Tag: Interest Rates

Inflation pushes up mortgage rates for second week in a row | CNN Business

Washington, DC
CNN
—

Mortgage rates climbed higher for the second consecutive week, following four weeks of declines. Inflation is running hotter, making rates more volatile, with the expectation that they will move in the 6% to 7% range over the next few weeks.

The 30-year fixed-rate mortgage averaged 6.32% in the week ending February 16, up from 6.12% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.92%.

After climbing for most of 2022, mortgage rates had been trending downward since November, as various economic indicators indicated inflation may have peaked. But a stronger-than-expected jobs report and a Consumer Price Index report that showed inflation is only moderately easing suggest the Federal Reserve could continue hiking its benchmark lending rate in its battle against inflation.

Inflation is keeping mortgage rates volatile, said Sam Khater, Freddie Mac’s chief economist.

“The economy is showing signs of resilience, mainly due to consumer spending, and rates are increasing,” said Khater. “Overall housing costs are also increasing and therefore impacting inflation, which continues to persist.”

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.

Investors are digesting the latest economic data, said George Ratiu, Realtor.com manager of economic research.

The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

“While the Fed signaled that it will continue to raise rates this year, the moves are expected to come in 25 basis point increments, a less aggressive tightening than what we saw in 2022,” said Ratiu. “The central bank is acknowledging that it sees its monetary actions having a tangible effect on inflation. The CPI data out this week seems to confirm the bank’s views.”

At the same time, he said, many companies expect the economy will enter a recession as a result of the Fed’s rate hikes, even in the face of data pointing to continued resilience.

“This expectation is becoming more visible in the growing number of companies resorting to layoffs as a hedge against a potential economic slowdown,” he said. “People who are laid off pull back on spending, and even those who are still employed may begin to do the same due to worries about losing their job, thus potentially sending consumer spending into a downward spiral.”

For home buyers, the cost of financing a home is expected to go up.

Already, rates have been climbing in recent weeks, leading to a drop in mortgage applications. Last week, applications fell 7.7% from one week earlier, according to the Mortgage Bankers Association.

Buyers are proving to be interest rate sensitive, according to MBA.

“Purchase applications dropped to their lowest level since the beginning of this year and were more than 40% lower than a year ago,” said Joel Kan, MBA’s vice president and deputy chief economist. “Potential buyers remain quite sensitive to the current level of mortgage rates, which are more than two percentage points above last year’s levels and have significantly reduced buyers’ purchasing power.”

Mortgage rates are expected to move in the 6% to 7% range over the next few weeks, said Ratiu.

For housing markets, he said, “the rebound in rates translates into higher mortgage payments, adding pressure on homebuyers.”

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February 16, 2023
Watch CNBC’s full interview with Smead Capital Management CIO Bill Smead

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Bill Smead of Smead Capital Management joins ‘The Exchange’ to discuss the economy and the homebuilder trade. He’s been bullish on the homebuilders for nearly a decade.

06:18

Wed, Feb 15 20231:48 PM EST

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February 15, 2023
Labor markets are still strong, says Bank of America CEO Brian Moynihan

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Squawk on the Street

CNBC’s Sara Eisen sits down with Brian Moynihan, Bank of America CEO, to get his thoughts on consumer spending, 2023 expectations and mortgages.

05:21

an hour ago

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February 14, 2023
Inflation report due Tuesday has the potential to deliver some bad news

Prices are displayed in a grocery store on February 01, 2023 in New York City.

Leonardo Munoz | Corbis News | Getty Images

Just as Federal Reserve officials have grown optimistic that inflation is cooling, news could come countering that narrative.

All market eyes Tuesday will be on the release of the Labor Department’s consumer price index, a widely followed inflation gauge that measures the costs for dozens of goods and services spanning the economy.

The CPI was trending lower as 2022 came to close. But it looks like 2023 will show that inflation was strong — perhaps even stronger than Wall Street expectations.

“We’ve gotten surprises on the soft side for the last three months. It wouldn’t be at all surprising if we get surprise on the hot side in January,” said Mark Zandi, chief economist at Moody’s Analytics.

Economists are expecting that CPI will show a 0.4% increase in January, which would translate into 6.2% annual growth, according to Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.

However, there’s some indication the number could be even higher.

The Cleveland Fed’s “Nowcast” tracker of CPI components is pointing toward inflation growth of 0.65% on a monthly basis and 6.5% year over year. On the core, the outlook is for 0.46% and 5.6%.

The Fed model is based on what its authors say are fewer variables than the CPI report while utilizing more real-time data rather than the backward-looking numbers often found in government reports. Over time, the Cleveland Fed says its methodology outperforms other high-profile forecasters.

Impact on interest rates

If the reading is hotter than expected, there are potential important investing implications.

Fed policymakers are watching the CPI and a host of other data points for clues on whether a series of eight interest rate increases is having the desired effect of cooling inflation that hit a 41-year high last summer. If it turns out that monetary tightening isn’t working, it could force the Fed into a more aggressive posture.

Zandi said, however, that it’s dangerous to make too much of individual reports.

“We shouldn’t get fixated too much on any month-to-month movements,” he said. “Generally, looking through month-to-month volatility we should see continued decline in year-over-year growth.”

Indeed, the CPI peaked out around 9% in June 2022 on an annual basis but has been on the decline since, falling to 6.4% in December.

But food prices have been stubborn, still up more than 10% from a year ago in December. Gasoline prices also have reversed course, with prices at the pump up about 30 cents a gallon in January, according to AAA.

Even the initially reported 0.1% decline in the headline CPI for December has been revised up, and is now showing a gain of 0.1%, according to revisions released Friday.

“When you’ve had a string of lower-than-expected numbers, can that continue? I don’t know,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Boockvar said he doesn’t expect the January report to have a lot of influence on the Fed one way or the other.

“Let’s just say the headline number is 6%. Is that really going to move the needle for the Fed?” he said. “The Fed seems intent on raising another 50 basis points, and there’s clearly going to be a lot more evidence needed for them to change that. One number is certainly not going to do that.”

Markets currently expect the Fed to raise its benchmark interest rate two more times from its current target range of 4.5%-4.75%. That would translate to another half a percentage point, or 50 basis points. Market pricing also indicates that Fed will stop at a “terminal rate” of 5.18%.

Changes in the CPI report

There are other issues that could cast a cloud over the report, as the Bureau of Labor Statistics is changing the way it’s compiling the report.

One significant alteration is that it is now weighting prices on a one-year comparison rather than the two-year duration it had previously used.

That has resulted in a change in how much influence the various components will have — the weighting for both food and energy prices, for instance, will have an incrementally smaller influence on the headline CPI number, while housing will have a slightly heavier weighting.

In addition, shelter will have a heavier influence, going from about a 33% weight to 34.4%. The BLS also will give heavier price weighting to unattached rental properties, as opposed to apartments.

The change in weightings are done to reflect consumer spending patterns so the CPI provides a more accurate cost-of-living picture.

Correction: Economists polled by Dow Jones predict the core CPI will rise by 5.5% on an annual basis. An earlier version misstated the figure.

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February 14, 2023
Japan nominates new central bank leader in possible move away from ultra-easy policy | CNN Business

Hong Kong
CNN
—

The Japanese government has nominated Kazuo Ueda to lead its central bank, in a surprise move that could pave the way for the country to wind down its ultra-loose monetary policy.

If appointed, Ueda — a 71-year-old university professor and a former Bank of Japan (BOJ) board member — would succeed Haruhiko Kuroda, the country’s longest serving central bank chief and the architect of its current yield curve control policy (YCC). His term ends on April 8.

Ueda’s nomination must be approved by both houses of parliament, each is currently controlled by the ruling coalition, before the government of Prime Minister Fumio Kishida can formally appoint him for a five-year term.

Analysts believe Ueda’s appointment could increase the odds that the BOJ will exit its prolonged ultra-easy monetary policy, which is increasingly difficult to maintain at a time when inflationary pressure is rising and other central banks are hiking rates aggressively.

“Investors reckoned that the pick of Ueda-san is a signal to pave the way [for BOJ] to exit the ultra-loose policy,” said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.

“[The] chance for ending the yield curve control policy and negative interest rate[s] has been increasing,” he said, but adding that the BOJ’s monetary policy will likely stay “accommodative.”

The yield curve control policy is a pillar of the central bank’s effort to keep interest rates low and stimulate the economy.

Accommodative is a term used to describe monetary policy that adjusts to adverse market conditions and usually involves keeping interest rates low to spur growth and employment.

The BOJ has implemented an ultra-easy policy since Kuroda took the reins in 2013. In 2016, after years of aggressive bond buying failed to push up prices, it introduced the yield curve control program, where it bought targeted amounts of bonds to push down yields, in order to stoke inflation and stimulate growth.

As part of that program, the central bank targeted some short-term interest rates at an ultra-dovish minus 0.1% and aimed for 10-year government bond yields around 0%.

But as prices rose and interest rates elsewhere went up, pressure has grown on the BOJ to wind down YCC.

In December, the BOJ shocked global markets by allowing the 10-year government bond yield to move 50 basis points on either side of its 0% target, in a move that stoked speculation the central bank may follow the same direction as other major economies by allowing rates to rise further.

The unexpectedly hawkish decision caused stocks to tumble, while sending the yen and bond yields soaring.

But Kuroda later dismissed a near-term exit from his ultra-loose monetary policy.

When local media first reported Friday that Ueda would be nominated as the next BOJ governor, the yen jumped against both the US dollar and the euro.

“Investors interpreted the news as signaling a hawkish turn,” said Stefan Angrick, senior economist at Moody’s Analytics.

“But it will take time for the implications to become clear,” he said. “With demand-driven price pressure still preciously scarce and stronger wage gains yet to materialize, it’s hard to see the BOJ rush towards tightening under a new governor.”

On Friday, Ueda told reporters that he thinks “the current BOJ policy is appropriate” and “monetary easing must carry on given the current state.”

In an opinion piece published last July in the Nikkei, Ueda warned against prematurely raising rates.

However, in the same piece, he also noted the BOJ should prepare an exit strategy, saying that a “serious” examination is needed at some point on the unprecedented monetary easing framework, which has continued far longer than most would expect.

“We don’t think he is expected to immediately change the BOJ’s policy stance based on his previous remarks,” said Min Joo Kang, senior economist at ING Group, in a recent research report.

“He [Ueda] is likely to shift monetary policy only gradually and the BOJ’s data dependency – inflation and wage growth – will become more important.”

Japan’s economy remains weak, highlighting the tough task ahead for Ueda.

According to the latest data from Tuesday, Japan’s economy grew by an annualized 0.6% in the fourth quarter of 2022, reversing a 0.8% contraction in the third quarter. But it was much weaker than the consensus forecast of 2% expansion.

“We believe that the modest recovery will continue this year, but today’s data support[s] the Bank of Japan’s argument that the recovery is still fragile and that easy monetary policy is needed,” said ING analysts. “The incoming new governor will find it difficult to start any normalization.”

– CNN’s Junko Ogura contributed reporting

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February 14, 2023
In a market that’s gone mad, investors can embrace these dependable stocks | CNN Business

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.

New York
CNN
—

Many people don’t have the time or inclination to do deep research on stocks.

It’s often easier to buy an exchange-traded fund that owns a basket of the top blue chips, like Apple

(AAPL), Microsoft

(MSFT) and Amazon

(AMZN). Other investors like to bet on themes and memes instead of poring over a company’s financial statements and regulatory filings. Hence the recent craze for momentum stocks like GameStop

(GME) and AMC

(AMC).

But for old-fashioned investors with a little gray in their hair (and veteran business journalists like yours truly) there are other ways to find winning stocks for the long haul.

I’ve been running stock screens using market data software, first from FactSet and now from Refinitiv, on and off during the more than 20 years I’ve worked at CNN Business. (It was CNNMoney when I first started.)

I’ve typically done this stock picking feature in early to mid February as a Stocks We Love type of story, pegging it to Valentine’s Day. (Here’s the first one I did in 2002!) So they’ve often been littered with cheesy references to how romantic it is to find a reliable company you can count on for a long-term relationship.

Well, investing trends have changed a bit in the past two decades. Some would argue that active investing (actually choosing individual companies) is no longer in vogue thanks to the rise of passively run index funds.

And to be fair, the experts are right, mostly. Investors usually are better off owning an index ETF. If the goal is saving for retirement in particular, a diversified mix of companies is safer than trying the riskier strategy of identifying individual winners and losers.

But you know what they say about not being able to teach an old dog new tricks? I still believe there’s value in looking for quality stocks at bargain prices. Legendary investors like Warren Buffett and Peter Lynch of Fidelity fame would likely agree.

With that in mind, I ran one final stock screen for this Valentine’s Day. Like my past screens, I tried to find companies with strong fundamentals (solid sales and earnings growth), low levels of debt and high returns on equity. And perhaps most importantly, I screened for companies trading at a reasonable price based on their estimated earnings.

This screen wound up identifying 33 companies that could make sense as a buy-and-hold investment. All of them generated double-digit sales growth annually over the past five years and they are all expected to report profit growth of at least 10% a year for the next few years.

Some of the more prominent companies on the list? IT services/consulting giant Accenture

(ACN) made the cut. So did software leader Adobe

(ADBE), semiconductor manufacturer Analog Devices

(ADI), chip equipment juggernaut Applied Materials

(AMAT) and Venmo owner PayPal

(PYPL).

That’s a fair amount of exposure to the tech sector. But several other non-techs made my list too.

Auto insurer Progressive

(PGR) (hi Flo!), health insurer Humana

(HUM), cosmetics retailer Ulta Beauty

(ULTA), UGG boots and Hoka sneakers maker Deckers Outdoor

(DECK) and trucker JB Hunt

(JBHT) met my criteria.

As did financial services firm Raymond James

(RJF), perhaps most famous for having its name on the Tampa Bay Buccaneers stadium Tom Brady briefly called home.

None of these stocks are likely to be moonshots that will surge because of comments that someone makes on Reddit. But they might offer a little more in the way of security and dependability. And after all, isn’t that what we all want from a long-term partner on Valentine’s Day?

The broader market has continued to rally, in large part due to hopes that inflation pressures (and more Federal Reserve rate hikes) will soon be things of the past. But consumers are still skittish when it comes to buying more costly items.

Meat processing giant Tyson Foods

(TSN) reported disappointing results last week, largely due to a pullback in consumer demand for pricier beef. Luxury apparel retailer Capri Holdings

(CPRI), which owns the Versace, Jimmy Choo and Michael Kors brands, also posted lousy numbers.

But shoppers still seem to be spending on more affordable goods. Pepsi

(PEP) reported sales and earnings last week that topped Wall Street’s targets. Fast food giant Yum! Brands

(YUM), the owner of Taco Bell, KFC and Pizza Hut, issued solid results too.

That could bode well for several leading consumer companies that are on tap to report earnings this week, including Pepsi competitor Coca-Cola

(KO) as well as Restaurant Brands

(QSR), the parent company of Burger King, Popeyes, Tim Horton and Firehouse Subs.

Kraft Heinz

(KHC), restaurant owner Bloomin’ Brands

(BLMN), Sam Adams brewer Boston Beer

(SAM) and food delivery service DoorDash are also scheduled to release their latest results this week.

The restaurant stocks in particular could do well.

“Consumers continue to trade goods for services,” said Jharonne Martis, director of consumer research for Refinitiv, in a report. Martis noted that the restaurant and broader leisure sector has continued to outperform other consumer-related industries this year.

Inflation is obviously still a concern for big consumer brands. Companies have to deal with the challenge of trying to pass on higher costs to customers without driving them away.

That could become less of a problem though.

The US government will report both its Consumer Price Index and Producer Price Index for January this week and economists are hoping for a further slowdown in year-over-year prices. Consumer prices rose 6.5% over the past 12 months through December, down from a 7.1% pace in November.

“There are positive signs. Inflation has passed the peak so there is a little bit of a respite,” said Kathryn Kaminski. chief research strategist with AlphaSimplex.

Higher prices were a problem for retailers during the holidays. Retail sales fell 1.1% in December from November, according to figures from the US government, following a 0.6% drop in November.

But retail sales are expected to bounce back as inflation becomes less of an issue. Economists are forecasting a 0.9% increase in retail sales for January when those numbers come out later this week.

Monday: Earnings from TreeHouse Foods

(THS), Avis Budget

(CAR), FirstEnergy

(FE), IAC

(IAC) and Palantir

Tuesday: US CPI; Japan GDP; UK employment report; earnings from Coca-Cola, Asahi Group, Marriott

(MAR). Cleveland-Cliffs

(CLF), Restaurant Brands, Suncor Energy

(SU), Airbnb, Herbalife

(HLF), GoDaddy

(GDDY) and TripAdvisor

(TRIP)

Wednesday: US retail sales; UK inflation; weekly crude oil inventories; annual meeting of Charlie Munger’s Daily Journal Co

(DJCO); earnings from Kraft Heinz, Lithia Motors

(LAD), Sunoco

(SUN), Sonic Automotive

(SAH), Ryder

(R), Barrick Gold

(GOLD), Biogen

(BIIB), Owens Corning

(OC), Krispy Kreme, Cisco

(CSCO), AIG

(AIG), Shopify

(SHOP) and Boston Beer

Thursday: US PPI; US weekly jobless claims: US housing starts and building permits; China housing prices; earnings from US Foods

(USFD), Lenovo

(LNVGF), Nestle

(NSRGF), Paramount Global, Southern

(SO), Hasbro

(HAS), Hyatt

(H), Bloomin’ Brands, WeWork, Applied Materials

(AMAT), DoorDash, DraftKings and Redfin

(RDFN)

Friday: Earnings from Deere

(DE), AutoNation

(AN), Sands China

(SCHYF) and AMC Networks

(AMCX)

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February 12, 2023
Here’s what keeps Jerome Powell up at night and interest rates high | CNN Business

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York
CNN
—

Federal Reserve Chairman Jerome Powell threw markets into a tizzy on Tuesday as he spoke about the economy alongside his former boss, Carlyle Group co-founder David Rubenstein, at the Economic Club of Washington.

Stocks struggled for direction as investors tried to get a read on Powell’s economic outlook, attitude towards inflation and on future interest rate hikes. Wall Street cheered as the Fed chair said the disinflationary process has begun, then soured when he said the road to reaching 2% inflation will be “bumpy” and “long” with more rate hikes ahead.

Markets soared to new highs, before quickly falling to session lows and then recovering to close the day in the green.

“Powell doesn’t want to play games with financial markets,” said EY Parthenon chief economist Gregory Daco after the conversation. But at the same time, he said Powell wanted to communicate that the Fed’s “base case was not for inflation to come down as quickly and painlessly as some market participants appear to expect.”

Here’s why Powell thinks bringing down prices will be more difficult than investors anticipate.

Structural changes in the labor market: The US economy added an astonishing 517,000 jobs in January, blowing economists’ expectations out of the water. The unemployment rate fell to 3.4% from 3.5%, hitting a level not seen since May 1969.

The current labor market imbalance is a reflection of the pandemic’s lasting effect on the US economy and on labor supply, said Powell on Tuesday in answer to a question about the report. “The labor market is extraordinarily strong,” he said. Demand exceeds supply by 5 million people, and the labor force participation rate has declined. “It feels almost more structural than cyclical.”

“If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more,” he said.

Core services inflation: Powell noted that he’s seeing disinflation in the goods sector and expects to soon see declining inflation in housing. But prices remain stubborn for services. Service-sector inflation, which is more sensitive to a strong labor market, is up 7.5% from the year prior through the end of 2022, and has not abated, he said.

“That sector is not showing any disinflation yet,” Powell said. “There has been an expectation that [higher prices] will go away quickly and painlessly and I don’t think that’s at all guaranteed.”

Geopolitical uncertainties: Powell also cited concerns that the reopening of China’s economy after the sudden end of Covid-Zero restrictions, plus uncertainty about Russia’s war on Ukraine could also affect the inflation path in ways that remain unclear.

▸ The labor market is strong, but tech layoffs keep coming. There were around 50,000 tech jobs cut in January, and the trend has continued into February.

Video conferencing service Zoom is one of the latest to announce layoffs. The company said Tuesday that it’s cutting 1,300 jobs or 15% of its workforce.

Zoom CEO Eric Yuan said in a blog post on Tuesday that Zoom ramped up employment quickly due to increased demand during the pandemic. The company grew three times in size within 24 months, he said and now it must adapt to changing demand for its services.

“The uncertainty of the global economy, and its effect on our customers, means we need to take a hard — yet important — look inward to reset ourselves so we can weather the economic environment, deliver for our customers and achieve Zoom’s long-term vision,” he wrote.

Yuan added that he plans to lower his own salary by 98% and forgo his 2023 bonus. Shares of Zoom closed nearly 10% higher on Tuesday.

The announcement comes just one day after Dell said it would lay off more than 6,500 employees.

Amazon

(AMZN), Microsoft

(MSFT), Google and other tech giants have also recently announced plans to cut thousands of workers as the companies adapt to shifting pandemic demand and fears of a looming recession.

▸ Neel Kashkari, president of the Federal Reserve Bank of Minneapolis told CNN that he is starting to think that the US economy could avoid a recession and achieve a so-called soft landing.

It’s hard to have a recession when the job market is still so robust, he told CNN’s Poppy Harlow on Tuesday on CNN This Morning.

Still, “we have more work to do,” Kashkari told Harlow, adding that the labor market is “too hot” and that is a key reason why it is “harder to bring inflation back down.”

Although many investors are starting to think the Fed may pause after just two more similarly small hikes, to a level of around 5%, Kashkari said he believes the Fed may have to raise rates further. Kashkari has a vote this year on the Federal Open Market Committee, the Fed’s interest-rate setting group.

▸ It’s a good time to be in the oil business. BP’s annual profit more than doubled last year to an all-time high of nearly $28 billion.

The British energy company said in a statement that underlying replacement cost profit rose to $27.7 billion in 2022 from $12.8 billion the previous year. The metric is a key indicator of oil companies’ profitability.

BP

(BP) also unveiled a further $2.75 billion in share buybacks and hiked its dividend for the fourth quarter by around 10% to 6.61 cents per share.

BP’s shares rose 6% in Tuesday trading following the news. Over the past 12 months, its shares have soared 24%.

The earnings are the latest in a string of record-setting results by the world’s biggest energy companies, which have enjoyed bumper profits off the back of skyrocketing oil and gas prices.

Last week, another energy major Shell reported a record profit of almost $40 billion for 2022, more than double what it raked in the previous year after oil and gas prices jumped following Russia’s invasion of Ukraine.

On Wednesday it was TotalEnergie

(TTFNF)s turn. The French company posted annual profit of $36.2 billion for 2022, double the previous year’s earnings.

Disney has found itself in the middle of a culture war battle that could end up transferring Disney World’s governance to a board appointed by Florida Gov. Ron DeSantis. And that may be the least of Disney’s problems, writes my colleague Chris Isidore.

The company faces a media industry in turmoil, plunging cable subscriptions, a still-recovering box office, massive streaming losses, activist shareholders, possible reorganization and layoffs and growing labor disputes with employees. That’s a lot for CEO Bob Iger to handle.

Iger, who retired as CEO in 2020 only to be brought back in November, has been mostly quiet about his plans for the company since his return. That ends at 4:30 p.m. ET Wednesday when he is set to begin an earnings call with Wall Street investors.

Click here to read more about what to look for on what is certain to be a closely-followed call.

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February 8, 2023
Americans are becoming ‘reluctant’ to make larger purchases, new Fed report shows | CNN Business

Minneapolis
CNN
—

As retail sales took a bit of a breather in December, so did the credit cards.

US consumers’ outstanding credit grew by $11.56 billion to end the year, according to Federal Reserve data released Tuesday. It’s the lowest monthly gain since January 2021 and well below economists’ expectations of $25 billion.

For much of 2022, consumer debt levels grew at record rates as pandemic-induced pent-up demand ran up against a period of rampant inflation.

However, as the year drew to a close — and the Federal Reserve jacked up interest rates to combat inflation — that bullish spending activity was curtailed.

“Long story short, we’re seeing a more cautious consumer,” Ted Rossman, senior industry analyst with Bankrate, told CNN.

“Consumer spending certainly isn’t falling off a cliff, but we are seeing ample evidence that Americans are becoming more reluctant to make certain purchases, especially larger expenses and acquiring physical goods,” he said. “Services spending has been more robust, perhaps still owing to pent-up demand that stacked up during the pandemic for things like traveling and dining out.”

Revolving credit balances, which is mostly credit cards, grew by 7.3% in December, according to Tuesday’s report. That’s the lowest month-on-month increase since the summer of 2021, Rossman noted.

Still, those balances growing in a month when spending was down likely shows the toll taken by higher interest rates, Rossman said.

The average credit card charges a record-high 19.95%, Rossman said, citing Bankrate data that also showed that 46% of card holders are carrying a balance from month to month. That’s up from 39% a year before.

“Even if spending may be tailing off a bit, high inflation and higher interest rates are making balances harder to pay off,” he said. “More people are putting necessities on credit cards and financing these expenses over time.”

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February 7, 2023
Australia’s central bank signals more tightening ahead after hiking rates to decade high | CNN Business

Sydney
Reuters
—

Australia’s central bank raised its cash rate by 25 basis points to a decade-high of 3.35% on Tuesday and reiterated that further increases would be needed, in a more hawkish policy tilt than many had expected.

Wrapping up its February policy meeting, the Reserve Bank of Australia (RBA) also dropped previous guidance that it was not on a pre-set path and forecast inflation would only return to the top of its target range of 2-3% by mid-2025.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” governor Philip Lowe said in a statement.

Markets were surprised by the hawkish tone of the RBA which shattered any expectations of an imminent pause to the tightening campaign. The futures market has priced in a peak rate of 3.9%, implying at least two more rate hikes in March and April, compared with 3.75% before the decision.

The local dollar shot up to $0.6940, extending earlier gains. Three-year government bond yields jumped 15 bps to 3.254% while ten-year yields also surged 15 bps to 3.615%.

“The surprise was not in the decision, but rather the shift in tone and forward guidance in the Governor’s Statement,” said Gareth Aird, head of Australian economics at CBA, as he updated his call for rates to peak at 3.85% after the decision, compared with 3.35% previously.

“This change implies that the RBA Board has essentially made up their mind and intend to raise the cash rate further over coming months, if the economic data prints in line with their updated forecasts.”

Markets had expected a quarter-point move, with some risk of a bigger rise given recent inflation data had surprised on the high side. This was the ninth hike since last May, lifting rates by a total of 325 basis points.

Lowe said that core inflation had been higher than expected, with the trimmed mean gauge accelerating to 6.9% last quarter from a year ago, above the central bank’s previous forecast of 6.5%.

Inflation is expected to decline to 4.75% this year and only slow to around 3% by mid-2025, according to the RBA’s latest forecasts.

The RBA also expects economic growth to average around 1.5% over 2023 and 2024.

The interest rate increases so far, including Tuesday’s move, will add over A$900 a month in repayments to the average A$500,000 mortgage, according to RateCity, a deadweight for a population that holds A$2 trillion ($1.3 trillion) in home loans.

Housing prices fell for the ninth straight month in January, with prices in Sydney and Melbourne down about 10% from a year ago.

There are signs that consumers are finally pulling back on spending as the cost of living surges and rate increases bite. Australian retail sales recorded the biggest drop in more than two years in December.

The next big test is the December quarter wage growth report later this month, which analysts expect to be robust given the labor market is at its strongest in nearly 50 years.

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” warned Lowe as he signaled the bank’s intention to extend the tightening cycle.

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February 6, 2023
Larry Summers: More likely the Fed can pull off a soft landing, but don’t get hopes up | CNN Business

New York
CNN
—

After a shocking jobs report, Larry Summers, treasury secretary under Bill Clinton, said he is more encouraged the Fed can pull off a soft landing, but cautioned it is a “big mistake” to think the economy is “out of the woods” on Fareed Zakaria GPS Sunday.

Friday’s job’s report saw an astonishing 517,000 jobs added in January and unemployment tick down to 3.4%, the lowest since 1969. Economists had predicted 185,000 jobs, expecting a slower jobs market after almost a year of aggressive rate hikes from the Federal Reserve.

The Fed once hiked interest rates less aggressively this week, reflecting a sense inflation is cooling. It brings up the question: Can the United States pull off a soft landing, bringing down inflation without triggering a recession?

Summers said it “looks more possible that we’ll have a soft landing than it did a few months ago,” but he has continued fears about inflation indicators that have come back to earth, but are still too high for his liking.

“They’re still unimaginably high from the perspective of two or three years ago, and that getting the rest of the way back to target inflation may still prove to be quite difficult,” Summers said.

Zakaria asked if triggering a recession was worth it to bring down inflation, if 3 to 3.5% inflation rates could become the norm.

Summers said it’s a trade-off between short run reductions in unemployment, and permanent changes in inflation.

“The benefit we can get from pushing unemployment low is on almost all economic theories and likely not to be a permanent one,” Summers said. “But if we push inflation up and those issues become entrenched, we’re going to live with that inflation for a long time.”

The US has about 3 million people who have just stopped looking for work. Summers attributed it to older people who decided to retire earlier than normal patterns would suggest during COVID.

He said there is a “grand reassessment” of the workplace post-COVID.

“You don’t get to be a CEO if you don’t love being in the office,” Summers said. “And so CEOs want all their people to come back and be working, but lots of people like their dens better than they like their cubicles.”

Summers also had advice for President Joe Biden as a debt ceiling crisis brews in Washington.

“I would advise him that it’s not a viable strategy for the country to default on obligations,” Summers said. “That’s the stuff of banana republics, and that he’s not going to engage in any of that stuff.”

The United States has an “utterly bizarre system” where Congress votes on budgets and then separately has to authorize paying the bills incurred by those budgets, Zakaria pointed out, adding a crisis could be on the horizon because House Republicans don’t want to pay the bills until President Biden agrees to spending cuts, even though budgets were set by both parties.

Biden should insist “Congress do its job and approve the borrowing to finance the spending.”

Summers noted it only takes a few responsible Republicans to raise the debt limit.

“That some in the Republican Party may bow to the demands of the extremists does not mean that the President of the United States should do that.”

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February 5, 2023
Why did we get a monster jobs report if the economy is slowing? | CNN Business

Minneapolis
CNN
—

The economy wasn’t supposed to add half a million jobs in January.

In fact, a consensus poll of 81 economists expected job gains to land at around 185,000, according to Refinitiv. After 11 months of aggressive rate hikes from the Federal Reserve, the experts were naturally expecting the economy’s job gains to slow as higher borrowing costs percolated through the economy, slowing investment and growth and pushing companies to pull back on spending and hiring.

And yet, even though it seemed impossible, the labor market is somehow getting tighter, said Rucha Vankudre, senior economist at business analytics firm Lightcast.

“I think pretty much all the labor economists in the country this morning are shocked,” Vankudre said Friday during a webinar after the jobs report was released. I think the question on everyone’s mind is, ‘How can the labor market keep getting stronger and stronger, and how can this keep happening while at the same time we are seeing prices come down?’”

Instead of lending credence to what was a bubbling belief in a soft landing, Friday’s jobs report only seems to beg more questions about not only the state of the economy, but also of the Federal Reserve’s attempts to hammer down high inflation.

On Wednesday, the Fed concluded its first policymaking meeting of 2023 by green-lighting a quarter-point interest rate hike — the smallest since March — as a reflection of progress in its fight to lower inflation.

The more moderate increase had been long telegraphed and came despite a hotter-than-expected December Job Openings and Labor Turnover Survey (JOLTS) report, which showed job openings grew to more than 11 million, or 1.9 available jobs for every job seeker.

Fed officials remain laser focused on wages and inflation, and are seeing some progress there, said Elizabeth Crofoot, Lightcast senior economist. Fluctuations are to be expected in any economic data, and it’s (always) important to remember that “one month does not make a trend,” especially for January data, she said.

“I think [Fed officials] are going to say, ‘Let’s continue to keep our eye on the data,’ and they’re going to hold steady until they see that inflation rate come down,” Crofoot said.

The January jobs report shouldn’t trigger a wholesale change of what Fed members are thinking or what they were planning on doing before this report, Sarah House, senior economist at Wells Fargo, told CNN.

“I think it suggests that the labor market remains still very strong, and there’s still a lot of wage pressures coming from that strong labor market that the Fed needs to contend with if it’s going to get inflation back to 2% on a sustained basis,” House said, noting the Fed’s target inflation rate.

The Covid pandemic was a tremendous shock to global economies, and the US labor force is still showing the effects of historic employment losses, sudden shifts in consumer behavior, discombobulated supply chains, and efforts to return to a state of normality.

The employment recovery since 2021 has been historically robust, with the monthly job gains larger than anything seen on record.

January’s jobs report came with added complexity, because it included annual updates to populations estimates and revisions to employer survey data.

“Now we know both [2021 and 2022] had faster job growth than we previously realized,” said University of Michigan economists Betsey Stevenson and Benny Doctor in a statement Friday. “The patterns remain the same: Job growth accelerated in the second half of 2021 before slowing in the first half of 2022 and slowing further in the second half of 2022.”

The January reports also bring with them “seasonal noise,” said Joe Brusuelas, principal and chief economist for RSM US.

“I’m advising policymakers and clients to ignore the topline number [of 517,000],” he said, noting it’s likely a function of seasonal adjustments and a reflection of swings in hiring activity and traditional cutbacks that take place from mid-December to mid-January.

“That being said, even if a downward revision takes away 200,000 or so off the top, you still are sitting at around 300,000,” he added.

“The job market is clearly too robust at this time to re-establish price stability; therefore, the Federal Reserve is going to have to not only hike by 25 basis points at its March meeting, it’s going to have to do so at the May meeting,” he predicted.

Last summer, Fed Chair Jerome Powell warned that “some pain” (aka rising unemployment) would likely be felt as a result of the Fed’s sweeping efforts to tackle inflation.

Yet Powell did not once utter the word “pain” during his press conference on Wednesday, said Mark Hamrick, senior economic analyst with Bankrate.

“If they were to put money on it, I think Las Vegas oddsmakers would be doubling down right now on the soft landing scenario — not to say that’s the base case, per se, but the chances seem to be growing,” Hamrick said.

“If anything, the global economic scenario has brightened in recent days and weeks — and we got a significant ray of sunshine with this January employment report, including all the revisions — but that’s not to say that consumers or businesses should be complacent with respect to an eventual risk of a recession,” he said.

So for now, the chances of a soft landing remain unknown.

“This is sort of a bumpy, turbulent ride to who knows where,” Crofoot said.

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February 4, 2023
Treasury yields leap after much hotter jobs report than expected

U.S. Treasury yields rose Friday after jobs data came in much better than expected.

The 10-year Treasury yield was up more than 12 basis points at 3.526%. The 2-year Treasury was up roughly 20 basis points to 4.299%.

Yields and prices move in opposite directions and one basis point equals 0.01%.

Nonfarm payrolls increased by 517,000 for January, notably above the 187,000 additions estimated by Dow Jones. The unemployment rate fell to 3.4%, lower than the 3.6% expected by Dow Jones.

The data underscored the stickiness of the labor market. The Fed has been trying to cool the economy through monetary policy measures, including interest rate hikes. At the conclusion of its latest meeting on Wednesday, the central bank increased rates by 25 basis points, but also said it was starting to see a slight slowdown of inflation.

— CNBC’s Alex Harring contributed to this report.

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February 3, 2023
The US economy added a whopping 517,000 jobs in January | CNN Business

Minneapolis
CNN
—

The US economy added an astonishing 517,000 jobs in January, showing that the labor market isn’t ready to cool down just yet.

The unemployment rate fell to 3.4% from 3.5%, hitting a level not seen since May 1969 — two months before Neil Armstrong stepped on the moon — according to new data released Friday by the Bureau of Labor Statistics.

Economists were expecting 185,000 jobs would be added last month, based on consensus estimates on Refinitiv.

“With 517,000 new jobs added in January 2023 and the unemployment rate at 3.4%, this is a blockbuster report demonstrating that the labor market is more like a bullet train,” Becky Frankiewicz, president and chief commercial officer of ManpowerGroup, said Friday.

The shockingly strong monthly jobs gain — a number that several economists cautioned was influenced by seasonal factors and is subject to future revisions — bucks a trend of five consecutive months of moderating job growth during the latter half of 2022.

“The blowout 517,000 increase in total employment was almost certainly a function of seasonal noise and traditional churn in early-year job and wage environment and exaggerates what is already a robust trend in hiring,” Joe Brusuelas, principal and chief economist with RSM US, said in a statement.

Nonetheless the juggernaut of a report may cause complications for the Federal Reserve, which has been trying to tame high inflation with higher interest rates, said Seema Shah, chief global strategist of Principal Asset Management.

“Is [Fed Chair Jerome] Powell now wondering why he didn’t push back on the loosening in financial conditions?” Shah said in a statement. “It’s difficult to see how wage pressures can possibly soften sufficiently when jobs growth is as strong as this, and it’s even more difficult to see the Fed stop raising rates and entertain ideas of rate cuts when there is such explosive economic news coming in.”

“The market is going to go through a roller coaster ride as it tries to decide if this is good or bad news. For now, though, looks like the US economy is doing absolutely fine,” she said.

Still, the report also showed that wage growth moderated on an annual basis: Average hourly earnings fell 0.4 percentage points to 4.4% year over year. Monthly wage gains held steady at 0.3%.

“It’s quite remarkable to see such a realignment of the employment picture coinciding with an easing of wage pressure,” Mark Hamrick, senior economic analyst for Bankrate, said in an interview. “I think that might be part of this report that could help keep blood pressures down among Federal Reserve officials in the near term.”

Additionally, average weekly hours jumped to 34.7 hours from 34.3, and employment in temporary help services rebounded after two months of declines, indicating further demand for labor, noted Julia Pollak, chief economist at ZipRecruiter.

The report also showed an increase in the closely watched labor force participation rate to 62.4% from 62.3%. However, the increase in the share of people working or looking to work was a function of the BLS’ annual benchmark revisions to its household survey, one of two surveys that factor in to the monthly jobs report, noted PNC chief economist Gus Faucher.

Had it not been for the revisions, that number would have been unchanged at 62.3%, he added.

“The labor market is structurally tighter post-pandemic,” he said.

Every January, the BLS makes revisions on its employment data to reflect updated population estimates and other factors.

“On net, you saw stronger hiring in 2022 than what was initially reported,” said Sarah House, chief economist with Wells Fargo, told CNN.

Average monthly job growth in 2022 was revised up from an average of 375,000 per month to 401,000, she said.

Seasonality questions aside, other trends do align to support a strong January 2023 jobs report, Bankrate’s Hamrick said.

“When you have a number of things lining up, almost like a crime scene investigation, it tends to lend some credibility to that question of believability,” he said of the surprising half-a-million-plus job gains. “What are the things that are lining up? The continued remarkably low level of jobless claims, the rise in job openings, the increase in labor force participation.”

The gains were also widespread across industries, with job growth led by leisure and hospitality, professional and business services, and health care, according to the BLS report.

Industries that shed jobs last month included motor vehicles and parts (down 6,500 jobs), utilities (down 700 jobs) and information (down 5,000 jobs).

In recent months, mass layoff announcements — especially from Big Tech — had spurred concern that the cutbacks were a harbinger of broader cutbacks to come.

That doesn’t appear to be the case, considering jobless claims have remained historically low, job openings haven’t slipped and job gains remain strong, said Giacomo Santangelo, economist at Monster.

“The news is talking about big names laying off, but we don’t really hear what happens at small firms with less than 200 employees,” he said. “What we’re seeing at Monster is a lot of firms, a majority of firms, are looking to hire.”

The glut of available jobs — there are 1.9 open positions for every one job seeker — coupled with skills that are in high demand mean that workers are likely finding jobs quickly, he said. Additionally, those laid off by large technology firms likely received generous severance packages, so not all are filing for unemployment benefits.

Friday’s report showed that the median duration of unemployment was 9.1 weeks, just a smidge above the pre-pandemic level of 8.9 weeks in February 2020.

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February 3, 2023
Biden’s student loan forgiveness plan heads to the Supreme Court. How that affects the payment pause

Littlebee80 | Istock | Getty Images

It’s been nearly three years since most people with federal student loans have had to make a payment on their education debt.

The U.S. Department of Education has repeatedly cited specific dates for when the bills would resume, only to extend the pandemic-era break yet again.

Most recently, amid legal challenges to the Biden administration’s student loan forgiveness plan, the government told borrowers they’d get even more time. But the timing it gave wasn’t as straightforward as it was with previous extensions.

Here’s what borrowers need to know.

Student debt bills may not resume for months

In August 2022, President Joe Biden promised to cancel up to $20,000 of student loan debt for tens of millions of Americans, but Republicans and conservatives quickly filed a number of lawsuits against his plan, forcing the administration to close its application portal in early November.

As a result of those challenges, the Education Department announced another extension of the repayment pause in late November.

It said federal student loan bills will be due again 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt. But the Department added that if the Biden administration is still defending its policy in the courts by the end of June, or if it’s unable to move forward with forgiving student debt by then, the payments will pick up at the end of August.

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Almost half of Americans think we’re already in a recession

The Supreme Court will begin to hear oral arguments over Biden’s plan at the end of February.

When payments could resume depends in part on when the justices reach their decision, said higher education expert Mark Kantrowitz.

“If the court issues a ruling a few weeks after the Feb. 28 hearing, repayment could restart in May or June,” Kantrowitz said. “If they wait until the end of the term, when they go on recess, in June or July, then there would be an August or September restart.”

Another payment pause extension is possible

It’s a time of uncertainty for the federal student loan system.

With Biden’s forgiveness plan up in the air, borrowers may be unsure what they owe. Throughout the pandemic, there have been a lot of changes to the companies that service federal student loans. And then there’s the fact that after three years without payments, millions of Americans have simply become accustomed to life without student debt bills.

“These student loan borrowers had the reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” Education Department Undersecretary James Kvaal said in a November court filing. “This belief may well stop them from making payments even if the Department is prevented from effectuating debt relief.

“Unless the Department is allowed to provide one-time student loan debt relief,” he went on, “we expect this group of borrowers to have higher loan default rates due to the ongoing confusion about what they owe.”

Considering that the U.S. Department of Education has already extended the payment pause roughly eight times, it’s possible borrowers could get more time still, Kantrowitz said.

“There will always be an excuse if they want a reason for another extension,” he said. “The most likely reasons could include a new worrisome Covid-19 mutation or economic distress.”

For now, collection activity still on pause

The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks if they fall behind on their student loans.

During the extended payment pause, however, the Education Department also says it won’t resume collection activity.

Borrowers in default on their student loans should also look into the recently announced “Fresh Start” initiative, in which they’ll have the opportunity to return to a current status.

Make the most of extra cash during the ongoing break

With headlines warning of a possible recession and layoffs picking up in some sectors, experts recommend that borrowers try to salt away the money they’d usually put toward their student debt each month.

Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. Consumers will just want to make sure any account they put their savings in is insured by the Federal Deposit Insurance Corp., meaning up to $250,000 of the deposit is protected from loss.

And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say.

The average interest rate on credit cards is currently more than 20%.

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February 3, 2023
What to look for in Friday’s jobs report | CNN Business

Minneapolis
CNN
—

A week that has been chock-full of economic data will be capped off Friday with the first US jobs report of 2023.

Economists estimate that 185,000 positions were likely added in January, according to Refinitiv.

That would be a considerable drop from the 504,000 jobs added in January 2022 and the 520,000 added in January 2021. It also would nearly match the 183,000 monthly average between 2010 and 2019, Bureau of Labor Statistics data shows.

And yet, while the Federal Reserve’s aggressive rate hikes have helped make a dent in inflation and resulted in slower economic activity without stark rises in unemployment, the full effects have yet to come, Fed Chair Jerome Powell warned Wednesday.

“I would say it is a good thing the disinflation we have seen so far has not come at the expense of a weaker labor market,” Powell said in a news conference following the Fed’s first monetary policymaking meeting of the year. “But I would also say the inflationary process you see under way is really at an early stage.”

America’s unemployment rate dipped back down in December to 3.5%, once again matching a 50-year low. It’s expected to tick up to 3.6% come Friday.

Layoff announcements — led by large tech firms — are picking up steam: The 43,651 job cuts announced in December jumped to 102,943 in January, according to a new data released Thursday morning by Challenger, Gray & Christmas.

Still, those spikes in cutbacks haven’t become widespread. New data released Thursday by the Labor Department showed weekly initial jobless claims fell for the fourth time in five weeks, landing at 183,000, which is the lowest weekly total since April.

“It’s a very interesting time where it’s really not clear whether what we’re seeing is a welcome, healthy rebalancing of the labor market — or a more worrying stall,” said Julia Pollak, senior economist with ZipRecruiter.

Beyond the key headline indicators of payroll gains, unemployment and average hourly earnings, here are some other areas of the jobs report that Pollak and other economists will scrutinize when the January jobs report is released Friday morning.

In December, the average working week for employees — including part-time workers — was 34.3 hours, according to BLS data.

That’s down from the January 2021 high of 35 hours when the average workweek ballooned as workers were scarce and other employees were forced to pick up the slack and the extra shifts, Pollak said.

“Typically, in good times, the workweek tends to be somewhere between 34.3 and 34.6 hours on average, and somehow it’s slowed all the way down to the bottom end of that range,” she said. “If it continues to deteriorate, that would suggest weakening demand for labor.”

And usually, when demand gets weak, hiring stalls and layoffs and job losses follow, she said.

As businesses recovered from the pandemic, they’ve increasingly relied on staffing agencies and contract employees. That sector started the pandemic with 2.9 million employees, plummeted to 1.9 million during the April 2020 trough, hit a record high of 3.56 million in July 2022 and has declined in each month since.

“The recent decline in temp staffing is mostly the result of a healthy recovery in full-time, in-house hiring,” Pollak said. “But if it falls much below 3 million, I think that would be a warning sign as well.”

Temporary and contract hiring can show where businesses expand and reduce their workforce at the margins, said Sarah House, senior economist at Wells Fargo.

“The fact that we see that paring down suggests that the demand backdrop is starting to soften, and maybe they just don’t see the reason to hire and expand as much as they had previously,” House said.

The imbalance of labor demand and worker supply has been consistently highlighted by the Fed as a potential sticking point in its efforts to lower inflation. While Fed officials have noted that wages don’t appear to be driving inflation, they have expressed concern that a a low participation rate and the imbalance of worker supply and demand could cause pay to rise and, in turn, cause higher prices.

The labor force participation rate inched up two-tenths of a percentage point in December to 62.3%. Although that came following three consecutive months of declines, the percentage of people working or actively looking for work hovered between 62.1% and 62.4% throughout 2022.

Based on Wednesday’s labor turnover data, that gap grew wider in December: There were 11.01 million job openings, or 1.9 available jobs for every unemployed person that month.

“Long Covid is pretty real, and there’s a sizable share of the population who continue to suffer health effects related to Covid that are preventing them from being able to work,” said John Leer, chief economist with Morning Consult. “Then there’s ongoing child care challenges; we’ve got a lot of folks who retired early; we’ve got limited immigration not where it was pre-pandemic.”

Beyond that and the ongoing demographic shifts of Baby Boomers aging out of the workforce, there’s also possibly some “information asymmetry” that’s occurring, he said.

“There are people outside of the labor market who aren’t working, and they just simply don’t know how needed they are right now,” he said. “And I think that’s a function of being a little removed. The world has changed pretty dramatically over the last two to three years, and it’s going to be difficult to show people that the skills they possess are needed right now.”

The government’s monthly jobs report is scheduled to be released at 8:30 a.m. ET on Friday.

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February 2, 2023
Bank of England takes interest rates to highest level since 2008 | CNN Business

London
CNN
—

The Bank of England raised UK interest rates by half a percentage point on Thursday, moving more aggressively than its US counterpart to fight inflation.

The central bank took rates to 4% — the highest level since the depths of the global financial crisis. UK inflation eased to 10.5% in December but remains near a 41-year high.

The Bank of England said inflation was likely to fall sharply over the rest of the year, largely as past increases in energy and other prices fall out of the calculation. But it signaled significant uncertainty over its forecast.

“The labor market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation,” the bank said in a statement.

Wholesale energy prices might also boost UK inflation more than expected, it added.

The Bank of England had to weigh up current price growth against the risk of recession. On Tuesday, the International Monetary Fund forecast that the United Kingdom would be the only major economy to contract this year.

The UK rate hike followed a quarter-point interest rate rise by the Federal Reserve on Wednesday. In contrast to the Bank of England, the Fed has slowed the pace of its increases as US inflation is starting to abate.

The European Central Bank is also expected to hike rates for the 20 countries that use the euro by half a percentage point later on Thursday. Eurozone inflation fell in January but at 8.5% remains way above the ECB’s 2% target.

— This is a developing story and will be updated.

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February 2, 2023
Hong Kong services to rebound as China reopens, but UBP says sector is coming from ‘fragile situation’

Hong Kong’s service sector will be the part of economy that sees “the biggest rebound” as borders reopen, UBP told CNBC’s “Squawk Box Asia” on Thursday.

However, it warned that the sector is coming “from a very fragile situation,” given its contraction in every quarter of 2022.

“We can’t exclude the possibility of further insolvencies or bankruptcies … even as things do look to improve in the months ahead,” said Carlos Casanova, UBP’s senior economist for Asia.

The latest figures from the Hong Kong government also showed the city’s economy contracted by 4.2% in its fourth quarter, the fourth-straight quarter of declines. Real GDP also shrank by 3.5% year-on-year.

“That contraction was much faster than we had anticipated, our forecast was -2.8%,” Casanova added.

Stock picks and investing trends from CNBC Pro:

However, the economist was optimistic that Hong Kong’s economy should be “in a position to return to expansion” in 2023.

“We are seeing signs that there’s been a sequential acceleration in January. So that’s the good news,” said Casanova.

Factors contributing to possible expansion

Besides the return of mainland Chinese tourists, Casanova said “more supportive equity valuations” will help improve sentiment in Hong Kong.

“You also have this expectation that the Fed will hike rates at a more modest pace in 2023 … that at some point you will have a pause,” he explained.

“And that means that this pro-cyclical headwind that we’ve been experiencing in Hong Kong with tighter monetary policy … will not be such a big drag in the year ahead.”

Boost for housing demand

Hong Kong’s property sector also experienced “subdued sentiment” last year and, like the services sector, is “definitely in a perilous situation as well,” said Casanova.

For example, home prices plunged to a five-year low in October as interest rates pushed up borrowing costs.

“In fact, data on the housing sector earlier this week showed that the number of mortgages that are underwater … is at the highest in 18 years,” Casanova said.

“But it only takes a very small number of mainland talent to move into Hong Kong in order to at least put a floor on that correction in housing prices.”

Reversing the number of mortgages that are in negative equity will be “a very important side-effect” from the reopening of borders and recovery of domestic demand, he added.

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February 1, 2023
Federal Reserve issues 8th consecutive interest rate hike

Federal Reserve issues 8th consecutive interest rate hike – CBS News

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As it continues efforts to combat inflation, the Federal Reserve on Wednesday increased interest rates by a quarter-point. In a statement, the Fed said that further hikes are likely.

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February 1, 2023
Wall Street to Jerome Powell: We don’t believe you

Do you want the good news about the Federal Reserve and its chairman Jerome Powell, the other good news…or the bad news?

Let’s start with the first bit of good news. Powell and his fellow Fed committee members just hiked short-term interest rates another 0.25 percentage points to 4.75%, which means retirees and other savers are getting the best savings rates in a generation. You can even lock in that 4.75% interest rate for as long as five years through some bank CDs. Maybe even better, you can lock in interest rates of inflation (whatever it works out to be) plus 1.6% a year for three years, and inflation (ditto) plus nearly 1.5% a year for 25 years, through inflation-protected Treasury bonds. (Your correspondent owns some of these long-term TIPS bonds—more on that below.)

The second bit of good news is that, according to Wall Street, Powell has just announced that happy days are here again.

The S&P 500
SPX,
+1.05%
jumped 1% due to the Fed announcement and Powell’s press conference. The more volatile Russell 2000
RUT,
+1.49%
small cap index and tech-heavy Nasdaq Composite
COMP,
+2.00%
both jumped 2%. Even bitcoin
BTCUSD,
+1.00%
rose 2%. Traders started penciling in an end to Federal Reserve interest rate hikes and even cuts. The money markets now give a 60% chance that by the fall Fed rates will be lower than they are now.

It feels like it’s 2019 all over again.

Now the slightly less good news. None of this Wall Street euphoria seemed to reflect what Powell actually said during his press conference.

Powell predicted more pain ahead, warned that he would rather raise interest rates too high for too long than risk cutting them too quickly, and said it was very unlikely interest rates would be cut any time this year. He made it very clear that he was going to err on the side of being too hawkish than risk being too dovish.

Actual quote, in response to a press question: “I continue to think that it is very difficult to manage the risk of doing too little and finding out in 6 or 12 months that we actually were close but didn’t get the job done, inflation springs back, and we have to go back in and now you really do have to worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage. Whereas…of course, we have no incentive and no desire to overtighten, but if we feel that we’ve gone too far and inflation is coming down faster than we expect we have tools that would work on that.” (My italics.)

If that isn’t “I would much rather raise too much for too long than risk cutting too early,” it sure sounded like it.

Powell added: “Restoring price stability is essential…it is our job to restore price stability and achieve 2% inflation for the benefit of the American public…and we are strongly resolved that we will complete this task.”

Meanwhile, Powell said that so far inflation had really only started to come down in the goods sector. It had not even begun in the area of “non-housing services,” and these made up about half of the entire basket of consumer prices he’s watching. He predicts “ongoing increases” of interest rates even from current levels.

And so long as the economy performs in line with current forecasts for the rest of the year, he said, “it will not be appropriate to cut rates this year, to loosen policy this year.”

Watching the Wall Street reaction to Powell’s comments, I was left scratching my head and thinking of the Marx Brothers. With my apologies to Chico: Who you gonna believe, me or your own ears?

Meanwhile, on long-term TIPS: Those of us who buy 20 or 30 year inflation-protected Treasury bonds are currently securing a guaranteed long-term interest rate of 1.4% to 1.5% a year plus inflation, whatever that works out to be. At times in the past you could have locked in a much better long-term return, even from TIPS bonds. But by the standards of the past decade these rates are a gimme. Up until a year ago these rates were actually negative.

Using data from New York University’s Stern business school I ran some numbers. In a nutshell: Based on average Treasury bond rates and inflation since the World War II, current TIPS yields look reasonable if not spectacular. TIPS bonds themselves have only existed since the late 1990s, but regular (non-inflation-adjusted) Treasury bonds of course go back much further. Since 1945, someone owning regular 10 Year Treasurys has ended up earning, on average, about inflation plus 1.5% to 1.6% a year.

But Joachim Klement, a trustee of the CFA Institute Research Foundation and strategist at investment company Liberum, says the world is changing. Long-term interest rates are falling, he argues. This isn’t a recent thing: According to Bank of England research it’s been going on for eight centuries.

“Real yields of 1.5% today are very attractive,” he tells me. “We know that real yields are in a centuries’ long secular decline because markets become more efficient and real growth is declining due to demographics and other factors. That means that every year real yields drop a little bit more and the average over the next 10 or 30 years is likely to be lower than 1.5%. Looking ahead, TIPS are priced as a bargain right now and they provide secure income, 100% protected against inflation and backed by the full faith and credit of the United States government.”

Meanwhile the bond markets are simultaneously betting that Jerome Powell will win his fight against inflation, while refusing to believe him when he says he will do whatever it takes.

Make of that what you will. Not having to care too much about what the bond market says is yet another reason why I generally prefer inflation-protected Treasury bonds to the regular kind.

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February 1, 2023
Federal Reserve hikes interest rates 0.25 percentage point

The Federal Reserve is raising its benchmark interest rate a quarter of a percentage point, officials with the central bank said on Wednesday, its eighth consecutive hike as policy makers try to subdue inflation.

The latest increase in the federal funds rate — what banks charge each other for short-term loans — is smaller than the Fed’s 0.5 percentage point increase in December as well as a string of three-quarter point moves over the course of 2022.

With the latest increase, the Fed’s target interest rate is set in a range between 4.50% and 4.75% — its highest level since late 2007.

“Ongoing hikes”

The Fed said its campaign to curb prices is working, while indicating it plans to keep rates high for some time.

“Over the past year we have taken forceful actions to tighten the stance of monetary policy,” Fed Chair Jerome Powell said in a press conference Wednesday.”Even so, we have more work to do. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” he said.

“We expect ongoing hikes will be appropriate,” Powell added.

The move to ease the pace of monetary tightening, which economists and investors had widely expected, comes amid signs the U.S. economy is cooling off and concerns about a possible recession later this year.

The Fed has been rapidly hiking rates since March of 2022 in a bid to snuff out persistent inflation. High interest rates slow the economy by making it more expensive for consumers and businesses to borrow money. However, policy makers worry that raising rates too high could tip the economy into a recession.

Although Powell has underlined his commitment to curbing inflation, the battle may be entering a different phase aimed at bringing the economy in for a gentle landing. The Fed alluded to the “extent” of any future rate hikes, in contrast to wording in its December statement about the “pace” of tightening.

The shift in language, while nuanced, suggests the Fed will now employ smaller rate hikes to tame inflation, according to analysts with Morgan Stanley.

Inflation across the U.S. has fallen from a yearly rate of 9.1% this summer — its highest level in four decades — to a more modest 6.5% in December. The Fed has signaled it wants inflation to fall closer to its 2% target before easing the pace of monetary tightening.

Job market “out of balance”

Despite cooling inflation and slowing economic growth, Powell said the job market remains too strong to bring prices and wages down to what the Fed considers healthy.

“The labor market remains extremely tight with the unemployment rate at a 50-year low, job agency very high and wage growth elevated,” he said, adding that “the labor market continues to be out of balance.”

The central bank fears that, if workers are able to change jobs too easily and command higher pay, it could lead corporations to further hike prices, entrenching inflation.

“Reducing inflation is likely to require a period of below-trend growth and softening of labor market conditions,” he added.

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February 1, 2023