Tag: Fed

Stocks post back-to-back loss after Fed minutes point to lingering inflation and rate risks

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U.S. stocks posted back-to-back losses Wednesday after Federal Reserve minutes of its July meetings showed concerns about inflation revving back up. The Dow Jones Industrial Average DJIA fell about 180 points, or 0.5%, ending near 34,765, according to preliminary FactSet data. The S&P 500 index SPX gave up 0.8% and the Nasdaq Composite Index COMP closed 1.2% lower. All three benchmarks booked back-to-back loses, while the S&P 500 ending at its lowest level in more than a month. Minutes of the Fed’s July 25-26 meeting said “most participants continue to see significant upside risks to inflation, which could require further…

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August 16, 2023
S&P 500 ends at lowest level in a month as investors monitor signs of China’s weakening economy

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U.S. stocks closed sharply lower Tuesday as investors monitored signs of China’s darkening economic backdrop and gauged if a robust U.S. consumer could spell more Federal Reserve rate hikes. The Dow Jones Industrial Average DJIA fell about 360 points, or 1%, to about 34,946, according to preliminary FactSet data. The S&P 500 index SPX dropped 1.2% to about 4,437, its lowest close since mid-July, according to FactSet. The Nasdaq Composite Index COMP ended 1.1% lower. Chinese retail sales and industrial production in the world’s second biggest economy grew less than expected in July. Its growing property woes also contributed…

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August 15, 2023
Inflation could rebound later this year. And that might be a good thing.

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U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning.

Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years.

On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month.

“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX.

If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall.

The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX.

PCE is said to be U.S. central bankers’ preferred inflation metric.

Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden.

“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden.

Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

“In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

See: Fed has ‘more work to do’ to get inflation back down, Daly says

Also read: Worker pay at center of Fed’s inflation fight

Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025.

“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
DJIA
gained 0.4%, and the S&P 500
SPX
was unchanged. The Nasdaq Composite
COMP
fell 0.5%.

Read on:

Want companies to lower their prices? Stop buying stuff from them.

‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

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August 13, 2023
Hate to spoil the party but there’s a new risk in town — a ‘no landing’ economy

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For the last 18 months, all you’ve heard from the markets is that the U.S. economy is three months away from a recession. Now, the popular analysis is that that inflation is on a smooth glidepath down and the economy will never have a downturn again.

Worries about a recession have evaporated, and all the talk is about a “soft landing,” with the Federal Reserve not having to hike interest rates more than once more, at most.

But behind the scenes, in some economic circles, there is growing concern about another risk for the economy, dubbed a “no landing” scenario.

What does “no landing” mean? Essentially it’s marked by economic growth that’s too strong to allow inflation to fall all the way to 2%, where the Federal Reserve aims for it to be, and therefore an economy that will need more Fed rate hikes, according to Chris Low, chief economist at FHN Financial.

So instead of the U.S. central bank starting to cut rates early next year, there may be more rate hikes in store.

“There is still considerable work to do before the inflation beast is fully tamed,” Low said.

Former Fed Vice Chair Richard Clarida described the risk in crystal-clear terms. “If the Fed finds itself in March 2024 with an unemployment rate of 4% and an inflation rate of 4% with some of that temporary good news behind them, they are in a very tough spot,” Clarida said in a recent interview with Bloomberg News.

“It is a risk. It is not the base case. But if I was still there [at the Fed], I would be assessing it,” he added.

So why does this matter? Why would the Fed be in such a tough spot? Two words: presidential election.

A Fed that is dedicated to bringing inflation down might have to slam the brakes on the economy forcefully to get the job done. That gets tough during an election year, especially one that already seems poised to be filled with acrimony.

“The Fed does not play politics with monetary policy. The FOMC will do what is right for the economy, election year or not. Nevertheless, FOMC participants are already sensitive to triggering a recession. Doing it in an overt way when Congress, a third of the Senate, and the White House are up for grabs would be reckless,” Low said.

Andrew Levin, professor of economics at Dartmouth College and a former top Fed staffer, said “raising interest rates sharply in the midst of an election cycle could be a delicate matter. Even the vaunted inflation fighter, Paul Volcker [the Fed’s chairman from 1979 to 1987], decided to ease off the brakes midway through the 1980 presidential campaign.”

Ray Fair, a Yale economics professor, thinks that, whether or not the Fed successfully lowers consumer-price inflation to the vicinity of 2% will be what really matters for the 2024 presidential election. If inflation does not go gently and the Fed is still fighting next year, it would likely be negative for President Joe Biden and the Democratic Party, he said.

See: Inflation could rebound later this year. And that might be a good thing.

To avoid hiking rates next year, the Fed, in Low’s view, will raise interest rates to 6% by the end of this year. That is an out-of-consensus call. Financial markets think the Fed is done hiking with its benchmark policy interest rate in a range of 5.25% to 5.5%.

Many economist and the financial markets are talking more about prospective Fed rate cuts in early 2024 than any more hikes.

Asked during a recent radio interview if he thought a “no landing” scenario was taking shape, Philadelphia Fed President Patrick Harker replied: “I don’t think so.”

Harker said the economy was likely on track to return to the low-interest-rate and low-inflation environment of 2012-19.

“I think about this a lot, and I asked myself what’s different fundamentally about the U.S. economy now then the way it was before the pandemic,” Harker said. He concluded that there wasn’t much difference.

The big trend Harker mentioned was demographics, with baby boomers still moving in large numbers into retirement. “I don’t think we have to stay in a high-inflation regime. I think we can get back to where we were,” he said.

Steve Blitz, chief U.S. economist at research firm GlobalData.TSLombard, said he puts the probability of a “no landing” scenario at about 35%.

Blitz added it was a common mistake for economists, policy makers, traders and journalists “to presume that the expansion to come is going to look like the expansion that was.”

“At least in the United States, that was never the case,” he added.

Blitz said that if the U.S. economy were growing at a rate below 2% with an inflation rate higher than 3%, the Fed would have to raise the policy rate to about 6.5%. But if the economy is humming along with 3% growth and inflation over 3%, that would be a trickier spot. “Does the Fed really want to slow that down?” he asked.

See: The U.S. economy is aiming for a three-peat: 2% GDP growth

The range of possible outcomes for the economy remains wide. Some economists still believe that a recession early next is the most likely outcome.

Other economists, like Michelle Meyer, chief U.S. economist at Mastercard, think the economy will continue to grow, with inflation coming down. Meyer described that outcome as “a soft landing with bumps.”

Stephen Stanley, chief economist at Santander U.S., said he thinks the U.S. economy will “muddle through” next year with subpar growth in the range of 1% for several quarters and inflation slowing gradually.

“Obviously, that optimism melts away if we’re back to readings of 0.4% and 0.5% on core CPI in three months or six months,” Stanley said.

Economic calendar: See what’s on the U.S. economic-data docket in the coming week

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August 13, 2023
Inflation could rebound later this year. And that might be a good thing.

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U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning.

Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years.

On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month.

“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX.

If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall.

The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX.

PCE is said to be U.S. central bankers’ preferred inflation metric.

Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden.

“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden.

Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

“In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

See: Fed has ‘more work to do’ to get inflation back down, Daly says

Also read: Worker pay at center of Fed’s inflation fight

Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025.

“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
DJIA
gained 0.4%, and the S&P 500
SPX
was unchanged. The Nasdaq Composite
COMP
fell 0.5%.

Read on:

Want companies to lower their prices? Stop buying stuff from them.

‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

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August 13, 2023
Consumers seeing substantial improvement in U.S. economy over past 3 months: University of Michigan survey

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The numbers: The University of Michigan’s gauge of consumer sentiment inched down to a preliminary August reading of 71.2 after hitting a 22-month high of 71.6 in the prior month.

Economists polled by the Wall Street Journal had expected sentiment to inch up to a 71.7 reading in August.

Another key part of the report is the U. of M. measure of inflation expectations.

According to the report, Americans’ expectations for overall inflation over the next year slipped to 3.3% in August from 3.4% in the prior month, while expectations for inflation over the next 5 years inched down to 2.9% from 3%.

Key details: According to the Michigan report, a gauge of U.S. consumers’ views on current conditions rose to to 77.4 in August from 76.6 in the prior month, while a barometer of their future expectations fell to 67.3 from 68.3.

Big picture: Sentiment has been boosted by waning recession fears and disinflation in grocery store prices.

What the University of Michigan said: “Consumer sentiment was essentially unchanged from July, with small offsetting increases and decreases within the index. In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago,” said Joanne Hsu, the director of University of Michigan consumer surveys.

Market reaction: Stocks
DJIA

SPX
were mixed in early trading Friday while the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose to 4.12%, the highest level since the spike last week after Fitch Ratings downgraded the U.S. credit rating.

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August 11, 2023
U.S. wholesale prices surprise to the upside in July, PPI shows

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The numbers: The U.S. producer price index rose 0.3% in July, the Labor Department said Friday, up from a revised flat reading in June and the largest gain since January.

Economists polled by The Wall Street Journal had forecast a 0.2% advance.

The core producer price index, which excludes volatile food, energy prices, and trade services rose 0.2 in July, up from a 0.1% gain in the prior month. This is the largest increase since February.

Key details: Over the past year, headline producer price inflation was running at a 0.8% rate in July, up from 0.2% in the prior month.

Core prices are up 2.7% from a year earlier, matching the gain in June. Core PPI prices were running at a 5.8% rate in July 2022.

A big part of the increase in producer prices was in the services sector.

The cost of services rose 0.5% last month, up from a 0.1% drop in June. This is the largest increase in a year. The increase was led by a 7.6% gain for portfolio management.

The cost of goods rose 0.1% in July after a flat reading in the prior month.

Energy prices were flat in July, down sharply from a 0.7% gain in the prior month.

Wholesale food prices jumped 0.5% after a 0.2% fall in the prior month.

Further back on the production line, prices for intermediate goods fell 0.6%, the sixth straight monthly decline.

Big picture: Price pressures have been diminishing at the producer level much faster than at the consumer level. Economists are watching the inflation data closely to see if the July interest rate hike by the Federal Reserve was the last hike of the cycle.

What are they saying? “In short, PPI surprised to the upside in July. While we do not expect further rate hikes this year, if inflation surprises to the upside and the labor market and growth do not slow, another increase in interest rates cannot be ruled out in 2023,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Market reaction: U.S. stocks
DJIA

SPX
were set to open lower on Friday after the stronger-than-expected PPI data. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose to 4.12%.

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August 11, 2023
Former Fed official Clarida backs another interest-rate hike this year

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Former Federal Reserve Vice Chair Richard Clarida on Thursday said he thinks another interest-rate hike this year would be a wise move by the U.S. central bank.

In an interview on Bloomberg, Clarida said the biggest risk for the Fed is to declare “mission accomplished” too early and having to restart rate hikes next year.

“So if I were there, it would skew me to getting in that additional hike this year, and I think some members of the Fed will see it that way,” Clarida said.

Fed Chair Jerome Powell said Wednesday that the Fed will decide what to do about interest rates on a “meeting-by-meeting” basis.

Read: Fed no longer foresees a U.S. recession, highlights from Powell presser

The Fed is forecasting that the unemployment rate will rise to 4.5% by the end of 2024 from 3.6% in June.

That is still a forecast for recession because under the Sahm rule, created by former top Fed staffer Claudia Sahm, the start of a recession is signaled when the three-month moving average on the unemployment rate rises by 0.5 percentage points or more from its low during the past year.

But Clarida said the Fed faces an alternative scenario where inflation picks up again early next year after slowing later this year.

“If the Fed finds itself in March of 2024 with an unemployment rate of 4% and and inflation rate of 4% with some of that temporary good news [on inflation] behind them, they’re in a very tough spot,” he said.

“I do think that’s a risk. It’s not the base case,” he said.

The Dow Industrial Average
DJIA,
-0.61%
was trading slightly lower on Thursday after 13 straight sessions in the green.

The yield on the 10-year Treasury yield
TMUBMUSD10Y,
4.016%
has risen to 3.97%, the highest level in two weeks.

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July 27, 2023
Morgan Stanley credits Bidenomics in lifting its U.S. economic-growth outlook

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“The U.S. economy is enjoying ‘a boom in large-scale infrastructure [and] rebounding domestic business investment led by manufacturing.’”

— Morgan Stanley’s Zentner

At least one major investment bank has bought into Bidenomics.

President Joe Biden’s Infrastructure Investment and Jobs Act has seeped into the domestic economy, “driving a boom in large-scale infrastructure,” wrote Ellen Zentner, chief U.S. economist for Morgan Stanley, in a research note out late this week. Plus, she wrote, “manufacturing construction has shown broad strength.”

As a result Morgan Stanley now projects 1.9% gross domestic product (GDP) growth for the first half of this year. That’s some four times higher than the bank’s previous forecast for the first half of 2023 of 0.5%.

Infrastructure spending signed into law in 2021 marked an early legislative win for a president handed only a slim majority in Congress. It was followed up by another legislative banner for the incumbent: the Inflation Reduction Act, a climate change and healthcare-focused spending bill signed into law about a year ago. Much of the incentives in the laws are tied to domestic manufacturing and require U.S. hiring, sometimes at the expense of less-expensive or readily available goods from abroad.

As a result of these economic lifts, the Morgan Stanley
MS,
+0.22%
analysts also doubled their original estimate for GDP growth in the fourth quarter, to 1.3% from 0.6%. And they nudged up their forecast for GDP in 2024 by a tenth of a percent, to 1.4%.

“The narrative behind the numbers tells the story of industrial strength in the U.S,” Zentner wrote.

Read: Are we still going to have a recession? Maybe next year

The White House has run with the theme of U.S. brick-and-mortar economic growth in recent weeks, increasingly leveraged by the president and his acolytes as “Bidenomics.” It’s a phrase originally used by Republicans to take a shot at the president, who has been saddled with high inflation and rising interest rates in his first term.

Don’t miss: Everyone thinks the Fed’s rate hike next week will be the final one — except the Fed

For now, the Biden team co-opted the term as a badge of honor as Biden has tried to tap into economic performance during recent road appearances. That included a speech to a union crowd at a shipyard in Philadelphia this past week.

Bidenomics and Morgan Stanley forecasts aside, wider polling shows that some Americans, likely feeling the lingering sting of inflation, aren’t yet convinced.

A Monmouth University poll released Wednesday showed only three in 10 Americans feel the country is doing a better job recovering economically than the rest of the world since the COVID-19 pandemic. Respondents were split on Biden’s handling of jobs and unemployment, with 47% approving and 48% disapproving of his performance.

The latest CNBC All-America Economic Survey, released Thursday, found that just 37% of respondents approved of Biden’s handling of the economy, while 58% disapproved. Some 20% of Americans agreed that the economy was excellent or good, while 79% said it was just fair or poor, CNBC’s poll found.

Republicans looking to challenge Biden and the Democrats in 2024 care less about Wall Street’s forecasts and more about Main Street’s polling, it would seem.

“Bidenomics is about blind faith in government spending and regulation,” Republican House Speaker Kevin McCarthy said in a statement Friday. “It’s an economic disaster where government causes decades-high inflation, high gas prices
RB00,
-0.32%,
lower paychecks and crippling uncertainty that leaves America worse off.”

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July 22, 2023
Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

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Federal Reserve Board Gov. Christopher Waller said Thursday he was not swayed by June’s benign consumer inflation data, and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year.

“I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said in a speech to bond-market experts, known as The Money Marketeers of New York University.

That would bring the Fed’s benchmark rate to a range of 5.5%-5.75%.

Waller said that, while the cooling of CPI data for June was welcome news, “one data points does not make a trend.”

“The report warmed my heart, but I have got to think with my head,” Waller said.

He noted that inflation slowed in the summer of 2021 before rocketing higher.

In his remarks, Waller said he is now more confident that the contagion from the collapse of Silicon Valley Bank in March will not create a significant problem for the economy.

“I see no reason why the first of those two hikes should not occur at our meeting later this month,” he said.

Traders in derivative markets have priced in high odds of a rate hike after the Fed’s meeting in two weeks. But traders have been skeptical the Fed will follow through with a second hike, even before the soft CPI data.

Waller said the timing of the second hike depends on the data.

“If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said.

During a question-and-answer session, Waller stressed that September was a “live meeting,” meaning the Fed could hike rates at that time.

Some economists had thought the Fed was moving to an “every-other-meeting” pace of hikes, but Waller said he did not favor such mechanical moves, and that data should be the deciding factor.

Some Fed officials want the central bank to hold rates steady in July, and perhaps through the end of the year, thinking the economy is going to be hit by “lagged” effects from past rate hikes.

Waller said he believes the bulk of the effects from last year’s tightening have passed through the economy already.

“Pausing rates now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station,” he said.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.786%
has fallen to 3.77% this week after a lower-than-expected gain in jobs in the June report and the cooling of inflation. The yield had hit a recent high of 4.07% ahead of those softer reports.

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July 13, 2023
U.S. Treasury posts sharply higher $228 billion June deficit

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WASHINGTON, July 13 (Reuters) – The U.S. government posted a $228 billion budget deficit for June, up 156% from a year earlier as revenues continued to weaken and July benefit payments were accelerated into June, the U.S. Treasury Department said on Thursday.

The deficit compares to a June 2022 budget gap of $89 billion. June receipts fell $42 billion, or 9% from a year ago, to $418 billion, while June outlays rose $96 billion, or 18%, to $646 billion.

But some $86 billion worth of July benefit payments were made in June because July 1 fell on a weekend, and without these and other calendar adjustments, the June deficit would have been $142 billion — a 66% increase over June 2022.

For the first nine months of the 2023 fiscal year, which ends Sept. 30, receipts fell $423 billion, or 11%, from the year-ago period to $3.413 trillion. The decline was primarily driven by lower non-withheld individual income taxes due to lower capital gains in 2022 and lower year-end salary bonuses, as well as sharply higher individual tax refunds as the Internal Revenue Service cleared a backlog of unprocessed receipts.

The Federal Reserve has earned $93 billion less this year because it is paying higher interest on bank reserves and no longer has positive net income – a situation that a Treasury official said was expected to continue.

Year-to-date outlays rose $455 billion, or 10% from a year earlier to $4.805 trillion. Higher outlays for Social Security this year have been driven by cost-of-living adjustments, while the interest on the public debt so far this year has risen $131 billion, or 25%, to $652 billion due to higher interest rates.

Also driving up outlays were $52 billion in Federal Deposit Insurance Corp costs to resolve failing banks, a Treasury official said.

Reporting by David Lawder; Editing by Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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July 13, 2023
U.S. stocks rise as bulls get ‘wish’ on inflation report, yet soft landings for Fed are ‘pretty improbable’

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Markets seem to be embracing the notion of a soft landing for the U.S. economy despite inflation remaining above the Federal Reserve’s 2% target.

“Soft landings are not impossible, but they’re pretty improbable,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview. “They’re particularly challenging in an environment where the labor market is tight,” he said, and yet “many investors are sort of enamored with this idea that we could get a soft landing.”

The U.S. stock market was rising Wednesday after fresh data showed inflation rose in June slightly less than expected. Meanwhile, the unemployment rate remains low in the U.S., with wage growth helping to fuel consumer spending in an economy that grew at a revised 2% annualized pace in the first quarter.

“There’s a race going on between the Fed slowing the economy down, and then on the other side, inflation becoming entrenched,” said Elliott. In that race, the Fed has been “one or two steps behind,” he said, ahead of Wednesday’s inflation reading.

The consumer-price index showed U.S. inflation rose 0.2% in June for a year-over-year rate of 3%, according to a report Wednesday from the Bureau of Labor Statistics. Core CPI, which excludes energy and food prices, increased 0.2% last month for a year-over-year rate of 4.8%. The Bureau of Labor Statistics said core inflation’s rise in June marked the smallest monthly increase since August 2021.

“The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July,” Bill Adams, chief economist for Comerica Bank, said in emailed comments Wednesday. “The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum.”

Many investors have been expecting the Fed to hike its benchmark interest rate by a quarter percentage point at its policy meeting later this month, which would bring it to a targeted range of 5.25% to 5.5%. Federal-funds futures on Wednesday pointed to a 92.4% probability of such a rate hike and a slightly more than 80% chance of the Fed then pausing at its next meeting in September, according to CME FedWatch Tool, at last check.

After the expected increase in July, traders in the fed-funds-futures market were on Wednesday largely expecting the Fed to hold rates steady for the rest of the year.

“The bulls get their wish – CPI print came in better than expectations,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, in emailed comments Wednesday. “We think the danger now is that the Federal Reserve does one too many rate increases and the soft landing turns into something harder.”

In Elliott’s view, both the stock and bond markets lately appeared to be embracing the idea of a soft landing for the economy.

The yield on the two-year Treasury note, which recently has been trading below the Fed’s benchmark rate, tumbled after the CPI report was released Wednesday. Two-year yields
TMUBMUSD02Y,
4.758%
were down about 16 basis points around midday Wednesday at 4.73%, according to FactSet data.

“As the Fed has moved interest rates to very restrictive levels thus far, and probably will execute another hike or possibly two from here, we think that patience should be a real virtue in their overall disposition toward ongoing monetary policy,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments Wednesday. “Today’s CPI report for June displayed notable moderation, which is good news for policy makers, markets and households overall.”

U.S. stocks were up Wednesday afternoon, with the S&P 500
SPX,
+0.83%
gaining 0.7% while the Dow Jones Industrial Average
DJIA,
+0.39%
rose 0.4% and the Nasdaq Composite
COMP,
+1.15%
advanced 0.9%, according to FactSet data, at last check. The stock-market’s fear gauge, the Cboe Volatility index
VIX,
-7.28%,
was down more than 7% at 13.8 around midday Wednesday.

Read: S&P 500 is most likely going to correct back to 4,100, Mizuho warns market bulls

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July 12, 2023
Some Fed officials pushed for June rate hike, minutes show

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There was support from an unspecified number of Federal Reserve officials for an interest rate hike at the central bank’s policy meeting in June, according to a summary of the discussions released Wednesday.

“Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or they could have supported such a proposal,” the minutes of the June 13-14 meeting said.

These…

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July 5, 2023
Recession canceled? U.S. stock market ‘pretty frothy’ after S&P 500’s strongest first half since 2019.

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The S&P 500 index just wrapped up its strongest first half of a year since 2019, as a U.S. recession feared near by many investors seems perpetually further away than anticipated, leaving the stock market rally’s momentum for the rest of 2023 in question.

It’s “difficult to gauge” when the “liquidity unleashed” by the U.S. government during the pandemic will run out, said José Torres, senior economist at Interactive Brokers, in a phone interview, referring to fiscal and monetary stimulus in 2020-2021. While the Federal Reserve has been raising interest rates since 2022 to battle high inflation, the Fed’s intervention after regional-bank failures in March provided more liquidity to the financial system, he said.

That “created this environment for risk assets to run higher,” said Torres. And then, the artificial-intelligence craze has more recently driven “momentum” in U.S. stocks, he said. “I think the market goes lower from here.”

The S&P 500
SPX,
+1.23%
in mid-March was trading near its starting level in 2023, as regional-bank woes weighed on stocks before the Fed’s intervention that month. The central bank’s bank term funding program, announced March 12, helped shore up confidence in the banking system, taking off “a lot of pressure on financial conditions,” according to Torres.

The S&P 500 rose 15.9% in the first six months of 2023 for its strongest first-half of a year since 2019, according to Dow Jones Market Data. Each of the index’s 11 sectors climbed in June, marking the first time since November that all of them were up in the same month.

The U.S. economy has been resilient despite the Fed’s rapid interest rate hikes in 2022 to cool demand and bring down still high inflation. Investors appear to be shrugging off recession worries after some surprisingly strong economic data in recent days.

“Ladies and Gentleman, the recession has been cancelled!” wrote Bernard Baumohl, chief global economist at the Economic Outlook Group, in a note emailed June 29.

“Let’s not forget that despite the economy’s impressive performance the first three months, prices have continued to ease as well,” Baumohl said in the note. “Virtually every inflation metric has been falling,” he said, so “unless inflation shows signs of reversing course and accelerates, the Fed should maintain its current pause.”

The Fed has slowed its interest-rate hikes this year, pausing them at its June policy meeting while signaling that further rate increases may still be coming. Federal-funds futures on Friday showed traders largely expecting the Fed to lift its benchmark rate by a quarter point in July to a targeted range of 5.25% to 5.5%, according to the CME FedWatch Tool, at last check.

Investors have cheered the Fed’s pause, with many expecting it’s near the end of its rate-hiking cycle, which had led to brutal losses for stocks and bonds last year.

Meanwhile, economic data released in the past week showed a revised estimate for U.S. growth in the first quarter was higher than anticipated; new orders for manufactured durable goods were stronger than expected in May; sales of newly built homes that same month beat economists’ forecasts; consumer confidence jumped in June to a 17-month high based on a Conference Board survey; and that initial jobless claims in the week ending June 24 fell.

See also: U.S. economy on track to grow as fast as 2% in the second quar ter

Investors also welcomed more evidence of inflation easing. U.S. inflation measured by the personal-consumption-expenditures price index softened to 3.8% in May on a 12-month basis, the slowest increase since April 2021, based on a government report Friday.

But Torres said he worries the U.S. economy may be growing too fast for the Fed’s fight with inflation, potentially leading the central bank to become more hawkish by further tightening monetary policy.

‘Shocked’

“There’s a huge discrepancy” between two-year Treasury yields
TMUBMUSD02Y,
4.908%
and where the Fed has indicated its benchmark rate may wind up at the end of its hiking cycle, he said. That’s after the recent rise in two-year yields from the wake of their fall during the regional-banking stress.

The Fed’s summary of economic projections, released in June, showed its policy rate could wind up as high as 5.6% by the end of this year, compared to a current targeted range of 5% to 5.25%.

Meanwhile, the yield on the two-year Treasury note rose 81.7 basis points in the second quarter to 4.877% on Friday, the highest level since March 9 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

“I’ve been shocked the market has already been able to digest this yield move to the upside,” said Torres. “There’s still more room to the upside on yields,” he said, adding that two-year Treasury rates often are viewed as a gauge of how hawkish the Fed may be with its policy rate.

The U.S. stock market rose on Friday, closing out June with weekly, monthly and quarterly gains.

The S&P 500 and Nasdaq Composite
COMP,
+1.45%
each finished the month at its highest closing level since April 2022, with both indexes notching their longest monthly win streaks since 2021, according to Dow Jones Market Data. The technology-heavy Nasdaq soared 31.7% during the first six months of 2023, clinching its best first half since 1983.

Sentiment in the stock market has gotten “pretty frothy,” making equities vulnerable to a decline, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview. “On the surface the market has been incredibly resilient, but of course the concentration has been extreme.”

She pointed to a “small handful” of megacap stocks, including names like Apple Inc.
AAPL,
+2.31%
Microsoft Corp.
MSFT,
+1.64%
and Nvidia Corp.
NVDA,
+3.63%,
powering the performance of the S&P 500 and Nasdaq.

Read: Apple clinches $3 trillion valuation, becoming first U.S. company to close at that mark

Such stocks “really kicked into high gear” at the start of the banking trouble in March, as investors, in a defensive move, sought companies that are “highly liquid” and generate cash, she said.

Stocks in that megacap group, sometimes referred to as Big Tech although they span sectors including communication services and consumer discretionary as well as information technology, have also benefited from AI exposure, said Sonders.

Weakness, strength on the roll

Sonders said she sees the U.S. as having experienced “rolling” recessions in different segments – such as housing or manufacturing – as opposed to the entire economy being swept up in a full-blown downturn. “The recession versus no recession debate” is missing the current nuances of this cycle, in her view.

“We’ve seen weakness and strength rolling through the economy as opposed to everything either booming at the same time, or falling apart at the same time,” she said. So while cracks may turn up in the services sector, the U.S. could still benefit from other areas, such as the recent lift seen in the housing market, which already has gone through a recession, according to Sonders.

Read: Homebuilder ETF outperforms S&P 500, industry’s stocks still ‘cheap’ in 2023 market rally

In the stock market, megacap names have gotten a lot of attention for their surge this year, yet other pockets, such as homebuilders and the S&P 500’s industrials sector, have recently done well, she said. Industrial stocks
SP500EW.20,
+0.92%
recently stood out to Sonders for their “decent breadth.”

But to her thinking, “this is not the kind of environment to make a monolithic sector call or two,” rather Sonders favors screening stocks for characteristics such as “high quality” when looking for investment opportunities.

Fluctuating financial conditions have made it harder to discern when the U.S. could fall into a recession, according to Torres. But rates rising further poses the risk of returning to the kind of environment that created stress for regional banks, he said. And with “commercial real estate lurking in the background” as a concern, he said it’s tough to see the stock market climbing from the S&P 500’s already “rich” levels.

“The higher the Fed pushes rates, the more pressure that’s gonna put on bank balance sheets,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in a phone interview. “It just becomes a question of whether or not you’re going to see a run on a particular bank.”

This coming week, the Fed will release minutes from its June policy meeting. Investors will see them on Wednesday, the day after the July 4 holiday in the U.S.

While the S&P 500 has rallied in 2023, shares of the SPDR S&P Regional Banking ETF
KRE,
-1.14%
sank 30.5% in the first half of the year while the Invesco KBW Bank ETF
KBWB,
+0.24%
is down 20.5% over the same period, according to FactSet data.

“There is a lot of dispersion within the market,” said Ripley. “There are pockets that are doing better than others.”

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July 2, 2023
JPMorgan, Goldman, Citi and Morgan Stanley boost dividends after Fed stress tests

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Major U.S. banks including Morgan Stanley and JPMorgan Chase & Co. announced dividend increases late Friday, in the wake of the results of the Federal Reserve’s latest bank stress tests earlier this week.

JPMorgan
JPM,
+1.40%
said it plans to raise the bank’s dividend to $1.05 a share, up from $1 a share, for the third quarter, subject to board approval.

The stress tests “show that banks are resilient — even while withstanding severe shocks — and continue to serve as a pillar of strength to the financial system and broader economy,” JPMorgan Chief Executive Jamie Dimon said in a statement.

“We continue to maintain a fortress balance sheet with strong capital levels and robust liquidity,” Dimon added.

Morgan Stanley
MS,
+0.19%
said it will increase its quarterly dividend to 85 cents a share from the current 77.5 cents a share, beginning with its third-quarter dividend. The bank also said that its board reauthorized a multiyear share buyback totaling as much as $20 billion, without an expiration date, beginning in the third quarter.

Don’t miss: Fed stress tests see large banks able to handle recession and slide in commercial-real-estate prices

See also: Wall Street upbeat on banks after ‘mostly positive’ Fed stress tests results

“The results of the Federal Reserve’s stress test demonstrate the durability of our transformed business model. We remain committed to returning capital to our shareholders and are raising our dividend by 7.5 cents,” Chief Executive James P. Gorman said in a statement.

Wells Fargo
WFC,
+0.54%,
for its part, said it will increase its dividend to 35 cents a share, up from 30 cents a share, subject to board approval. It said it has the capacity to undertake a share buyback, “which will be routinely assessed as part of the company’s internal capital adequacy framework that considers current market conditions, potential changes to regulatory capital requirements, and other risk factors,” without elaborating further.

Goldman Sachs Group Inc.
GS,
-0.17%
said it would raise its dividend, to $2.75 a share from $2.50 a share, starting July 1.

Market Pulse: Goldman Sachs reportedly looking to exit Apple partnership

Citigroup Inc. C said its board had approved an increase in its quarterly dividend to 53 cents a share, from 51 cents, also for the third quarter.

Citi Chief Executive Jane Fraser said that, while the bank “would have clearly preferred not to see an increase in our stress capital buffer, these results still demonstrate Citi’s financial resilience through all economic environments, including the severely adverse scenario envisioned in the Federal Reserve’s stress test.”

Citi’s “robust capital and liquidity position, as well as the diversification of our funding and our business model, allow Citi to continue to be a source of strength for our clients and navigate challenging macro environments securely,” Fraser said.

The bank bought back $1 billon in shares in the second quarter and will continue to evaluate its capital actions, the chief executive said. “We are completely committed to simplifying Citi, improving returns and delivering value to our shareholders.”

Shares of Morgan Stanley and Wells Fargo rose 1.5% and 0.1%, respectively, in the after-hours session after ending the regular trading day up a respective 0.2% and 0.5%. JPMorgan shares edged up 0.2% in the extended session after closing 1.4% higher on Friday. Citigroup shares were up 0.2%, while Goldman’s were largely unchanged.

Bill Peters contributed.

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June 30, 2023
A breakfast-cereal giant’s grumbles about prices could be music to the Fed’s ears

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General Mills the megamanufacturer behind your morning Cheerios, reported a drop in earnings that might make it question whether continuing to raise prices is worth it.

General Mills
GIS,
+0.52%
CEO Jeff Harmening acknowledged during the company’s fourth-fiscal-quarter earnings call this week that consumers responded to higher prices by making fewer purchases. “As you look at the last 12 weeks, it’s pretty clear that elasticity — volume elasticities have increased,” which may suggest consumer demand is more sensitive to price increases than it had been previously.

In business and economics, price elasticity refers to the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes.

“ ‘Companies have been raising prices pretty aggressively. We’re seeing that trend definitely subside.’ ”

— Richard Moody, Regions Financial Corp.

The manufacturer of the Häagen-Dazs, Pillsbury and Betty Crocker product lineups, as well as its famed breakfast cereals, felt the impact of this phenomenon as it reported a decline in profits and sales volume for its fourth quarter.

Read: General Mills’ stock slides 5% as sales fall short. North American retailers are reducing inventory.

Richard Moody, chief economist at Regions Financial Corp., said higher prices are posing an issue for companies more broadly. “Companies have been raising prices pretty aggressively. We’re seeing that trend definitely subside. Sellers of goods just don’t have as much pricing power as they had for most of last year and the prior year,” Moody told MarketWatch.

This could be music to the ears of Federal Reserve officials, who are trying to get inflation back down to their 2% target.

St. Louis Fed President James Bullard, during the early days of the fight against inflation in 2022, said inflation would return to the Fed’s target once companies find out that raising prices is harmful to their bottom lines.

In an interview last May with Fox Business Network he observed that “a lot of CEOs have come on TV and said, ‘Oh, I have lots of pricing power, and I can do whatever I want and make a lot of money … but I think some of them are going to get punched in the face here with the fact that consumers have to react.”

Context: Fed-preferred PCE gauge shows lowest U.S. inflation rate since April 2021, but stickiness at core hints at persistent price pressure

Also see: U.S. consumer sentiment climbs to 4-month high on slower inflation and end of debt-ceiling fight

Though General Mills’ drop in earnings might not be the punch in the face Bullard warned of, its recent quarterly update could be a sign that continuing to raise prices is now looking harmful to financial results.

A statement from the company attributed the drop in earnings to a trend among retailers toward lower inventory levels. During the pandemic, grocery stores stocked up on Nature Valley snack bars and CoCo Puffs due to concerns about supply-chain complications. General Mills says retailers are holding less inventory now, so there is less on the shelves for consumers to purchase.

CEO Harmening said the majority of General Mills’ price increases are in the marketplace already. Though conditions can change, “we feel good about what we see right now with our pricing and the inflationary environment that we see,” he said, a possible indication that the company might back off of flexing price muscle.

Other economists were uncertain about reading too much into lower earnings for companies like General Mills.

Will Compernolle, macro strategist at FHN Financial, said he detected a bit of a culture change due to grocery-store inflation over the past two years. “People are buying less stuff to eat at home. And that is, you know, a kind of mysterious trend in the sense that this is always considered a necessity,” he said.

As pandemic-era stay-at-home recommendations and other public health measures were eased, there’s been “a temporary surge in food-services spending” as people have chosen to go out to restaurants rather than cook at home, he said.

He said it is unclear how companies like General Mills will respond to consumer spending. In order to determine demand, they will have to see what “the new normal looks like when the dust settles” and ask whether “people going to go back to their old composition of food at home versus food away.”

Read: Shopping at Kroger can be up to four times cheaper than eating out, CEO says

Robert Frick, corporate economist with Navy Federal Credit Union, said he has observed “consumers are saving more and spending less, perhaps out of caution, as most believe a recession is either here or imminent.”

Lower-income Americans have become particularly sensitive to price increases, Frick said. He shared his “hunch” that there is “kind of a drag on spending because lower-income Americans are being hurt so badly.”

“It seems likely most of the effects of spending plateauing overall has to do with that lower third of Americans [having] really started to, you know, pinch their pennies and run up their debt, and they don’t want to run it up any more,” Frick said.

Income and spending data released by the government on Friday showed people may have more money to spend but are not spending quite as much.

U.S. consumer spending slowed in May, rising just 0.1%, compared with 0.6% growth in consumer spending in the prior month. Consumers saved 4.3% of their disposable income, an increase from April’s 3.4% savings rate.

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June 30, 2023
Dow ends 270 points higher, Nasdaq closes flat on upbeat economic data

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U.S. stocks ended mostly higher Thursday, getting a boost from the financial sector, on positive tones from the banking sector and the economy. The Dow Jones Industrial Average
DJIA,
+0.80%
rose about 269 points, or 0.8%, ending near 34,122, according to preliminary FactSet data. The S&P 500 index
SPX,
+0.45%
ended 0.5% higher, while the Nasdaq Composite Index
COMP,
-0.00%
closed virtually unchanged. The S&P 500’s financial sector was a standout, climbing 1.7%, a day after 23 of the nation’s biggest banks passed annual “stress tests,” designed to model their ability to withstand a severe global recession scenario. The U.S. economy also saw a revised gross domestic product reading of 2% in the first quarter. Federal Reserve Chairman Jerome Powell on Thursday also downplayed concerns that the Federal Reserve might be at risk of going too far with its rate hikes, at a meeting with other global central bankers in Spain, while also saying that coming rate decisions would be decided on a meeting-to-meeting basis.

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June 29, 2023
New York Empire State, Philadelphia Fed factory indexes mixed but show signs of optimism

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The numbers: Two U.S. regional gauges of manufacturing sentiment showed signs in June that they may be improving after a rough patch, according to data released Thursday.

The Philadelphia Federal Reserve’s manufacturing index slipped further to a reading of negative 13.7 in June from negative 10.4 in the prior month, but economists had expected a reading of negative 14.8, according to a Wall Street Journal survey of economists. This is the tenth straight negative reading.

The…

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June 15, 2023
Philadelphia Fed’s factory gauge shows ninth straight month of declining activity in May

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The numbers: The Philadelphia Federal Reserve said Thursday its gauge of regional business activity rose to negative 10.4 in May from negative 31.3 in the prior month. Any reading below zero indicates deteriorating conditions. This is the ninth straight negative reading and the eleventh in the last twelve months.

Economists polled by the Wall Street Journal expected a negative 20 reading in May.

Key details: The barometer on new orders increased 13.8 points but remained at negative 8.9 in May. The shipments index rose slightly to negative 4.7. The measure on six-month business outlook worsened to negative 10.3 in May from negative 1.5 in the prior month.

Big picture: The continued contraction in activity is a sign that U.S. manufacturing continues to struggle.

The Philadelphia Fed index is closely followed to give economists an advance signal of factory conditions across the country.

The national ISM manufacturing index has been in contractionary territory for six months.

Earlier this week, the similar Empire State survey released by the New York Fed showed manufacturing activity plummeted 42.6 points to negative 31.8 in May.

Market reaction: Stocks
DJIA,
-0.23%

SPX,
+0.05%
were set to open mixed on Thursday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.627%
rose to 3.62%.

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May 18, 2023
Biden says US debt ceiling talks are moving along

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WASHINGTON, May 13 (Reuters) – President Joe Biden said on Saturday that talks with Congress on raising the U.S. government’s debt limit were moving along and more will be known about their progress in the next two days.

“I think they are moving along, hard to tell. We have not reached the crunch point yet,” Biden told reporters at Joint Base Andrews.

“We’ll know more in the next two days,” he said.

Biden is expected to meet with Republican House Speaker Kevin McCarthy and other congressional leaders early next week to resume negotiations.

The leaders had canceled a planned meeting on Friday to let staff continue discussions.

Aides for Biden and McCarthy have started to discuss ways to limit federal spending as talks on raising the government’s $31.4 trillion debt ceiling to avoid a catastrophic default creep forward, Reuters has reported.

The Treasury Department says it could run out of money by June 1 unless lawmakers lift the nation’s debt ceiling.

Reporting by Jeff Mason; Writing by Eric Beech; Editing by David Gregorio

Our Standards: The Thomson Reuters Trust Principles.

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May 14, 2023