House for sale with “For Sale” real estate sign in yard in spring or summer season. No people.
Fstop123 | E+ | Getty Images
Mortgage demand fell last week compared with the previous week, despite a continued drop in rates, according to the Mortgage Bankers Association‘s seasonally adjusted index.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.83% from 7.07%, with points increasing to 0.60 from 0.59 (including the origination fee) for loans with a 20% down payment, the group said Wednesday. Even with the recent decline, rates are still much higher than they were at the start of the Covid pandemic.
“With the positive news about the drop in inflation, and the FOMC [Federal Open Market Committee] projections proclaiming a pivot towards rate cuts, the 30-year fixed mortgage rate reached its lowest level since June 2023,” said Mike Fratantoni, MBA senior vice president and chief economist.
“At least as of last week, borrowers’ response to this rate move was rather tepid,” Fratantoni said.
Applications to refinance a home loan dropped 2% for the week ended Friday, after jumping 19% the week before, according to the MBA. Refinance demand was 18% higher than the same week one year ago, however.
Applications for a mortgage to purchase a home declined 1% for the week and were 18% lower than the same period last year.
Despite the drop in demand, the Mortgage Bankers Association predicted good news ahead for the market, despite expecting a “mild recession” in the first half of next year.
“We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market,” the group said, referring to the Federal Reserve’s recent signal that it is looking to cut its benchmark rate multiple times next year. “We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations.”
The association said it expects mortgage origination volume to increase 22% in 2024 to $2 trillion, with a 14% rise in purchase volume and a 56% jump in refinance demand.
Due to next week’s Christmas holiday, the MBA will release mortgage application data for the weeks ending Dec. 22 and 29 on Jan. 3.
Younger generations in the U.S., including millennials and Gen Zers, are much more likely to believe that the Social Security system needs reforming than those in their 60s and 70s, according to a recent survey conducted by Redfield & Wilton Strategies on behalf of Newsweek.
A majority of 63 percent of Americans “strongly agreed” (28 percent) or “agreed” (35 percent) that the Social Security system needs to be reformed, according to the Redfield & Wilton Strategies/Newsweek poll. Only 10 percent “strongly disagreed” (5 percent) or “disagreed” (another 5 percent).
The poll was conducted on December 8 among a sample population of 1,500 eligible voters in the U.S.
Some 40 percent of respondents said they believe that the Social Security program currently pays out more to retirees than it is receiving in Social Security tax payments, while 26 percent disagreed with this statement.
Shoppers walk around Twelve Oaks Mall on November 24, 2023 in Novi, Michigan. A majority of millennials think that the Social Security program is making more payments than it receives taxes, according to an exclusive Newsweek poll. Emily Elconin/Getty Images
Millennials (those aged between 27 and 42), Gen Zers (those aged between 18 and 26), and Gen Xers (those aged between 43 and 58) were more likely than boomers (those older than 59 years old) to think that Social Security should be reformed.
According to the poll, 56 percent of Gen Zers, 76 percent of millennials and 69 percent of Gen Xers believed the system should be reformed, against 50 percent of boomers.
There were also overwhelmingly more millennials (52 percent) thinking that the system isn’t getting as many tax payments as it was handing out benefits to retirees than any other generations, including Gen Z (39 percent), Gen X (25 percent) and boomers (39 percent).
“In general, millennials and plurals—our name for Gen Z—are skeptical that Social Security benefits as robust as those retirees like me currently enjoy will be available to them when they retire,” Morley Winograd, author of three books on the millennial generation, told Newsweek.
“They have been told by Republicans in Congress, seconded by deficit hawks in think tanks, that the money will run out before they can claim it,” he said. “None of that is true. But, luckily, the younger generation’s skepticism of experts and politicians will help prevent the kind of unnecessary tinkering with future, never present, Social Security payments that some older folks advocate.”
While boomers are the richest generations on the planet, millennials remain burdened by the debt “many of them incurred by paying excessive and economically unjustified tuition prices when we decided to make them the first generation in American history to have the majority of the burden of paying for higher education fall on them and their parents,” Winograd said.
Social Security is currently facing an uncertain future as it is expected to face a 23 percent across-the-board benefit cut in 2033, according to the Committee for a Responsible Federal Budget, unless something changes until then. For an average newly retired couple, that means $17,400 less.
Fixing the Social Security system is becoming an increasingly urgent issue, according to Richard Johnson, director of the Program on Retirement Policy at the Urban Institute, a Washington-based think tank, told Newsweek.
“By law, Social Security payments cannot exceed the program’s resources. The program now pays out more in benefits than it collects in revenue,” the expert said.
While the Social Security’s trust fund is currently making up the difference, this trust fund is widely expected to run out by 2034. “When that happens, Social Security will be able to pay less than 80 percent of promised benefits,” Johnson said, citing the conclusion reached by several experts.
“Unless policymakers fix Social Security’s finances in the next 10 years, millions of retirees and people with disabilities would plunge into poverty.”
For Johnson, the solution might involve cutting benefits or increasing taxes—a change that would be unpopular among retirees, but necessary. “Fixing Social Security sooner rather than later would share the pain of any benefit cuts or tax increases among more people, reducing the pain for later generations,” Johnson said.
Winograd is a little more positive on the outlook of the program, saying that a resilient U.S. economy could keep Social Security afloat.
“Whether or not Social Security is able to maintain its current levels of payments or not depends on what assumptions you make about the performance of the U.S. economy in the future—an impossible thing to predict with any degree of accuracy,” Winograd said.
“But, for instance, if the economy were to grow at the 5.2 percent rate GDP grew in the third quarter of this year, there would be no problem with Social Security benefits in the foreseeable future,” he said.
“Of course, this is a difficult rate to sustain, but with disruptors like AI now starting to change the productivity rates of the U.S. economy in ways as profound as the internet and personal computing did in the go-go 1990s, there is no reason to believe that the U.S. economy won’t continue to outperform the expectations of most economists, who are still waiting to see if the recession they forecasted for last year and the year before arrives,” he added.
“And, besides, if the system does turn out to need more money, it can be quickly and equitably raised by simply removing the income cap on paying Social Security taxes, which is one of the more egregious regressive elements of our current tax laws and very unpopular with young voters now flooding the electorate.”
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
U.S. ports are receiving multimillion dollar grants to upgrade cargo handling infrastructure.
The grants are part of the Biden administration’s $21 billion commitment to modernize port infrastructure in the U.S.
Midsize port cities such as Baltimore are among the 2023 grant recipients. In November, the Port of Baltimore received a $47 million grant to kick-start an offshore wind manufacturing hub, among other improvements. For example, the funds will pay for a new berth, or dock, for rolling cargo. Baltimore is the top U.S. destination for rolling cargo imports, a category including farm machinery from John Deere and light-duty vehicles from BMW, according to the Maryland Port Administration.
More than $653 million in Port Infrastructure Development Program grants were awarded to U.S. ports in 2023 by the U.S. Department of Transportation, Maritime Administration. Other projects receiving federal funds include the Port of Tacoma Husky Terminal Expansion in Washington state ($54.2 million), and the North Harbor Transportation System Improvement Project in Long Beach, California ($52.6 million).
Baltimore isn’t the only city with a growing port according to maritime economists. Experts say gateways along the U.S. southeast coast are moving more cargo as major points of entry clog up with truck traffic.
“All of the ports on the East Coast are upgrading their infrastructure and capacity,” said Walter Kemmsies, managing partner at the Kemmsies Group, a maritime economics consulting firm currently working with the Port Authority of Georgia in Savannah. “What that does is it makes it more attractive to the ocean carriers. They like to be able to go in and out of a port very quickly, and they like to go to several ports.”
Ports America formed a public-private partnership with the state of Maryland to manage equipment and operations in sections of the Port of Baltimore. The group told CNBC that $550 million in upgrades have gone into Seagirt Marine Terminal alone for densification of the container yard since the partnership began in 2010.
These upgrades build on past plans to revive America’s declining industrial cities. In Baltimore, public officials are addressing bottlenecks along the supply chain beyond the Port. They believe that the Howard Street Tunnel expansion project will increase double-stack rail capacity out of Baltimore, which could help the companies working at the port move goods to and from points in the Midwest.
Watch the video above to see more of the upgrades coming to the Port of Baltimore.
Smartphones. Cars. Toasters. Fighter jets. While vastly different on the outside, all four items share something similar on the inside: semiconductors.
“There’s no tech industry without semiconductors,” said Stacy Rasgon, senior semiconductor analyst at Bernstein Research.
Semiconductors represent a $574 billion industry globally and are on pace to cross the trillion-dollar mark by the end of the decade. The industry has been caught in the crosshairs between the U.S. and China, two of the world’s largest economies.
The U.S., which leads the world in global semiconductor market share, recently issued sweeping restrictions on the sale of advanced chips and chipmaking equipment to China, in an attempt to restrict Beijing’s access to critical technologies. The Biden administration has said the export controls are aimed in part at preventing the use of American-made chips in China’s military. China, meanwhile, has accused the U.S. of abusing export restrictions to impede the country’s technological advances.
“We cannot allow China to have our most sophisticated semiconductor chips for use in the Chinese military,” U.S. Secretary of Commerce Gina Raimondo said in an interview with CNBC on Oct. 30, 2023. “That’s where we’ve drawn the cut line.”
Watch the video above to find out more about how the semiconductor industry became the centerpiece of a technological tug-of-war between the U.S. and China, and what the potential implications are for companies caught in the middle of it all.
Correction: A previous version of this story misstated the value of the semiconductor industry. According to the Semiconductor Industry Association, global semiconductor sales reached $574 billion in 2022.
A Petroleos de Venezuela SA oil pumpjack on Lake Maracaibo in Cabimas, Zulia state, Venezuela, on Friday, Nov. 17, 2023.
Gaby Oraa | Bloomberg | Getty Images
The International Energy Agency on Thursday said evidence of softening global oil demand is mounting and a slowdown is expected to continue into 2024, reaffirming a starkly different outlook compared to oil producing group OPEC.
The IEA said oil market sentiment had turned “decidedly bearish” in recent weeks, even after some members of OPEC and non-OPEC oil-exporting allies — collectively known as OPEC+ — on Nov. 30 announced a new round of voluntary production cuts in the first quarter of next year.
Oil prices were higher on Thursday morning, paring losses after recently falling to their lowest level since late June on gnawing oversupply concerns.
International benchmark Brent crude futures with February expiry traded 1.4% higher at $75.31 per barrel at 9 a.m. London time, while U.S. West Texas Intermediate crude futures for front-monthJanuary traded 1.3% higher at $70.36 per barrel.
In its latest monthly oil market report, the IEA said global oil demand was on course to rise 2.3 million barrels per day to 101.7 million barrels per day in 2023, noting that this forecast “masks the impact of a further weakening of the macroeconomic climate.”
The energy agency warned that “evidence of a slowdown in oil demand is mounting,” with the pace of expansion poised to “slow drastically” from 2.8 million barrels per day year-on-year in the third quarter to 1.9 million barrels per day in the final three months of 2023.
It prompted a downward revision of the IEA’s global consumption growth forecast of nearly 400,000 in the fourth quarter, with weaker-than-anticipated demand in Europe, Russia and the Middle East accounting for the bulk of that adjustment.
Looking ahead, the IEA said oil consumption growth is projected to halve next year, falling to 1.1 million barrels per day as global economic growth stays below trend in major economies, and as Covid-19-related distortions fade.
OPEC blamed “exaggerated concerns” about oil demand growth for a recent downturn in oil prices and maintained its relatively high oil use prediction for next year.
It reaffirmed its outlook for world oil demand growth in 2023 at 2.46 million barrels per day, roughly in line with the IEA’s forecast.
For next year, OPEC said it sees world oil demand at 2.25 million barrels per day, unchanged from the previous month, but a sharply higher estimate than the IEA’s prediction of 1.1 million barrels per day for the period.
The Federal Reserve announced it will leave interest rates unchanged Wednesday, in a move that many believe will conclude the central bank’s rate hike cycle and set the stage for rate cuts in the year ahead.
The Fed has raised interest rates 11 times since March 2022 — the fastest pace of tightening since the early 1980s. The spike in interest rates caused consumer borrowing costs to skyrocket while inflation remained elevated, putting many households under pressure.
Although the central bank indicated it will continue to pursue its 2% inflation target, “the real question at this stage is when they’ll begin cutting,” said Columbia Business School economics professor Brett House.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Here’s a look back at how the central bank’s rate hike cycle affected everything from mortgage rates and credit cards to auto loans and student debt, and what may happen to borrowing costs next.
Credit card rates jumped to nearly 21% from 16%
Most credit cards come with a variable rate, which hasa direct connection to the Fed’s benchmark rate.
After the previous rate hikes, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.
Between high inflation and record interest rates, consumers will end the year with $100 billion more in credit card debt, according to data from WalletHub. Not only arebalances higher, but more cardholders are carrying debt from month to month.
Going forward, APRs aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to Greg McBride, chief financial analyst at Bankrate.
“Credit card debt is high-cost debt in any environment but that’s particularly true now and that’s not going to change,” he said.
Mortgage rates hit 8%, up from 3.2%
Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home lost considerable purchasing power, partly because of inflation and the Fed’s period of policy tightening.
“Mortgage rates rocketed higher from record lows to more than 20-year highs,” McBride said.
After hitting 8% in October, the average rate for a 30-year, fixed-rate mortgage is currently 7.23%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.
A “For Sale” sign outside a house in Edmonton, Alberta, in Canada on Oct. 22, 2023.
Nurphoto | Nurphoto | Getty Images
Already, though, housing affordability is showing signs of improvement heading into the new year.
“Market sentiment has significantly shifted over the last month, leading to a continued decline in mortgage rates,” said Sam Khater, Freddie Mac’s chief economist. “The current trajectory of rates is an encouraging development for potential homebuyers,” he added, kickstarting a “modest uptick in demand.”
McBride also expects mortgage rates to ease in 2024 but not return to their pandemic-era lows. “You are still looking at rates in the 6s, not rates in the 3s or 4s,” he said.
Auto loan rates surpassed 7%, up from 4%
Even though auto loans are fixed, car prices had been rising along with the interest rates on new loans, leaving more consumers facing monthly payments that they could barely afford.
The average rate on a five-year new car loan is now 7.72%, up from 4% when the Fed started raising rates, according to Bankrate.
“The largest segment of consumers financing a new car today has a 7.9% APR,” said Ivan Drury, Edmunds’ director of insights. “That’s a far cry from those spring 2020 pandemic deals of 0% financing for 84 months that drove significant sales of large trucks and SUVs.”
But despite high interest rates, vehicle affordability is improving, with new car prices decreasing year over year and sales incentives increasing.
“The new-vehicle market is shifting to a buyer’s market, not a seller’s market,” according to Cox Automotive research.
Federal student loans are at 5.5%, up from 3.73%
Federal student loan rates are also fixed, so most borrowers weren’t immediately affected by the Fed’s moves. But undergraduate students who took out new direct federal student loans this year are paying 5.50%, up from 4.99% in the 2022-23 academic year and 3.73% in the 2021-22 academic year.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are paying even more in interest. How much more, however, varies with the benchmark.
Top-yielding online savings account rates have made more significant moves and are now paying over 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.
Even though those rates are peaking, “from a savings standpoint, 2024 is still going to be a really good year for savers because inflation is likely to decline faster than the yields on savings accounts,” McBride said.
Rate cuts, an increased chance of a soft landing and lower inflation — the outlook for next year is looking up in the CNBC Fed Survey, to a point.
Respondents to the CNBC Fed Survey see the Federal Reserve beginning rate cuts next year, though not as aggressively or as quickly as markets have priced in. June is the first month for which more than half of respondents have a reduction built in, rising to 69% by July. Overall, the average respondent forecasts about 85 basis points of cuts next year, roughly one 25 basis point trim a quarter, but not as much as the 120 basis points built into futures markets.
“The Fed needs to begin laying out a road map to rate cuts that may represent tighter policy since cuts will be lagging the decline in inflation and real rates will be rising,” writes John Ryding, chief economic advisor to Brean Capital, in response to the survey.
Kathy Bostjancic, chief U.S. economist at Nationwide, writes in, “The markets have prematurely priced in high odds of rate cuts starting in Q1, but we do expect further steady disinflation will lead the Fed to begin rate cuts around mid-year.”
Like the Fed itself, the 35 respondents to the survey, including economists, strategists and analysts, separate into hawks and doves on the issue of rate cuts next year.
“I still believe (Powell) has the memories of the 1970s in his mind and will be more stubborn in keeping monetary policy tight for longer than markets want him to be,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.
But Michael Englund of Action Economics writes in, “The U.S. headline y/y inflation metrics will fall sharply into early-2024 thanks to weakness in energy prices and easier comparisons, leaving the Fed with significant elbow room to start tightening even if core year over year inflation rates remain firm.”
Respondents boosted the probability of a soft landing to 47%, up 5 points from the October survey. They lowered the probability of a recession in the next year by 8 points to 41%, the lowest since the spring of 2022.
Still, the average respondent sees the unemployment rate rising to 4.5% next year and gross domestic product coming in just below 1%, or about half of potential, showing that all is not rosy with the forecast and that an economic slowdown remains the baseline forecast for the group.
“A softening in hiring, income growth, and confidence all point to reduced consumer and business spending,” says Joel Naroff of Naroff Advisors.
But Diane Swonk, chief economist at KPMG, writes in: “The U.S. consumer has proven itself a worthy adversary to everything the Fed has dealt it in its fight against inflation. The key is for a ‘Rocky’ ending, with the consumer still standing and able to leave the ring and heal, once the Fed rings the final bell and starts to cut rates.”
Inflation is forecast to decline on average to 2.7% by the end of next year, down from an expected year-end level of 3.2% for the consumer price index. About a third of respondents forecast the Fed will hit its 2% inflation target next year, 37% say it will happen in 2025 and 28% say it will happen after 2025 or never.
“For the FOMC in 2024, 3.5% inflation is acceptable, recession is not,” says Steven Blitz, chief U.S. economist at TS Lombard. “With 61% of adults owning equities, the highest since 2008, the Fed is not going to sacrifice faith in equities on the altar of 2% inflation.” Fed officials have insisted they will continue to pursue 2% as their inflation target.
Another wild card for next year is whether the Fed ends quantitative tightening in which it has been reducing its balance sheet to tighten monetary policy by allowing the bonds on its balance sheet to mature without replacing them. On average, respondents see the Fed halting QT in November 2024. But that average masks a wide disparity in views, with 55% saying it will happen in 2024 (evenly divided between the first and second half of the year), 30% saying it will happen in 2025 or later and 13% saying they don’t know.
The Fed is seen stopping QT with its balance sheet at $6.2 trillion, compared with the current level of $7.7 trillion and with bank reserves at $2.6 trillion, down from the current level of $3.4 trillion. At $95 billion a month in QT, that implies another eight or nine months of QT to reduce bank reserves to the average expect level. Fed officials have not specified a level, but respondents believe they could announce an end to QT as soon as August and will likely taper QT, or gradually reduce the amount of runoff, before bringing it to an end. When the Fed announces the end of QT, 56% believe it will also say that it will allow all of its mortgage and agency-backed securities to roll off of its balance sheet, 15% say it won’t and 29% do not know.
Respondents to the CNBC Fed Survey see the S&P rising above 5,000 for the first time, on average, but not until the end of 2025. They forecast only a modest gain through 2024 of less than 2% from the current level to 4,696. But much depends on the economic growth: 47% see stocks as overpriced if there’s a soft landing, compared with 91% who say stocks are overpriced if there’s a recession.
Subodh Kumar, president, Subodh Kumar & Associates, sees the market in a period of limbo, unable to break out either way: “The equity markets … appear neither able to reach beyond the highs set at year-end 2021 nor do they appear to be willing to sustain a classical correction,” he wrote.
Barry Knapp, managing partner at Ironsides Macroeconomics, says, “Equities are expecting a ‘V’ shaped earnings recovery, an outcome that is unlikely with contracting bank credit.”
The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.
The Fed’s leaders expect their interest rate decisions to eventually slow that growth.
The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.
“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.
“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”
A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.
“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”
Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.
“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”
Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.
Fed Chairman Jerome Powell prepares to deliver remarks to the The Federal Reserve’s Division of Research and Statistics Centennial Conference on November 08, 2023 in Washington, DC.
Chip Somodevilla | Getty Images
A flurry of major central banks are set to make their final rate decisions of the year in a crunch week that will test market bets for rate cuts in early 2024.
The U.S. Federal Reserve on Wednesday will kick off what is poised to be a pivotal week, followed by a “Super Thursday” when the European Central Bank, Bank of England, Swiss National Bank and Norway’s Norges Bank will all meet.
Policymakers at the central banks are broadly expected to hold interest rates steady, except for Norway’s central bank which warned it would likely raise the cost of borrowing in December.
Investors will be searching for clues in the banks’ statements on when rate cutting could start next year as inflation continues to fall away from its highest level in decades.
“The biggest risk to ‘risk-on’ is the fact that the Fed does not do what the market is telling it that it is going to do, which is slash interest rates over the course of 2024,” David Neuhauser, chief investment officer of Livermore Partners hedge fund, told CNBC’s “Squawk Box Europe” on Monday.
“The market is telling you one thing, so what the market is doing essentially is calling out the Fed’s credibility … and we’ll see who’s right here.”
Market participants overwhelmingly expect the Fed to hold rates at 5.25%-5.50%, although traders are pricing in a 25 basis point cut as early as March next year, according to the CME FedWatch Tool.
The Fed has sought to push back on market expectations for aggressive rate reductions next year, however.
Fed Chairman Jerome Powell warned earlier this month that it would be “premature” to speculate when policy might ease and suggested the central bank would be “prepared to tighten policy if it becomes appropriate to do so.”
“There’s two different dynamics at play: what the market is telling you, and what Federal Reserve Chairman Powell is telling you, let’s see who has the credibility this time,” Neuhauser said.
Powell has also noted that policy is currently “well into restrictive territory” and said the balance of risks between doing too much or too little were close to balanced.
“When we think about the Fed moving into next year, we think it makes sense that they are on the lookout for when and how much to reduce rates,” Sam Zief, head of global FX strategy at J.P. Morgan Private Bank, told CNBC’s “Street Signs Europe” on Monday.
“As their policy rate is so restrictive, as the unemployment rate gets closer to neutral, as inflation gets closer to neutral, their policy rate should do the same. The real question is: what is the pace of that?”
The Marriner S. Eccles Federal Reserve building during a renovation in Washington, DC, US, on Tuesday, Oct. 24, 2023.
Valerie Plesch| Bloomberg | Getty Images
Ahead of the Fed’s meeting Wednesday, Zief said market participants should be prepared to be slightly disappointed by a lack of clarity over the pace and scale of further interest rate changes.
“Our base case is actually that the Fed isn’t going to say all of that much. The dots probably don’t move all that much. The statement probably doesn’t change all that much,” he added.
The Fed’s approaching rate decision comes shortly after U.S. job creation showed little sign of abating in November. Nonfarm payrolls grew by a seasonally adjusted 199,000 for the month, beating expectations of 190,000, while the unemployment rate dipped to 3.7%, compared with the forecast for 3.9%.
Economists said at the time that the economic data appeared to reflect a job market that continues to be resilient even after a year of dodging recession fears.
Major banks elsewhere are set to follow in the Fed’s footsteps with their final respective policy statements on Thursday.
Investors will be closely monitoring the ECB’s meeting for any sign the central bank is poised to impose swift rate cuts in 2024. Euro zone inflation, which exceeded 10% last year, came in at 2.4% in November, reflecting its lowest level in more than two years.
Price rises have dropped quickly toward the ECB’s target levels of 2% in recent months, fueling investor bets for rate cuts early next year.
Christine Lagarde, president of the European Central Bank (ECB), at a rates decision news conference in Frankfurt, Germany, on Thursday, Sept. 14, 2023. The ECB raised interest rates again, acting for the 10th consecutive time to choke inflation out of the euro zone’s increasingly feeble economy.
Bloomberg | Bloomberg | Getty Images
Policymakers have cautioned investors, however, that the “last mile” of tackling disinflation could be the hardest — and it may take twice as long as the battle to get inflation back under 3%.
Economists at Deutsche Bank said in a research note published earlier this month that it was once again bringing forward the timing of the first ECB rate cut to April, citing the latest inflation data and the tone of official commentary. It added that there is also a “significant risk” of a rate cut as soon as March.
“We fear we were too timid,” economists at Deutsche Bank said on Dec. 6. “The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed.”
Economists at Pantheon Macroeconomics have said that while the consensus now expects the first ECB rate cut in June next year, “we still believe March is a good bet.”
The Federal Reserve is expected to announce it will leave rates unchanged at the end of its two-day meeting this week after recent signs the economy is in fairly good shape and as inflation continues to drift lower.
“While there’s been talk about an imminent recession going back to early last year, the U.S. economy has remained substantially more resilient than expected,” said Mark Hamrick, senior economic analyst at Bankrate.
“A soft landing appears to be the greatest likelihood for next year,” he said. However, the economy isn’t out of the woods just yet, Hamrick added, and “a mild and short recession can’t totally be ruled out.”
Even though inflation is still above the central bank’s 2% target, markets have already been pricing in the likelihood that the Fed is done raising interest rates this cycle and is now looking toward potential rate cuts in 2024.
For consumers, that means relief from high borrowing costs — particularly for mortgages, credit cards and auto loans — may finally be on the way as long as inflation data continues to cooperate.
And yet, “continued slowing in inflation doesn’t mean price decreases, it means a price leveling,” said Columbia Business School economics professor Brett House.
If the central bank can continue to make progress toward its 2% target without bringing the economy to a more abrupt slowdown, there is the possibility of achieving the sought-after “Goldilocks” scenario.
In that case, the economy would grow enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.
For consumers, that means “we are likely to see interest rates come down slowly and growth to remain relatively robust and we are likely to see the jobs market remain relatively strong,” House said.
For some, that expectation may be too optimistic.
“While we also expect a softish landing, the pace of the recent rally in stocks and bonds looks unlikely to be sustained,” Solita Marcelli, UBS Global Wealth Management’s chief investment officer Americas, wrote in a recent note.
“Equity markets are already pricing in plenty of good news, pointing to an unrealistic level of confidence from stock investors,” Marcelli said.
Markets are now even showing a roughly 13% chance of a rate cut as early as January, according to the UBS note.
Central bank policymakers, however, won’t cut for the sake of cutting. More likely, that kind of policy easing would be in response to a sharply slowing economy and rising unemployment, neither of which would be good news for most Americans.
“Aggressive rate cutting cycle would be a sign of deep worry that we are heading toward a hard landing,” House said. That has negative implications for the labor market and, therefore, consumers. “The most important determinant of household finances is whether people have a job or not,” House said.
Wall Street is sounding the alarm about the U.S. economy, with a number of banking experts predicting the country is headed for recession.
The CEOs of big American banks including Jamie Dimon of JPMorgan, Brian Moynihan of Bank of America and Jane Fraser of Citigroup are today testifying before the U.S. Senate Banking Committee’s annual Wall Street oversight hearing.
Their testimony comes as the U.S. economy has been hit with soaring inflation over the last year. Inflation has declined from 9 percent in Jun 2022 to 3.2 percent in October 2023, but it is still above the Fed’s target of 2 percent.
Since March 2022, the Federal Reserve has responded by hiking interest rates 11 times to 5.5 percent. This has elevated borrowing costs for a range of goods including housing, car and business investments, sparking concerns about a potential recession, which is typically defined by analysts as two consecutive quarters of contracting gross domestic product (GDP).
Traders work on the floor of the New York Stock Exchange during morning trading on December 01, 2023, in New York City. A number of banking experts have predicted the U.S. is headed for a recession. Photo by Michael M. Santiago/Getty Images
On Tuesday, prior to the hearing, Fraser, the head of the third-largest bank in the U.S., said in prepared remarks released by the Senate Banking Committee a recession might happen because of a confluence of factors including inflation, rising debt levels and the wars between Russia and Ukraine and Israel and Hamas.
She said people are spending less and customers in low bands of credit scores are taking on the highest levels of debt since 2019. However, she said she does not “see a drastic downturn on the horizon.”
Meanwhile, last week Dimon warned rising inflation and interest rates were recessionary indicators.
“A lot of things out there are dangerous and inflationary. Be prepared,” he said at the 2023 New York TimesDealBook Summit in New York. “Interest rates may go up and that might lead to recession.”
In October, Apollo Management’s chief economist Torsten Sløk said the US is headed for a recession but that it is likely to be milder than previous slumps.
Newsweek has contacted the Federal Reserve Board and the U.S. Treasury by email to comment on this story.
However, other commentators have offered different insights regarding the state of the U.S. economy. Data published last month from Bank of America‘s Global Research division shows the U.S. may be on track to avoid recession in 2024.
The bank’s report forecasts a soft landing rather than a recession, meaning inflation may moderate despite high interest rates without much damage to the labor market, and said inflation will slow down, meaning the Fed will be able to cut rates by 0.25 percent per quarter in 2014. However, a survey of experts by the Financial Times suggested the Fed won’t cut interest rates until July 2024.
Meanwhile, a November Consumer Confidence Survey from the Conference Board showed that expectations of a recession fell to their lowest level in 2023, even as two-thirds of those surveyed still anticipate a slowdown over the next year.
IMF projections predict there will be 2.1 percent growth for the year, and GDP grew at an annual rate of 2.1 percent in the second quarter of 2023 and 5.2 percent in the third quarter.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Elon Musk, chief executive officer of Tesla Inc., during a fireside discussion on artificial intelligence risks with Rishi Sunak, UK prime minister, not pictured, in London, UK, on Thursday, Nov. 2, 2023.
Tolga Akmen | Bloomberg | Getty Images
Tesla faces a growing revolt in Scandinavia after Danish dockworkers joined a sympathy strike with Swedish mechanics, heaping pressure on the electric vehicle giant to grant collective bargaining rights to employees.
Members of Swedish trade union IF Metall have been at loggerheads with Tesla for six weeks, and have garnered support via a secondary strike action from fellow workers across a range of industries in Sweden, including postal workers, painters, dockworkers and electricians.
Tesla CEO Elon Musk bemoaned the blockage of license plate deliveries by postal workers as “insane” and late last month filed lawsuits against both the Swedish Transport Agency and the postal service.
After Swedish dockworkers blocked the reception of Tesla cars into the country, there had been speculation that the company would seek to deliver cars to Danish ports and transport them by truck across to Sweden.
However, IF Metall requested support from Denmark’s largest trade union, which on Tuesday announced a sympathy strike.
Jan Villadsen, chair of Denmark’s 3F Transport union, said Tuesday that IF Metall and Swedish workers are “fighting an incredibly important battle” and therefore have his union’s full support.
“Just like companies, the trade union movement is global in the fight to protect workers. With the sympathy strike, we are now stepping in to put further pressure on Tesla,” Villadsen said in a statement.
“Of course, we hope that they come to the negotiating table as soon as possible and sign a collective agreement.”
In what appeared to be a direct attack on Musk, Villadsen added that “even if you are one of the richest in the world, you can’t just make your own rules.”
“We have some labor market agreements in the Nordic region, and you have to comply with them if you want to run a business here,” he said.
“Solidarity is the cornerstone of the trade union movement and extends across national borders. Therefore, we are now taking the tools we have and using them to ensure collective agreements and fair working conditions.”
All members of 3F Transport are covered by the sympathy conflict, meaning that dockworkers and drivers will not receive and transport Tesla cars to Sweden.
Swedish labor relations, shaped by a series of accords reached throughout the 20th century, mean that almost all pay is subject to collective agreements between companies and labor unions, without any government intervention.
Tesla has so far refused to sign up to one of these collective bargaining agreements, leading around 120 mechanics in Sweden to launch a strike action in late October.
The striking workers are not asking for more pay, but simply for Tesla to honor the principle of collective bargaining. The dispute highlights the potential for an ongoing ideological stalemate not just between Tesla and 120 mechanics, but between U.S. corporate power and the deeply entrenched principles underpinning the Scandinavian economic model.
The extension of solidarity strikes to Denmark could signal further problems for Musk amid the risk of similar solidarity action in Norway and Germany, where collective agreements are also a key tenet of labor relations.
IF Metall told CNBC on Tuesday that it has no ongoing talks with Tesla but hopes the U.S. giant will “return to the negotiations table as soon as possible.”
“We are confident that they eventually will realize that collective agreement is beneficial for them as well. We are prepared for a prolonged conflict, but we are hoping for a swift solution,” the union said.
After surging over 8% in October, mortgage rates are falling back toward 7% again, and that is jump-starting the refinance market.
Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 7.17% from 7.37%, with points dropping to 0.60 from 0.64 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association. That was the lowest level since August.
As a result, applications to refinance a home loan increased 14% from the previous week and were 10% higher than the same week one year ago.
“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” said Joel Kan, MBA vice president and deputy chief economist. “Refinance applications saw the strongest week in two months and increased on a year-over-year basis for the second consecutive week for the first time since late 2021.”
The actual level of refinance demand, however, is still quite low, given that so many borrowers refinanced in the first years of the Covid pandemic, when rates hit more than a dozen record lows.
“Recent increases could signal that 2023 was the low point in this cycle for refinance activity, consistent with our originations forecast,” Kan added.
Applications for a mortgage to purchase a home fell 0.3% for the week and were 17% lower than the same week a year earlier. Potential buyers are still battling high prices and low inventory of homes for sale.
Mortgage rates continued to move lower this week. The government’s all-important monthly employment report, expected to be released Friday, could either continue that trend or reverse it, depending on what it says about the state of the economy.
“November was a stellar month for mortgage rates, and December is picking up right where it left off,” said Matthew Graham, chief operating officer at Mortgage News Daily. He noted that a softer-than-expected report on job openings released Tuesday helped continue the trend.
“The labor market had been running too hot. Job openings are still ‘above-trend,’ in fact, but by cooling off at a faster pace, there are positive implications for interest rates,” Graham added.
Big bank CEOs will likely convey deposits and earnings are stable to lawmakers on Wednesday, according to a major financial services executive. Thomas Michaud, CEO of Stifel company Keefe, Bruyette & Woods, thinks the hearing before the Senate Banking Committee will successfully provide assurance to Washington and Wall Street. Banking chiefs slated to speak at the “Annual Oversight of Wall Street Firms” hearing include JPMorgan CEO Jamie Dimon and Goldman Sachs CEO David Solomon. “The crisis of the spring where we had three of the four largest failures in history is behind us,” Michaud said on CNBC’s ” Fast Money ” on Tuesday. He’s referring to Silicon Valley Bank , Signature Bank and First Republic — the latter of which was the nation’s biggest bank failure since the 2008 financial crisis. Michaud, who testified before Congress in May on the bank failures, hopes Wednesday’s hearing re-addresses the call for changes to prevent bank runs from pushing other financial institutions over the edge. “One way to fix it is deposit insurance reform,” he said. “The targeted approach to change deposit insurance to reduce the ‘too big to fail’ thinking, so depositors don’t run like that. That is what we need, and that effort has stalled in Congress.” He thinks action is needed to keep mid-sized banks competitive with the big banks — starting with lifting Federal Deposit Insurance Corp coverage limits for small businesses. Currently, the FDIC covers $250,000 per depositor, per insured bank, per ownership category — an amount that is likely inadequate for small businesses . “If deposit insurance reform in my opinion doesn’t happen, there’s going to be tremendous pressure on those [mid-size] banks to consolidate,” Michaud said. Disclaimer
Last week, the average interest rate for certain 30-year fixed-rate mortgages decreased to 7.37% from 7.41% the prior week, in the fourth successive week of declines. Lower mortgage rates have prompted mortgage applications to pick up.
Yet, about 80% of outstanding U.S. mortgages have interest rates below 5%, according to Bank of America’s research. Even the recent decline in mortgage rates may not provide incentive for homeowners to move.
“The story for 2023 has been one of homeowners staying put,” said Daryl Fairweather, chief economist at Redfin.
Factors that have contributed to that immobility have recently started to ease, though it remains to be seen whether that will last.
The median monthly mortgage payment is down more than $150 from the peak, marking the lowest level in three months, Redfin’s Nov. 30 research found. Monthly payments are falling as mortgage rates come down from their peak.
The weekly average 30-year mortgage rate fell to 7.29% in late November, down from a 7.79% high in October, according to Redfin.
Those declining rates have offset rising home prices, with the median sale price up 4%. The number of new listings, which is up 6%, has had the biggest year-over-year increase since 2021, according to Redfin.
More prospective homebuyers may be willing to take a chance to reach their goal, with 62% indicating they are waiting for prices and/or rates to fall before buying a home, down from 85% who said the same six months ago, according to Bank of America.
Major life events tend to prompt people to move, according to Skylar Olsen, chief economist at Zillow.
“The problem is, right now, the finances block people from following that major fundamental change,” Olsen said.
For example, they may choose to struggle through a long commute to a new job while they wait for lower home prices, she said.
That may be poised to start to shift in 2024, but it will likely be very gradual, Olsen said.
Zillow’s forecast has called for mortgage rates improving very slowly, which means the number of new listings may also improve very gradually, she said.
Prospective buyers who are hoping for a big drop in home prices will be disappointed, Olsen said.
Rather than a dramatic decline, there will likely be slower home price growth over the next five years, she said, barring any big changes to current dynamics.
The Federal Reserve needs to cut interest rates at least five times next year to avoid tipping the U.S. economy into a recession, according to portfolio manager Paul Gambles.
Gambles, co-founder and managing partner at MBMG Group, told CNBC’s “Squawk Box Asia” the Fed was behind the curve on cutting rates, and in order to avoid an extreme and protracted monetary tightening cycle it will have to deliver at least five cuts in 2024 alone.
“I think Fed policy is now so disconnected from economic factors and from reality that you can’t make any assumptions about when the Fed is going to wake up and and start smelling the amount of damage that they’re actually causing to the economy,” Gambles warned.
The current U.S. policy rate stands at 5.25%-5.50%, the highest in 22 years. Traders are now pricing in a 25-basis-point cut as early as March 2024, according to the CME FedWatch Tool.
Federal Reserve Chairman Jerome Powell said on Friday that it was too early to declare victory over inflation, watering down market expectations for interest rate cuts next year.
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said in prepared remarks.
Recent data from the U.S. has signaled easing price pressures, but Powell emphasized that policymakers plan on “keeping policy restrictive” until they are convinced that inflation is heading solidly back to the central bank’s target of 2%.
Financial markets, however, perceived his comments as dovish, sending Wall Street’s main indexes to new highs and Treasury yields sharply lower on Friday. The perception now being that the U.S. central bank is effectively done raising interest rates.
The Labor Department’s consumer price index, which measures a broad basket of commonly used goods and services, climbed 3.2% in October from a year earlier but remained flat compared with the previous month.
Veteran investor David Roche told CNBC’s “Squawk Box Asia” that unless there were big external shocks to U.S. inflation in the form of energy or food, it was “almost certain” that the Fed was done raising rates, which also means the next rate move will be down.
“I will stick to 3%, which I think is already reflected in many asset prices. I don’t think we’re going to push inflation down to 2% anymore. It’s too embedded in the economy by all sorts of things,” said Roche, president and global strategist at Independent Strategy.
“Central banks don’t have to fight as fiercely as they did before. And therefore, the embedded rate of inflation will be higher than before it will be 3% instead of 2%,” said Roche, who correctly predicted the Asian crisis in 1997 and the 2008 global financial crisis.
It is now left to be seen what the Fed’s interest-rate plans are at its next and final meeting of the year on Dec. 13. Most market players expect the central bank to leave rates unchanged.
The world’s largest cryptocurrency surged more than 4% on Monday in Asia to a 19-month high, and traded as high as $41,520 as of 12.30am ET, based on Coin Metrics data. This is the first time since May 2022 that bitcoin has breached the $40,000 level, according to LSEG. Bitcoin is now up more than 145% from the start of the year.
This comes after scandals rocked the market including the collapse of crypto exchange FTX in November last year. Last month, FTX founder Bankman-Fried was found guilty of all seven criminal charges brought against him related to the collapse of his crypto empire.
“Now that $40,000 has been revisited for the first time in almost 19 months, $48,000 and $52,000 look to be the next significant lines in the sand,” said Antoni Trenchev, co-founder of digital asset company Nexo.
This boosted confidence in the market that a bitcoin ETF may eventually be approved, pushing up the price of the world’s largest cryptocurrency.
“How swiftly Bitcoin marches towards $50,000 might well depend on when a spot-Bitcoin ETF is approved and even then, there’s no guarantee the much anticipated nod from the SEC will put a rocket booster under the price,” said Trenchev.
During a fireside chat on Dec. 1, Federal Reserve Chairman Jerome Powell said it’s too early to talk about cutting interest rates right now, and the central bank will be “keeping policy restrictive” until policymakers are sure that inflation is returning solidly to 2%.
“Like most forecasters, my colleagues and I anticipate that growth in spending and output will slow over the next year, as the effects of the pandemic and the reopening fade and as restrictive monetary policy weighs on aggregate demand,” he said, according to a transcript.
His comments gave rise to expectations the Fed is probably done raising interest rates for now, as the series of rate hikes since March 2022 have cut into economic activity.
Yet at the same time, Powell said it is “premature to conclude with confidence that we have achieved a sufficiently restrictive stance” and that more hikes could follow.
– CNBC’s Jesse Pound and Jeff Cox contributed to this report.
According to NewEdge Wealth’s Ben Emons, the final month of the year typically creates a bigger appetite for the yellow metal.
“It’s been very consistent every December. It’s been a pretty strong performance for gold — especially when there is a rally in the stock market in November,” the firm’s head of fixed income told CNBC’s “Fast Money” on Tuesday.
Gold settled at a new record high Friday. It closed the day up almost 2%, at $2,089.70 an ounce.
Emons listed the economic backdrop and geopolitical backdrop as additional positive catalysts for gold.
“There’s uncertainty next year. We have an election. We don’t know what’s going to happen. We get a recession maybe, maybe not,” said Emons. “At the same time, gold rallies when there’s this risk-on feel in the markets, and that’s really when real rates and interest rates are declining. This gives the gold a really good push for the breakout.”
In a note to clients this week, Emons wrote that months for both gold and stocks are a “rare combo.” Gold gained 3% while the Dow and S&P 500 were both up almost 9% in November.
“[It] tends to occur when markets price in major easing cycles,” he wrote. “Currently, that is going on in a mild manner, which puts the spotlight on the seasonals of gold.”
Emons suggests the strength will continue into next year.
“Central banks are again outbidding gold against dwindling supply, likely setting up the metal for a major breakthrough towards 2100 … lifting boats for laggards like utilities have a shot to claim market leadership by early 2024,” Emons also wrote.
“Fast Money” trader Guy Adami also sees gold shining due to the dollar‘s recent performance.
“If rates continue to go lower, the dollar will go lower. That will be a tailwind for gold,” he said. “Gold is within a whisper of having a huge breakout to the upside.”
As of Friday’s close, gold is up more than 14% so far this year.
A security guard at the New York Stock Exchange (NYSE) in New York, US, on Tuesday, March 28, 2023.
Victor J. Blue | Bloomberg | Getty Images
With central banks having hiked interest rates at breakneck speed and those rates likely to stay higher for longer while the lagged effects set in, the macroeconomic outlook for 2024 is far from clear.
The Washington-based institution sees U.S. GDP growth, which has remained surprisingly resilient in the face of over 500 basis points of interest rate hikes since March 2022, to remain among the strongest developed market performers at 2.1% this year and 1.5% next year.
The U.S. economy’s resilience has fueled an emerging consensus that the Federal Reserve will achieve its desired “soft landing,” slowing inflation without tipping the economy into recession.
Yet Deutsche Bank‘s economists, in a 2024 outlook report published Monday, were quick to point out that monetary policy operates with lags that are “highly uncertain in their timing and impact.”
“With the lagged impact of rate hikes taking effect, we can already see clear signs of data softening. In the U.S., the most recent jobs report showed the highest unemployment rate since January 2022, credit card delinquencies are at 12-year highs, and high yield defaults are comfortably off the lows,” Deutsche’s Head of Global Economics and Thematic Research, Jim Reid, and Group Chief Economist David Folkerts-Landau said in the report.
“At the outer edges of the economy there is obvious stress that is likely to spread in 2024 with rates at these levels. In the Euro Area, Q3 saw a -0.1% decline in GDP, with the economy in a period of stagnation since Autumn 2022 that will likely extend to mid-Summer 2024.”
The German lender has a considerably bleaker prognosis than market consensus, projecting that Canada will have the highest GDP growth among the G7 in 2024 at just 0.8%.
“Although that is still positive and the profile improves through the year, it means the major economies will be more vulnerable to a shock as they work through the lag of this most aggressive hiking cycle for at least four decades,” Reid and Folkerts-Landau said, noting that potential “macro accidents” would be more likely in the aftermath of such rapid tightening.
“We had 10-15 years of zero/negative rates, plus an increase in global central bank balance sheets from around $5 to $30 trillion at the recent peak, and it was only a couple of years ago that most expected ultra-loose policy for much of this decade. So it’s easy to see how bad levered investments could have been made that would be vulnerable to this higher rate regime.”
U.S. regional banks triggered global market panic earlier this year when Silicon Valley Bank and several others collapsed, and Deutsche Bank suggested that some vulnerabilities remain in that sector, along with commercial real estate and private markets, creating “a bit of a race against time.”
‘Higher for longer’ and regional divergence
The prospect of “higher for longer” interest rates has dominated the market outlook in recent months, and Goldman Sachs Asset Management economists believe the Fed is unlikely to consider cutting rates next year unless growth slows by substantially more than current projections.
In the euro zone, weaker growth momentum and a large drag from tighter fiscal policy and lending conditions increase the likelihood that the European Central Bank pauses its monetary policy tightening and potentially pivots toward cuts in the second half of 2024.
“While the Fed and ECB seem to have steered away from a hard landing path during the tightening cycle, exogenous shocks or a premature pivot to policy easing may reignite inflation in a way that requires a recession to force it lower,” GSAM economists said.
“Conversely, further monetary tightening might trigger a downturn just as the effects of prior tightening begin to take hold.”
GSAM also noted regional divergence in the trajectory of growth prospects and inflation patterns, with Japan’s economy surprising positively on the back of resurgent domestic demand driving wage growth and inflation after many years of stagnation, while China’s property market indebtedness and demographic headwinds skew its risks to the downside.
Meanwhile Brazil, Chile, Hungary, Mexico, Peru and Poland were early hikers of interest rates in emerging markets and were among the first to see inflation slow sharply, meaning their central banks have either begun cutting rates or are close to doing so.
“In a desynchronized global cycle, with higher-for-longer rates and slower growth in most advanced economies, the road ahead remains uncertain,” GSAM said, adding that this calls for a “diversified and risk conscious investment approach across public and private markets.”
Recession risk ‘delayed rather than diminished’
In a roundtable event on Tuesday, JPMorgan Asset Management strategists echoed this note of caution, claiming that the risk of a U.S. recession was “delayed rather than diminished” as the impact of higher rates feeds through into the economy.
JPMAM Chief Market Strategist Karen Ward noted that many U.S. households took advantage of 30-year fixed rate mortgages while rates were still around 2.7%, while in the U.K., many shifted to five-year fixed rates during the Covid-19 pandemic, meaning the “passthrough of interest rates is much slower” than previous cycles.
However, she highlighted that U.K. exposure to higher rates is due to rise from about 38% at the end of 2023 to 60% at the end of 2024, while first-time buyers in the U.S. will be exposed to much higher rates and the cost of other consumer debt, such as auto loans, has also risen sharply.
“I think the the key conclusion here is that interest rates do still bite, it’s just taking longer this time around,” she said.
The U.S. consumer has also been spending pent-up savings at a faster rate than European counterparts, Ward highlighted, suggesting this is “one of the reasons why the U.S. has outperformed” so far, along with “incredibly supportive” fiscal policy in the form of major infrastructure programs and post-pandemic support programs.
“All of that fades into next year as well, so the backdrop for the consumer just doesn’t look as strong for us as we go into 2024 that will start to bite a little bit,” she said.
Meanwhile, corporates will over the next few years have to start refinancing at higher interest rates, particularly for high-yield companies.
“So growth slows in 2024, and we still think the risks of a recession are significant, and therefore we’re still pretty cautious about the idea that we’ve been through the worst and we’re looking at an upswing from here on,” Ward said.
The Gorgon liquefied natural gas (LNG) and carbon capture and storage (CCS) facility, operated by Chevron Corp., on Barrow Island, Australia, on Monday, July 24, 2023.
Bloomberg | Bloomberg | Getty Images
The oil and gas industry needs to let go of the “illusion” that carbon capture technology is a solution to climate change and invest more in clean energy, the head of the International Energy Agency said Thursday.
“The industry needs to commit to genuinely helping the world meet its energy needs and climate goals – which means letting go of the illusion that implausibly large amounts of carbon capture are the solution,” IEA Executive Director Fatih Birol said in a statement ahead of the United Nations Climate Change Conference in Dubai next week.
The technology captures carbon dioxide from industrial operations before emissions enter the atmosphere and stores it underground.
Oil and gas companies face a moment of truth over their role in the clean energy transition, Birol wrote in a an IEA report reviewing the industry’s role in transitioning to an economy with net zero carbon emissions by 2050.
Just 1% of global investment in clean energy has come from oil and gas companies, according to Birol. The industry needs to face the “uncomfortable truth” that a successful clean energy transition will require scaling back oil and gas operations, not expanding them, the IEA chief wrote.
“So while all oil and gas producers needs to reduce emissions from their own operations, including methane leaks and flaring, our call to action is much wider,” Birol wrote.
The industry would need to invest 50% of capital expenditures in clean energy projects by 2030 to meet the goal of limiting climate change to 1.5 degrees Celsius, according to the IEA report. About 2.5% of the industry’s capital spending went toward clean energy in 2022.
One of the major pitfalls in the energy transition is excessive reliance on carbon capture, according to the report. Carbon capture is essential for achieving net zero emissions in some sectors, but it should not be used as a way to retain the status quo, according to the IEA.
An “inconceivable” 32 billion tons of carbon would need to be captured for utilization or storage by 2050 to limit climate change to 1.5 degrees Celsius under current projections for oil and gas consumption, according to the IEA.
The necessary technology would require 26,000 terawatt hours of electricity to operate in 2050, more than total global demand in 2022, according to the IEA.
It would also require $3.5 trillion in annual investment from today through mid-century, which equivalent to the entire oil and gas industry’s annual revenue in recent years, according to the report.
U.S. oil major such as Exxon Mobil and Chevron are investing billions in carbon capture technology and hydrogen, while European majors Shell and BP have focused more on renewables such as solar and wind.
Exxon and Chevron are also doubling down on fossil fuels through mega deals. Exxon is buying Pioneer Resources for nearly $60 billion, while Chevron is purchasing Hess for $53 billion.
