Aurelia Butler

NEW YORK (Reuters) – Robust U.S. economic data is confronting investors with an unexpected question: whether strong growth can keep driving stocks higher even if the Federal Reserve delivers less monetary-policy easing than the market had hoped.Expectations that the Fed would pivot to cutting rates sent stocks soaring at the end of 2023 and pushed the S&P 500 to a record high in January. The index is up 4% this year after surging 24% in 2023.That narrative has been jolted by evidence that the economy may be running too hot for the Fed to cut rates without risking an inflationary rebound. Friday’s blockbuster U.S. employment number was the latest sign of stronger-than-expected growth, after Fed Chairman Jerome Powell days earlier deflated hopes the central bank would begin lowering rates in March.”Looking back on the fourth quarter and the recent rally in stocks, a lot of it was driven from the thought of a Fed pivot, and the Fed pivot is evaporating in front of our eyes,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.Market expectations of a near-term rate cut dimmed after the jobs data, with futures tied to the Fed’s main policy rate reflecting a 70% chance of the central bank lowering borrowing costs at its May 1 meeting, from over 90% on Thursday, according to the CME FedWatch Tool. The probability of a March cut stood at about 20%, from just under 50% a week ago.With Friday’s jobs report, “the six or seven rate cuts that markets had been pricing in seems very offside,” Seema Shah, chief global strategist at Principal Asset Management, said in a written commentary.Friday’s jobs report showed nonfarm payrolls increased by 353,000 jobs last month – well above the 180,000 increase expected by economists polled by Reuters. The economy also added 126,000 more jobs in November and December than previously reported.Plenty of investors believe the strong growth is a positive for stocks, especially if accompanied by better-than-expected corporate earnings. The S&P 500 hit a fresh high on Friday after the jobs data, helped by the soaring shares of Facebook parent Meta Platforms (NASDAQ:META) and Amazon (NASDAQ:AMZN), which rose 20% and 8%, respectively, following their corporate results.For 2024, S&P 500 earnings are expected to jump nearly 10% after a 3.6% rise in 2023, according to LSEG data. Those expectations will be tested in the coming week with another heavy batch of reports, including from Eli Lilly (NYSE:LLY), Walt Disney (NYSE:DIS) and ConocoPhillips (NYSE:COP).”I’ll trade a stronger economy with less rate cuts than a weaker economy with more rate cuts,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.Analysts at Capital Economics forecast a “banner” year for U.S. stocks, finishing 2024 over 10% above current levels at 5,500. Optimism over the business potential of artificial intelligence, which helped power stocks such as Nvidia (NASDAQ:NVDA) last year, will likely drive those gains, they said.However, sustained above trend growth poses another issue – fears of an inflationary rebound.”January job growth figures were strong, possibly too strong,” said Russell Price, chief economist at Ameriprise, in a Friday note. “There were multiple signs of strong wage growth which could filter through to resurgent … inflation pressures if maintained.”A longer period of high interest rates also could increase stress for areas of the economy that are already hurting such as commercial real estate.Shares of New York Community Bancorp (NYSE:NYCB), a major CRE lender in New York, have tumbled in recent days, setting off broader regional banking concerns, after the company slashed its dividend and posted a surprise loss.Ramped-up growth, along with expectations of rates staying at current levels for longer, could drive Treasury yields up. Higher yields can pressure equities because they compete with stocks for investors, while higher rates raise the cost of capital in the economy.The benchmark 10-year Treasury yield, which moves inversely to bond prices, hit 4.05% on Friday.Investors are still pricing in around 125 basis points of Fed cuts this year, LSEG data shows. That is down from around 150 basis points priced in earlier this week, but still far more than the 75 basis points the Fed has projected. More

Factory orders gained 0.2% after rebounding 2.6% in November, the Commerce Department’s Census Bureau said on Friday. The increase was in line with economists’ expectations. Orders increased 0.8% on a year-on-year basis in December. Manufacturing, which accounts for 10.3% of the economy, is being constrained by high interest rates. The outlook is, however, promising. The Federal Reserve left interest rates unchanged on Wednesday. Fed Chair Jerome Powell told reporters that rates had peaked and would move lower in coming months. The Institute for Supply Management’s manufacturing PMI neared the recovery zone in January.Civilian aircraft orders gained 0.4% in December after soaring 84.1% in November, while orders for motor vehicles, parts and trailers increased 0.9%. There were also increases in orders for primary metals, computers and electronic products as well as electrical equipment, appliances and components.Shipments of manufactured goods were unchanged. Manufactured goods inventories edged up 0.1%, while unfilled orders increased 1.3% after rising by the same margin in November. The government also reported that orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, increased 0.2% instead of 0.3% as estimated last month.Shipments of these so-called core capital goods were unchanged instead of edging up 0.1% as previously reported. Business spending on equipment rebounded slightly in the fourth quarter. More

Addressing a crowd of activists on Friday in Tula, the capital of Russia’s arms industry, Vladimir Putin crowed that the country’s economy had defeated western sanctions imposed after his invasion of Ukraine.“They predicted decline, failure, collapse — that we would stand back, give up, or fall apart. It makes you want to show [them] a well-known gesture, but I won’t do that, there are a lot of ladies here,” Putin said to a round of applause. “They won’t succeed! Our economy is growing, unlike theirs.”Russia’s president gloated that Russia’s economy had not only withstood an onslaught of sanctions from western countries — but was now bigger than all but two of them. He was referring to the World Bank’s ranking of GDP by purchasing power parity, by which Russia slightly edges ahead of Germany. “All of our industry did their part,” he said. On Tuesday, the IMF appeared to concur with Russia’s president. The IMF revised its own GDP growth forecast for Russia to 2.6 per cent this year, a 1.5 percentage point rise over what it had predicted last October.The Russian economy’s resilience has stunned many economists who had believed the initial round of sanctions over the invasion of Ukraine nearly two years ago could cause a catastrophic contraction. Instead, they say, the Kremlin has spent its way out of a recession by evading western attempts to limit its revenues from energy sales and by ramping up defence spending.Russia is directing a third of the country’s budget — Rbs9.6tn in 2023 and Rbs14.3tn in 2024 — towards the war effort, a threefold increase from 2021, the last full year before the invasion. This includes not only producing hardware, but also giving war-related social payments to those who fight in Ukraine and their families, as well as some spending on the occupied territories. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The significant increase in military expenditure marks “a striking break with Russia’s post-Communist development to date”, a recent Stockholm International Peace Research Institute (SIPRI) paper concluded. Putin’s own top economic officials have warned a surge in public spending comes at the risk of a major overheating of the economy in the near future. But for the time being, it is keeping growth robust.All of this would have been impossible if Russia had not continued to generate colossal revenues from its energy resources, despite sanctions.In 2023, Russia’s energy revenues reached Rbs8.8tn — a decline of about a quarter from the record-breaking result in 2022 but above the average for the past ten years. Despite this, the state has had to resort to increasingly irregular methods to generate revenue from one-off taxes and levies, including “voluntary donations” western businesses have to pay when leaving Russia. “The regime is resilient because it sits on an oil rig,” says Elina Ribakova, a non-resident senior fellow at the Peterson Institute for International Economics. “The Russian economy now is like a gas station that has started producing tanks.”As he announced Russia’s staggering military spending to lawmakers in September, finance minister Anton Siluanov used a Soviet slogan from the second world war to describe the Kremlin’s approach to the budget.“Everything for the front, everything for victory,” Siluanov said.The Kremlin’s shift to what Vasily Astrov, a senior economist at the Vienna Institute for International Economic Studies (WIIW), calls “military Keynesianism” is a radical break from the conservative macroeconomic policy of Putin’s first two decades in power.Technocrats like Siluanov and central bank governor Elvira Nabiullina helped steer Russia through multiple financial crises by aggressively targeting inflation, shoring up the country’s banking system, building up foreign currency reserves, and attempting to rein in additional spending.That approach also proved crucial in mitigating the initial impact of the sanctions at the war’s outset, when western countries froze $300bn of Russia’s sovereign reserves and the Kremlin imposed currency controls to halt an exodus of capital and a run on the banks.“The economic bloc [the finance ministry and central bank] keeps saving the regime. They have proven to be much more useful for Putin than the generals,” says Alexandra Prokopenko, a former Russian central bank official.Avoiding a bigger contraction in the economy allowed the Kremlin to pivot to fuelling growth through spending, Astrov says. Although the authorities officially continue to refer to the war in Ukraine as a “special military operation”, the entire country’s economy has shifted to producing for the war. Addressing a group of arms producers on Friday, Putin said they were “guaranteed to be filling orders for years to come” as Russia ramped up its weapons production and said the defence ministry was paying suppliers 80 per cent of the costs in advance.Vladimir Putin, accompanied by members of the Movement of the First youth group, visits the Russia Expo stand at the Exhibition of Achievements of National Economy in Moscow this week More