intermediate goods declined 0.6% while for capital goods it tumbled 0.8%. Energy production, however, recorded a rise in output of 0.9%.
    

    However, there has been evidence that recent struggles in the industrial sector in the eurozone could be bottoming out. A key survey of purchasing manufacturers said sentiment rose in December in the manufacturing industry.
    

    Among larger eurozone nations, output dipped on month by 0.3% in Germany and 1.5% in Italy, but expanded by 0.5% in France and 1.1% in Spain.
    

    Write to Ed Frankl at edward.frankl@wsj.com
    

    

    

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    U.S. stocks little changed in cautious trading ahead of inflation report, bank earnings
    
			
    U.S. stocks little changed in cautious trading ahead of inflation report, bank earnings
    
			
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    U.S. stock indexes were edging higher on Wednesday with technology stocks looking to extend gains ahead of the December inflation report, which is expected to shed more direct light on when the Federal Reserve could dial back its two-year-long effort to tighten monetary policy and cool the economy.  
    

    How are stock indexes trading
    

      

    • 
      The S&P 500
      
        SPX
      
       rose 8 points, or 0.2%, to 4,764
      

      • 

    • 
      The Dow Jones Industrial Average
      
        DJIA
      
       was up 38 points, or 0.1%, to 37,562
      

      • 

    • 
      The Nasdaq Composite
      
        COMP
      
       gained 43 points, or 0.3%, to 14,901.
      

      • 

    

    On Tuesday, the Dow industrials fell 0.4%, to 37,525, while the S&P 500 declined 0.2%, to 4,757, and the Nasdaq Composite gained less than 0.1%, to 14,858.
    

    

    What’s driving markets
    

    Inflation and its impact on bond markets and the Federal Reserve’s monetary-policy trajectory are the primary focus for markets this week as investors remain on hold ahead of Thursday’s December inflation reading and high-profile corporate earnings reports on Friday, when some of the big banks will kick off the fourth-quarter 2023 earnings season.
    

    The S&P 500 sits less than 0.7% shy of its record high of 4796.6 touched a little over two years ago, after rallying strongly in the last few months primarily on hopes that easing inflation will allow the Fed to lower interest rates sooner and faster than the markets previously anticipated.
    

    The yield on the 10-year Treasury
    
        BX:TMUBMUSD10Y,
    
       the benchmark for borrowing costs, has fallen from 5% in October to 4.014% on Wednesday.
    

    But for this bullish narrative to play out, inflation must be seen continuing to fall back to the central bank’s 2% target. That’s why great importance is therefore being placed on the consumer-price index for December, which will be published at 8:30 a.m. Eastern on Thursday.
    

    See: These traders bet on surprise blip higher in key December inflation reading
    

    Economists forecast that annual headline CPI inflation inched up to 3.2% last month from 3.1% in November. The core reading, which strips out more volatile items like food and energy, is expected to fall from 4% to 3.8%.
    

    Adam Phillips, director of portfolio strategy at EP Wealth Advisors, said the CPI report may give investors enough confidence that the disinflation is likely to continue, even if the price levels are “still a very long way from anything that is considered healthy.” 
    

    However, he cautioned that the economy has “certain factors” that are beyond the Fed’s control, such as the volatility in supply chains and growing geopolitical risks, as well as a potential resurgence in inflation, he told MarketWatch via phone on Wednesday.
    

    “[E]quities have remained broadly range-bound since just before Christmas, with little to push them in either direction,” said Jim Reid, strategist at Deutsche Bank.
    

    “That might change soon, since we’ve got the U.S. CPI print tomorrow, and then the start of earnings season on Friday, but for now at least, there’s been few headlines for investors to latch onto, just a bit of indigestion after over exuberance before New Year left markets with a little bit of an extended hangover,” Reid added.
    

    In U.S. economic data, the wholesale inventories declined 0.2% in November, in line with Wall Street expectations, as manufacturers continue to juggle with a fragile economy, according to the Commerce Department. 
    

    New York Fed President John Williams will speak in White Plains, N.Y., at 3:15 p.m. Eastern time. 
    

    Companies in focus
    

    

    

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    Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024
    
			
    Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024
    
			
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    Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.
    

    All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
    
        SPX
    
       and Nasdaq Composite
    
        COMP
    
       also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view. 
    

    

    It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.  
    

    Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy. 
    

    Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.
    

    Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.
    

    

              
    

    

    

    Source: CME FedWatch Tool, as of Jan. 5.
    

    

    

    Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
    
        DB,
    
        +0.81%
    
       counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong. 
    

    

              
    

    

    
        
      
    

    Sources: Bloomberg, Deutsche Bank. Chart is as of Nov. 20, 2023.
    

    

    

    Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion. 
    

    Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”
    

    The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to  3.2% year-on-year in November from a 4.2% annual rate in July. 
    

    The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.  
    

    Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.” 
    

    History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle.  However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
    
        BX:TMUBMUSD02Y,
    
       10-
    
        BX:TMUBMUSD10Y,
    
       and 30-year yields
    
        BX:TMUBMUSD30Y
    
       ending Friday at their highest levels in more than two to three weeks.
    

    See also: What history says about stocks and the bond market ahead of a first Fed rate cut
    

    While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.  
    

    “We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone. 
    

    December’s CPI report on Thursday is the data highlight of the week ahead. 
    

    On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month. 
    

    Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams. 
    

    Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out. 
    

    

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    Shale Is Keeping the World Awash With Oil as Conflicts Abound
    
			
    Shale Is Keeping the World Awash With Oil as Conflicts Abound
    
			
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    Updated Jan. 1, 2024 12:05 am ET
    

    

    

    

    

    

    

    

    A surprise surge in American oil and gas production and exports is helping to keep the world stocked, blunting the impact of widening conflict in the Middle East that has crimped key shipping lanes. 
    

    When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk about 5% and 23%, respectively. 
    

    

    Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
    

    

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    Why the 60-40 portfolio is poised to make a comeback in 2024
    
			
    Why the 60-40 portfolio is poised to make a comeback in 2024
    
			
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    Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance. 
    

    But as the yield on the 10-year Treasury note
    
        BX:TMUBMUSD10Y
    
       hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time. 
    

    

    And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch. 
    

    Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds. 
    

    “The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.” 
    

    See: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook
    

    Does 60-40 still make sense? 
    

    Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients. 
    

    The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement. 
    

    However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks. 
    

    At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show. 
    

    More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500
    
        SPX
    
       have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data. 
    

    The Bloomberg U.S. Aggregate Total Return Index
    
        AGG
    
       has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included. 
    

    But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index. 
    

    

              
    

    

    

    DEUTSCHE BANK
    

    

    

    The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024. 
    

    Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others. 
    

    A window of opportunity 
    

    The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors. 
    

    A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.
    

    But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels. 
    

    Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices. 
    

    There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close. 
    

    “The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said. 
    

    Read: Fed could be the Grinch who ‘stole’ cash earning 5%. What a Powell pivot means for investors.
    

    

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    Bundesbank Cuts German Growth Forecasts
    
			
    Bundesbank Cuts German Growth Forecasts
    
			
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    By Ed Frankl
    

    Germany’s central bank lowered its growth forecasts for the country’s economy for the next two years due to lower global demand, according to a twice-yearly report published Friday.
    

    The Bundesbank now expects gross domestic product growth at 0.4% and 1.2% for 2024 and 2025, down from 1.2% and 1.3%, respectively, under previous forecasts made in June.
    

    

    The bank penciled in for GDP to fall 0.1% in 2023 as a whole, and also predicts growth at 1.3% in 2026 in the fresh forecasts.
    

    Weak foreign demand is the main drag on the country’s key industrial sector, while restrained private consumption and higher financing costs are dampening investment, it said.
    

    However, the economy will benefit from a robust labor market, strong wage growth and falling inflation that should help bring about a recovery in household spending, it added.
    

    “From the beginning of 2024, the German economy is likely to return to an expansion path and gradually pick up speed,” Bundesbank President Joachim Nagel said.
    

    This comes as inflation is set to fall faster than previously expected. The Bundesbank sees harmonized annual inflation–based on European Union metrics–at 2.7% and 2.5% in 2024 and 2025, respectively, down from the 3.1% and 2.7% it predicted in June.
    

    “Monetary policy tightening is increasingly yielding results,” Nagel said.
    

    However, inflation is still set to be 2.2% in 2026, above the 2% target of the European Central Bank, which has recently raised rates at an unprecedented speed. The ECB held rates at a record high at its meeting this week.
    

    Meanwhile, the latest turmoil related to the German government’s budget–which for 2024 was only agreed to this week–won’t significantly alter the fiscal and macroeconomic outlook, according to the Bundesbank.
    

    However, there is still uncertainty regarding future fiscal policy, in particular for 2025 and in terms of the country’s transition to cleaner energy, it said.
    

    Write to Ed Frankl at edward.frankl@wsj.com
    

    

    

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    Import prices fall for second straight month and as U.S. inflation eases
    
			
    Import prices fall for second straight month and as U.S. inflation eases
    
			
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    Developing story. Check back for updates.
    

    The numbers: The cost of imported goods fell 0.4% to mark the second decline in a row, contributing to a slowdown in U.S. inflation more broadly.
    

    Economists polled by the Wall Street Journal had estimated a 0.8% drop.
    

    

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    A Strong Jobs Report Makes Big Rate Cuts Unlikely in 2024
    
			
    A Strong Jobs Report Makes Big Rate Cuts Unlikely in 2024
    
			
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    By 



















Randall W. Forsyth








    


    


    




    






    










    Updated Dec 09, 2023, 12:13 pm EST / Original Dec 08, 2023, 6:30 pm EST
    


    


    


    




    


    


    












    


    




    






    There’s good news and bad news on the U.S. economy.
    


    




    


    


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    The Sahm rule: What to know about the recession indicator that has Wall Street talking
    
			
    The Sahm rule: What to know about the recession indicator that has Wall Street talking
    
			
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    That was close. 
    

    After the U.S. unemployment rate climbed to 3.9% in October, stoking fears that the labor market might finally be starting to crack under the weight of the Federal Reserve’s interest-rate hikes, economic data released Friday showed that unemployment retreated to 3.7% in November. 
    

    

    That means the Sahm rule, an indicator devised to sniff out a recession long before one is officially declared, is now even further from triggering, after nearly brushing up against the threshold last month.  
    

    And according to the rule’s creator, former Federal Reserve economist Claudia Sahm, perhaps it won’t trigger, at least not during this cycle. 
    

    “I am more optimistic today that it doesn’t trigger,” Sahm told MarketWatch during a phone interview Friday. 
    

    What’s the Sahm rule, and why should we care about it?
    

    Wall Street and social media were abuzz with talk of the Sahm rule last month as the rising unemployment rate sparked a debate about whether a recession had begun. 
    

    The increase brought the Sahm rule indicator to 0.30, according to data available on a Federal Reserve branch website, bringing it closer to triggering than at any time during the past two years. It also sparked a brisk conversation among professional economists and amateur market watchers about what the Sahm rule is, how it works and why investors should care about it.
    

    After Sahm declared that the rule hadn’t triggered, some on social media accused her of misrepresenting her own rule, said the economist, who now runs her own consulting business.
    

    She was surprised by this, she told MarketWatch, since she thought the rule’s simplicity was one of its most important features. 
    

    It was initially devised with lawmakers in mind, intended to become an automatic mechanism to send out stimulus checks more quickly as a recession begins, thus helping to shield workers from some of the worst financial consequences. 
    

    But the debate has helped her realize that perhaps the rule’s dynamics aren’t clearly understood by all. 
    

    To try to remedy this, she published a step-by-step guide explaining how the Sahm rule is calculated, or at least how Sahm and the Fed calculate it. Economists are free to devise their own variations on the rule. Here are some key points: 
    

      

    • 
      The Sahm rule uses the three-month average of the monthly unemployment rate, instead of taking the latest rate in isolation.
      

      • 

    • 
      The current average is then compared with the lowest three-month average from the past year. Right now, that stands at around 3.5, Sahm said. 
      

      • 

    • 
      The 12-month low is subtracted from the current three-month average, and if the difference is 0.5 percentage point or greater, it means the rule has triggered. The rule is based on history and it has a strong precedent, meaning that almost every time unemployment has risen past this threshold, a recession has ensued. 
      

      • 

    

    The snowball effect
    

    The logic undergirding the rule is pretty straightforward, Sahm said: The rule is grounded in the notion, supported by historical data, that once employment starts to rise, it often snowballs. 
    

    Typically it increases by anywhere between 4 and 6 percentage points during a recession, Sahm said. 
    

    But just because the rule has held in the past doesn’t mean it always will. Sahm has previously said that she wouldn’t be surprised if the rule were to break because of pandemic-related distortions in the global economy. 
    

    She affirmed on Friday that she still believes this to be the case, although she doubts the rule will trigger this cycle. 
    

    That is largely because, as Sahm sees it, the rise in the unemployment rate has been driven not only by slowing job creation, but by workers returning to the workforce, a sign that supply-and-demand dynamics in the U.S. labor market are coming back into balance, and that maybe employers won’t need to be as precious about hiring in the future. 
    

    “If [the rebalancing] happens fast enough, then we won’t trigger. But if it slows down, then maybe we’ll trigger, but we’ll likely see unemployment move sideways before coming back down,” Sahm said. 
    

    Labor Department data showed the U.S. economy added 199,000 jobs in November, surpassing economists’ expectations for 190,000 new jobs. The number was also higher than the 150,000 created during the previous month. 
    

    See: Job report shows gain of 199,000 in November. Wages are still hot.
    

    

    

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    Consumer sentiment jumps in early December for the first increase in five months
    
			
    Consumer sentiment jumps in early December for the first increase in five months
    
			
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    This is a developing story. Stay tuned for updates here. 
    

    The numbers: The University of Michigan’s gauge of consumer sentiment rose to a preliminary December reading of 69.4 from a six-month low of 61.3 in the prior month. This is the highest level since August.
    

    Economists polled by the Wall Street Journal had expected a December reading of 62.4.
    

    

    Expectations of inflation cooled in early December, according to the report.
    

    Americans think inflation will average a 3.1% rate over the next year,  down from 4.5% in the prior month. That’s the lowest level since March 2021.
    

    Expectations for inflation over the next five years fell to 2.8% from 3.2% in November, which was the highest reading in over a decade.
    

    Key details: According to the report, a gauge of consumers’ views on current conditions jumped to 74 in December from 68.3 in the prior month, while a barometer of their expectations of the future rose to 66.4 from 56.8.
    

    Big picture: A lot of factors were behind the increase in confidence, with the solid job market and declining gasoline prices mentioned most often by economists. Stock prices have also been strong. Despite the gains, sentiment is still well below prepandemic levels. 
    

    Market reaction: Stocks
    
        DJIA
    

            SPX
    
       were higher in early trading on Friday, while the 10-year Treasury yield
    
        BX:TMUBMUSD10Y
    
       rose to 4.21% after the solid job report was released earlier in the morning.
    

    undefined
    

    

    

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    Toledo Is Hot for Housing. Plus, 2 Affordable Regions.
    
			
    Toledo Is Hot for Housing. Plus, 2 Affordable Regions.
    
			
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    The housing market’s stagnation this year is projected to carry over into 2024. But a forecast published today by Realtor.com identifies metro areas that are poised to see both rising prices and 















sales next year, with Toledo, Ohio, leading the way.  
    


    




    


    


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    New-home sales drop in October to much lower level than expected
    
			
    New-home sales drop in October to much lower level than expected
    
			
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    The numbers: U.S. new-home sales fell 5.6% to a seasonally adjusted annual rate of 679,000 in October, from a revised 719,000 in September, the government reported Monday. 
    

    Analysts polled by the Wall Street Journal had forecast new-home sales to occur at a seasonally adjusted annual rate of 725,000 in October.
    

    The data are often revised sharply….
    

    

    

    
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    Health of several key sectors, including the U.S. consumer, plus an outlook from Fed’s Powell on radar this coming week
    
			
    Health of several key sectors, including the U.S. consumer, plus an outlook from Fed’s Powell on radar this coming week
    
			
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    Recession fears are rising. Nothing beats fear better than good information and that’s what we will get this week. Investors and economists will get good insight into the mood of U.S. consumers and hear the last words of Federal Reserve Chair Jerome Powell ahead of the central bank’s next interest-rate meeting on Dec. 12-13.
    

    November consumer confidence
    

    Tuesday, 10:00 a.m. Eastern
    

    Economists surveyed by the Wall Street Journal expect that consumer’s view on the outlook have soured over the past few weeks. Geopolitical…
    

    

    

    
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    U.S. economy growing only at a subdued rate in early November, S&P Global says
    
			
    U.S. economy growing only at a subdued rate in early November, S&P Global says
    
			
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    The numbers: The U.S. economy expanded but at a relatively subdued pace in early November, latest data from S&P Global show.
    

    The S&P Global “flash” U.S. services index rose to 50.8 in November from 50.6 in the prior month, the highest level in four months.  Economists surveyed by the Wall Street Journal had forecast a reading of 50.2.
    

    On the…
    

    

    

    
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    Germany’s Economy Shrank 0.1% in 3Q, Confirming Prior Estimates
    
			
    Germany’s Economy Shrank 0.1% in 3Q, Confirming Prior Estimates
    
			
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    By Ed Frankl
    

    Germany’s economy contracted 0.1% from July to September, confirming prior estimates, as Europe’s largest economy languishes in a likely recession, according to data from the country’s statistics office released Friday.
    

    It matched expectations of economists polled by The Wall Street Journal. GDP contracted 0.4% on year, on a price…
    

    

    

    
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    EU gives France an ‘F’ grade on spending plans
    
			
    EU gives France an ‘F’ grade on spending plans
    
			
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    BRUSSELS / PARIS ― The French government has been told by the European Commission it urgently needs to adjust next year’s spending plans to fall into line with the EU’s debt and deficit rules when they return after a four-year suspension. 
    

    Paris is among four governments handed warnings over their budget plans by the bloc’s executive in its role policing member countries’ public expenditure. The rules, aimed at preventing instability in financial markets and the build-up of public debt, will retake effect on January 1 after they were shelved to allow greater investment during and after the COVID pandemic. 
    

    “France’s draft budgetary plan risks not being in line” with the bloc’s rules, Commission Vice President Valdis Dombrovskis told reporters in Strasbourg, pointing to rising public expenditure and insufficient cuts to energy support.
    

    Belgium, Finland, and Croatia fall into the same category, the Commission said in its statement on Wednesday. Ignoring warnings could trigger a so-called Excess Deficit Procedure, a lengthy process that includes specific demands to rein in spending and potentially concludes with financial sanctions.
    

    These reports cards, and the resumption of the Stability and Growth Pact rules in general, come at a critical time with Europe’s economic growth remaining feeble and high interest rates making borrowing more expensive. Russia’s war in Ukraine and growing tensions in the Middle East add to uncertainty for governments and central banks in Europe and beyond.
    

    ‘Whatever it takes’
    

    Pressure on France shifts the focus from Italy, which has long been considered the bad boy of Europe when it comes to public spending. Rome isn’t fully out of the woods: its budget is “not fully in line” with the rules, the Commission said. The same goes for Austria, Germany, Luxembourg, Latvia, Malta, Netherlands, Portugal and Slovakia.
    

    French Finance Minister Bruno Le Maire has repeatedly stressed that France’s 2024 budget would mark the end of the era of “whatever it takes” in economic spending, pledging to phase out emergency measures linked to the pandemic and the energy crisis. 
    

    As the Commission announced its assessments, a French economy ministry official was quick to stress Paris was unlikely to be punished with an Excessive Deficit Procedure and that it would not need to modify its budget law.
    

    “We won’t have to take any adjustment measure on this evolution of primary net spending,” the official said, on condition of anonymity, noting that the gap between France’s spending and Brussels’ recommendation was “very small.”
    

    The official insisted that, contrary to other EU countries, France did not receive a written request from Brussels. 
    

    Paris sees a deficit next year of 4.4 percent of GDP — exceeding the EU’s 3 percent threshold — and spending cuts of €5 billion. The French budget is still being discussed in the country’s parliament and is set to be approved by Christmas. 
    

    Commission Vice President Valdis Dombrovskis | Kenzo Tribouillard/AFP via Getty Images
    

    The Commission also raised concerns France’s debt-to-GDP ratio will rise to 110 percent of GDP next year. The EU’s limit is 60 percent.  
    

    ‘Because it’s France’
    

    Brussels is under some pressure to show it is serious about enforcing the EU’s deficit and debt rules, regardless of whether governments can agree on their overhaul by the end of the year — a deal that France is trying to broker. The EU wants to make them more flexible and better tailored to individual countries’ circumstances but Germany is leading a group of governments demanding that some strict targets over debt and deficit reduction remain. 
    

    France’s violation of the deficit criteria means the Commission could theoretically launch an “excessive deficit procedure” (EDP) from next spring — a red-flag label that means offending countries must adjust their spending.
    

    The French case is particularly sensitive because Paris has received special treatment before. In 2016, the Commission’s last president, Jean-Claude Juncker, justified his decision to give Paris leeway on its budget wrongdoing merely “because it is France.”
    

    This article has been updated with quotes from Strasbourg and Paris.
    

    

    

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