Evelyn Reynolds

Fourth-quarter gross domestic product is expected to show growth at a 2% seasonally adjusted annualized pace.
As the Commerce Department’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.
Two other key elements will take the focus as investors digest the report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation.

Consumers shop in Rosemead, California, on Dec. 12, 2023.
Frederic J. Brown | Afp | Getty Images

Economic growth likely slowed to its weakest pace in a year and a half to end 2023, possibly setting the stage for a more pronounced slowdown ahead, according to Wall Street economists.
The consensus outlook for the fourth quarter is that gross domestic product grew at a 2% seasonally adjusted annualized pace, sliding downward from the 4.9% in Q3 and the lowest reading since the 0.6% decline in the second quarter of 2022.

As the U.S. Department of Commerce’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.
The report likely will “represent a sharp deceleration” from the previous period, Bank of America economist Shruti Mishra said in a client note. “Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets.”
BofA has a below-consensus view that GDP — the sum of all goods and services produced during the period — will slow to a 1.5% pace, largely because parts of the economy not directly related to consumer spending, such as nonresidential business fixed investment and housing, will tail off.
In addition, the bank expects a slowdown in inventory restocking to shave close to a full percentage point off the headline number.
Looking forward, BofA forecasts the first quarter of 2024 to show growth of just 1%.

“Consumer spending is likely to slow from its current pace due to lagged effects from tighter financial conditions, higher energy prices, and cooling labor market,” Mishra said.
Elsewhere on Wall Street, expectations are mixed.
Goldman Sachs earlier this week lifted its Q4 estimate to 2.1%, an increase of 0.3 percentage points, taking its full-year GDP outlook to 2.8%. One significant factor Goldman sees is stronger-than-expected state and local government spending, which boosted Q3 growth by nearly a full percentage point and is predicted to show a 4.5% increase in the final three months of the year.
The bank’s economists also see growth holding up fairly well in 2024, ending the year at 2.1%.
Two other key elements will take the focus as investors digest the GDP report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation, specifically how the Federal Reserve might react to personal consumption prices that come out of Thursday’s report as well as a separate Commerce Department release Friday.
“We do expect the economy to slow … further in 2024 as the impact of monetary tightening continues to weigh on economic activities,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to hit a recession.”

RSM expects the GDP report to show a 2.4% gain on solid growth in consumer spending, though some economists say December’s larger-than-expected retail sales increase was fueled by seasonal distortions in the data that will be corrected in January.
Citigroup agrees with the consensus call of 2% growth in Q4 but sees tougher times ahead, mainly because of the lagged effect the Fed’s previous rate cuts will exert, as well as inflation that could turn out to be more durable than anticipated.
“Data released [Thursday] may in retrospect turn out to document the one quarter of true ‘Goldilocks’ conditions,” Citi economist Andrew Hollenhorst wrote. “But we do not share the market and Fed’s sanguine assessment of the macroeconomy over the remainder of the year.”Don’t miss these stories from CNBC PRO: More

“I’ve been in China for 27 years, and this is probably the lowest confidence I’ve ever seen,” Shaun Rein, founder of the China Market Research Group, told CNBC Monday.
He forecasts that China will experience “another 3-6 months minimum of a very painful economy.”
The world’s second-largest economy has faced a slower-than-expected recovery in 2023 after exiting Covid-19 restrictions.

BEIJNG, CHINA – NOVEMBER 13: Illuminated skyscrapers stand at the central business district at sunset on November 13, 2023 in Beijing, China. (Photo by Gao Zehong/VCG via Getty Images)
Vcg | Visual China Group | Getty Images

Deflation may soon start biting into Chinese growth, as Beijing looks at another three to six months of a “very painful economy,” according to one analyst who covers the country.
“This is something investors need to be cautious of. The economy here is bad, it’s pretty … it’s really bad. I’ve been in China for 27 years, and this is probably the lowest confidence I’ve ever seen,” Shaun Rein, founder of the China Market Research Group, told CNBC’s “Squawk Box Europe” on Monday.

“So deflation is starting to wield its ugly head. Consumers are waiting for discounts. They’re very nervous.”
Linked to a decline in the prices of goods and services, deflation is generally associated with an economic slowdown — raising questions over the growth outlook for China, whose post-Covid-19 recovery has already fallen short of some expectations in 2023. In December, depressed prices for pork — which makes up around a fifth of China’s CPI basket — heralded the possible advent of deflation.
“Deflation is a serious issue, I know the Chinese government doesn’t want me saying it, but it’s an issue that we need to be worried about,” Rein stressed. “So I am kind of surprised that they kept the prime rates unchanged. You know, it would have been nice if they had lowered them to try to get some stimulus into the country.”
Earlier on Monday, the People’s Bank of China held its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively, in line with forecasts. These are the pegs for most household and corporate loans in China and are one of many levers that the PBOC usually pulls in an effort to stimulate the economy.
The decision comes amid infectious expectations among investment banks that China’s economy will expand at a more sluggish pace in 2024. Beijing has set an official growth target of 5% this year, with Premier Li Qiang telling the World Economic Forum in Davos, Switzerland, last week that the Chinese economy swelled by a marginally higher 5.2% in 2023.

At the time, Li highlighted that China did not achieve its economic development through “massive stimulus” and “did not seek short-term growth while accumulating long-term risks.” “Rather, we focused on strengthening the internal drivers,” Li said.
Despite this, the International Monetary Fund in November outlined a forecast for China’s growth to slow in 2024 to just 4.6%. In a more recent Jan. 15 report, Moody’s assessed that China’s real GDP growth would hit 4% this year and in 2025, from an average of 6% between 2014 and 2023.

Economic slowdown is widely seen as a potential threat to Xi Jinping, whose Chinese Community Party has cultivated national political legitimacy through rapid growth. China’s status as the world’s second-largest economy has also solidified its international footing, making it and heavyweight energy exporter Russia the epicenter of the BRICS emerging markets group.
Yet Rein says that Beijing may stomach a “slight rough time” as long as the economy retains 5% growth, as the administration focuses on social transformation.
“The Communist Party of China doesn’t necessarily want a restructuring of the economy, they want a reform of society, so it’s a much bigger picture … Which is why I don’t think the government is going to want a major stimulus, so the new normal is going to be 4-5% growth over the next 3-5 years,” he said.
“I think you’re gonna deal with another 3-6 months minimum of a very painful economy, as China restructures, or as China, you know, transforms its economy towards a more slower-growth, fairer society.”
Among the more tremulous sectors of the Chinese economy, Rein identified the country’s once-bloated real estate market, which accounts for roughly a third of China’s economic activity and has been tumbling sharply since Beijing’s broad-stroke crackdown on the debt levels of mainland property developers. Real estate giants Evergrande and Country Garden have become key casualties of the clampdown.
“[Buyers] think housing prices might continue to drop, so even if there’s pent-up demand for housing, a lot of home buyers are telling us, we’re not going to buy this month, we’re not going to buy this quarter, because we’re scared prices are going to drop another couple [of] percent in the coming months,” Rein said Monday.
Such a consumer behavior could compound some expectations that China could take more than 10 years to liquidate the current overhang in its housing inventory. More

Major economies have proven surprisingly resilient to sharp interest rate increases from central banks over the last two years.
Wieting told CNBC’s “Squawk Box Europe” on Monday that he is optimistic the global economy does not need an “economic collapse” to rein in inflation.
Investors will be closely watching Friday’s personal consumption expenditure (PCE) inflation figure, the Fed’s preferred metric, for further clues as to when the central bank will begin cutting rates.

Jim Dyson | Getty Images News | Getty Images

The global economy does not need a “collapse” in order to bring inflation back to target and return to sustainable growth, according to Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth.
Major economies have proven surprisingly resilient to sharp interest rate increases from central banks over the last two years. This has been particularly evident in the U.S., with recession thus far avoided and the labor market remaining robust.

Talk has now turned to rate cuts as inflation remains on a downward trajectory toward central banks’ targets, while growth has slowed.
Wieting told CNBC’s “Squawk Box Europe” on Monday that he is optimistic the global economy does not need an “economic collapse” to rein in inflation.
“We had one massive shock — one pandemic, one collapse. We didn’t need two recessions to ultimately cure our inflation problem,” he said.
“It’s holding down parts of our economy now — manufacturing and trade declines are happening around the world — but these are likely to bottom within the year.”

U.S. headline inflation came in at an annual 3.4% year-on-year in December, remaining above the Federal Reserve’s 2% target but down considerably from a peak of 9.1% in June 2022.

Investors will be closely watching Friday’s personal consumption expenditure (PCE) inflation figure, the Fed’s preferred metric, for further clues as to when the central bank will begin cutting rates.
Meanwhile, a preliminary estimate of fourth-quarter GDP is scheduled for Thursday, with the economy expected to have grown by 1.7%, its lowest rate since the 0.6% decline in the second quarter of 2022.
“This period of slower global growth and slowing employment growth in the United States we think can pass and lead to a healthier growth period if we take a look particularly at the next year and beyond, and that’s this year’s business for investors,” Wieting said.
He highlighted that while there is excess that needs to be worked out of the economy, this was not the result of a “true overheating” or prolonged “boom,” but instead of excess government fiscal stimulus related to the pandemic recovery that wasn’t going to be repeated.
“If you take a look at money supply in the United States, it declined 4% over the past year. Take a look at the 1970s, it was almost 10% growth for the entire decade, important prices surging 14% every single year — that’s … sustained inflation,” Wieting said.
“This story with just all of this government spending coming and going — upheaval in supply and demand, consumer spending going up or down 30% between goods and services, during the pandemic period — that’s not the environment we’re in any longer.” More

Two big economic reports coming up this week could go a long way toward determining at least which way the central bank policymakers could lean on policy.
Gross domestic product will be released Thursday and the personal consumption expenditures prices reading on inflation is out Friday.
” “It’s not about secret meetings or decisions. It’s fundamentally about the data” that will determine policy, Chicago Fed President Austan Goolsbee told CNBC.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 19, 2024. 
Brendan Mcdermid | Reuters

Markets have become less convinced that the Federal Reserve is ready to press the button on interest rate cuts, an issue that cuts at the heart of where the economy and stocks are headed.
Two big economic reports coming up this week could go a long way toward determining at least which way the central bank policymakers could lean — and how markets might react to a turn in monetary policy.

Investors will get their first look at the broad picture of fourth-quarter economic growth for 2023 when the Commerce Department releases its initial gross domestic product estimate on Thursday. Economists surveyed by Dow Jones are expecting the total of all goods and services produced in the U.S. economy to have grown at a 1.7% pace for the final three months of 2023, which would be the slowest since the 0.6% decline in Q2 of 2022.
A day later, the Commerce Department will release the December reading on the personal consumption expenditures price index, a favorite Fed inflation gauge. The consensus expectation for core PCE prices, which exclude the volatile food and energy components, is 0.2% growth for the month and 3% for the full year.

Both data points should garner a lot of attention, particularly the inflation numbers, which have been trending towards the Fed’s 2% goal but aren’t there yet.
“That’s the thing that everybody should be watching to determine what the Fed’s rate path will end up being,” Chicago Fed President Austan Goolsbee said during an interview Friday on CNBC. “It’s not about secret meetings or decisions. It’s fundamentally about the data and what will enable us to become less restrictive if we have clear evidence that we’re on the path to get” inflation back to target.

Lowered rate-cut outlook

The releases come amid a market snapback about where the Fed is heading.

As of Friday afternoon, trading in the fed funds futures market equated to virtually no chance the rate-setting Federal Open Market Committee will cut at its Jan. 30-31 meeting, according to CME Group data as indicated through its FedWatch Tool. That’s nothing new, but the odds for a cut at the March meeting fell to 47.2%, a steep slide from 81% just a week ago.
Along with that, traders have taken one expected cut off the table, reducing the outlook for easing to five quarter percentage point decreases from six previously.
The change in sentiment followed data showing a stronger-than-expected 0.6% growth in consumer spending for December and initial jobless claims falling to their lowest weekly level since September 2022. On top of that, several of Goolsbee’s colleagues, including Governor Christopher Waller, New York Fed President John Williams and Atlanta Fed President Raphael Bostic, issued commentary indicating that at the very least they are in no hurry to cut even if the hikes are probably done.

“I don’t like tying my hands, and we still have weeks of data,” Goolsbee said. “Let’s take the long view. If we continue to make surprising progress faster than was forecast on inflation, then we have to take that into account in determining the level of restrictiveness.”
Goolsbee noted that one particular area of focus for him will be housing inflation.
The December consumer price index report indicated that shelter inflation, which accounts for about one-third of the weighting in the CPI, rose 6.2% from a year ago, well ahead of a pace consistent with 2% inflation.
However, other measures tell a different story.
A new Labor Department reading known as the New Tenant Rent Index, indicates a lower path ahead for housing inflation. The index, which measures prices for new leases that tenants sign, showed a 4.6% decline in the fourth quarter of 2023 from a year ago and more than double that quarterly.

Watching the data, and other factors

“In the very near term, we think the inflation data will cooperate with the Fed’s dovish plans,” Citigroup economist Andrew Hollenhorst said in a client note.
However, Citi foresees inflation as stubborn and likely to delay the first cut until at least June.
While it’s unclear how much difference the timing makes, or how important it is if the Fed only cuts four or five times compared to the more ambitious market expectations, market outcomes have seem linked to the expectations for monetary policy.
There are plenty of factors that change the outlook in both directions — a continued rally in the stock market might worry the Fed about more inflation in the pipeline, as could an acceleration in geopolitical tensions and stronger-than-expected economic growth.
“By keeping the potential alive for inflation to turn up, these economic and geopolitical developments could put upward pressure on both short-term rates and long-term yields,” Komal Sri-Kumar, president of Sri-Kumar Global Strategies, said Saturday in his weekly market note.
“Could the Federal Reserve be forced to raise the Federal Funds rate as its next move rather than cut it?” he added. “An intriguing thought. Don’t be surprised if there is more discussion along these lines in coming months.” More