Evelyn Reynolds

This week’s inflation data provided more evidence that the Federal Reserve is nearing its 2% objective, a mark that Goldman Sachs thinks the central bank may have already hit.
From a policy standpoint, lower inflation opens the door for the Fed to keep cutting interest rates.

Federal Reserve Chairman Jerome Powell arrives to a news conference following the September meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building on September 18, 2024 in Washington, DC. 
Anna Moneymaker | Getty Images

This week’s inflation data provided more evidence that the Federal Reserve is nearing its objective, fresh on the heels of the central bank’s dramatic interest rate cut just a few weeks ago.
Consumer and producer price indexes for September both came in around expectations, showing that inflation is drifting down to the central bank’s 2% target.

In fact, economists at Goldman Sachs think the Fed may already be there.
The Wall Street investment bank Friday projected that the Commerce Department’s personal consumption expenditures price index for September will show a 12-month inflation rate of 2.04% when it is released later this month.
If Goldman is correct, that number would get rounded down to 2% and be right in line with the Fed’s long-held objective, a little over two years after inflation spiked to a 40-year high and unleashed an aggressive round of interest rate hikes. The Fed prefers the PCE as its inflation gauge though it uses a variety of inputs to make decisions.
“The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is,” Chicago Fed President Austan Goolsbee said in a CNBC interview Thursday after the latest consumer price data was released. “We’d like to get both of them to stay in the space where they are right now.”

Some obstacles ahead

While keeping inflation at bay may not be an easy task, the latest data indicates that though prices are not receding from their troublesome heights of a few years ago, the rate at which they are increasing is pulling back.

The 12-month rate for the all-items consumer price index was at 2.4% in September, while the producer price index, a proxy for wholesale inflation and a leading gauge for pipeline pressures, showed an annual rate of 1.8%.
Goldman’s projection that the PCE index is heading to 2% is also about in line with tracking from the Cleveland Fed.
The central bank district’s “inflation nowcasting” dashboard pegs the 12-month headline PCE rate at 2.06% for September, which would get rounded up to 2.1%. However, on an annualized pace, inflation for the entire third quarter is running at just a 1.4% rate — well below the Fed’s 2% goal.
To be sure, there are some caveats to show that policymakers still have some work to do.
Core inflation, which excludes food and energy and is a metric that the Fed considers a better measure of longer-term trends, is expected to run at a 2.6% annual rate for the PCE in September, according to Goldman. Using just the consumer price index, core inflation was even worse in September, at 3.3%.
Fed officials, though, see the unexpectedly high shelter inflation numbers as a major driver of the core measure, which they figure will ease as a lower trend in rents works its way through the data.
Fed Chair Jerome Powell on Sept. 30, addressing the rent situation, said he expects housing inflation to continue to recede while “broader economic conditions also set the table for further disinflation.”
From a policy standpoint, lower inflation opens the door for the Fed to keep cutting rates, particularly as it turns its attention to the labor market, though there’s some trepidation about how quickly it should move.
September’s half percentage point reduction to a fed funds range of 4.75% to 5% was unprecedented for an economy in expansion, and the Fed at the very least is expected to return to its normal quarter-point pace. Atlanta Fed President Raphael Bostic even said Thursday he’d be open to skipping a move altogether at the November meeting.
“Aggressive easing would risk spiking consumer demand just as it is settling into a sustainable pace,” PNC senior economist Kurt Rankin said in a post-PPI analysis. “This result would in turn put pressure on businesses to meet that demand, re-igniting gains in those businesses’ own costs as they jockey for the necessary resources to do so.”
Futures traders are betting on a near certainty that the Fed cuts rates by a quarter point at both the November and December meetings. More

France’s newly-installed government on Thursday presented a draft budget containing 60 billion euros ($65.6 billion) in tax hikes and spending cuts in a bid to cut its 6.1% deficit to 5% of gross domestic product by next year.
While tax hikes are focused on big corporations and high earners, the budget also contains politically-controversial measures including a levy on electricity consumption, vast public spending cuts and a delay to pension adjustments.
Analysts warned the package may not be enough to stave off further ratings downgrades for the economy and may hinder economic growth.

France’s newly-installed government on Thursday presented a draft budget containing 60 billion euros ($65.6 billion) in tax hikes and spending cuts, as analysts warned the package may not be enough to stave off ratings downgrades for the economy.
The 2025 budget features a greater focus on tax-raising measures than some were expecting. Analysts also flagged “politically complicated” proposals such as a delay to an inflation adjustment for pensions, and cuts to local government, the civil service and the healthcare system.

Other key elements include temporary additional taxes on large shipping firms and corporations with revenue of more than a billion euros a year, impacting around 440 companies; an income tax surcharge on households with incomes over 500,000 euros; the reintroduction of a levy on electricity consumption; and an increase in taxes and charges on airline tickets and cars with high emissions.
One of the budget’s core aims is to reduce France’s projected 6.1% deficit for 2024 to 5% of gross domestic product next year — an effort to comply with European Union rules which state a member nation’s budget deficit should not exceed 3% of GDP.
The government set a new target of meeting this rule by 2029, an extension of its previous goal of 2027. It also warned the deficit could swell to 7% next year without action.

Political challenge

The task of finding 60 billion euros in a year left the government with few options, meaning it had to turn to those which are “politically complicated,” Hadrien Camatte, senior economist for France, Belgium and the euro zone at Natixis, told CNBC’s “Squawk Box Europe” on Friday.
The fragile French government led by Prime Minister Michel Barnier has already faced one vote of no confidence this week, which it survived.

The government was formed last month after fraught negotiations in the wake of the July parliamentary election, which handed the most seats to the left-wing New Popular Front — itself a relatively divided alliance — but failed to deliver any party or coalition a majority.

In acknowledgement of this, Barnier characterized the draft budget as a starting point to be debated by lawmakers and said he was open to changes that maintain its fiscal integrity.
“There will be changes and there will be heated debate regarding pensions and social security contributions,” Camatte said, with debate over the budget set to kick off on Oct. 21 and votes on various portions of it from Oct. 29.
“The problem is when you have to find 60 billion, we have never found 60 billion in one year, it would be unprecedented, and that’s why it’s not very credible to find so huge an amount, especially with only a very fragile relative majority.”

Tax focus

The policy mix underpinning the 2025 budget is “less skewed towards spending cuts and more geared towards tax increases than we anticipated,” analysts at Goldman Sachs said in a note Friday.
“The magnitude of the proposed consolidation and the corresponding reliance on tax increases leave us less confident in the ability of the government to meet its 2025 deficit target of 5.0%. Our previous research has found that abrupt adjustments and tax-based consolidations tend to have a lower chance of succeeding in improving the fiscal position sustainably,” they wrote, noting their own deficit forecast was 5.2%.
However, they also flagged the potential for some near-term political stability given the government’s survival of the Oct. 8 no confidence vote.

French Minister for the Economy, Finance and Industry Antoine Armand arrives at the Elysee presidential palace to attend the weekly cabinet meeting, during which France’s 2025 budget was presented, on October 10, 2024 in Paris. 
Ludovic Marin | Afp | Getty Images

This means their base case is currently for the government to pass the budget bill by the end of the year, they said, but with greater uncertainty beyond that point.
“When you need fresh money very quickly, you don’t have any other option than increasing taxes. The problem is that tax is already very elevated in France,” Natixis’ Camatte told CNBC, noting the country has the second-highest wage taxation rate in Europe.
Despite an emphasis on tax hikes, the bill’s split should see government spending cut by 40 billion euros while revenues rise by 20 billion euros, according to Erik-Jan van Harn, senior macro strategist at Rabobank.
However, he added: “Barnier’s ambitious plans are fraught with implementation risks. His government commits until 2029 but isn’t very likely to survive until then.”

Ratings risk

Questions remain over what the 2025 budget will mean for France’s economic growth, and whether the country can avoid further credit downgrades on its sovereign debt, after cuts by agencies S&P and Fitch over the last two years.
The government has spread its measures to try to avoid harming economic growth, Evelyn Herrmann, Europe economist at Bank of America Global Research, told CNBC’s “Squawk Box Europe” on Friday.
“There is the hope is that by doing that and by going more into perhaps the upper income groups and the particularly profitable companies — and the promise to do that temporarily — perhaps you avoid a kind of typical strong effect on growth of these measures,” she continued.
However, the Goldman Sachs analysts estimate the impact of the package on economic growth will turn from a 0.3 percentage point boost in 2024 to a 0.5 percentage point drag in 2025 and 2026; while UBS said the historically large 2% of GDP fiscal consolidation would be “likely to hurt growth.”
Statistics agency Insee this week forecast 1.1% growth for the French economy this year, which Natixis’s Camatte described as “maybe a bit too optimistic, even if it’s not unrealistic.”
“My worry is for the trajectory beyond 2025, because measures to reduce the deficit beyond 2025 are undocumented and when you are doing debt sustainability analysis, the trajectory of France is clearly a risk,” he said.
In the near-term, ratings agencies would be in a wait-and-see mode given the lack of specific detail around the budget, he added, though a negative outlook from S&P or Fitch could not be ruled out.
“At this stage it’s more keep calm and let’s decide next year to see if the spending cuts are credible or not,” Camatte said. However, he expects agency Moody’s, which has maintained a better rating on France, to go into a negative outlook this year before downgrading next year.
Rabobank’s Van Harn was even more downbeat, arguing that sharp spending cuts would “put a lid on economic growth” and that “a rating downgrade by one of the major rating agencies seems likely.”
“Stark austerity has its price. Economic growth, which is already weak, will be hampered by a sharp turn in France’s fiscal stance. The government would do well to consider the economic side effects of their policy, but the lack of political capital risks that Barnier will be forced to make the wrong decisions,” he said Friday.
“Given the risks already highlighted by [Fitch] and the comparatively optimistic nature of its earlier projections, we see a rating downgrade as likely. While clearly not a positive from a spread perspective we believe that the market is already largely pricing for such a move.”
— CNBC’s Charlotte Reed contributed to this story More

The producer price index was flat for the month and up 1.8% from a year ago. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1%.
Excluding food and energy, the PPI rose 0.2%, meeting expectations.
A 0.2% decline in final demand goods prices offset a 0.2% increase in services.

A measure of wholesale prices showed no change in September, pointing to a continued easing in inflation, the Labor Department reported Friday.
The producer price index, which measures what producers get for their goods and services, was flat for the month and up 1.8% from a year ago. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1% after August’s increase of 0.2%.

Excluding food and energy, the PPI rose 0.2%, meeting expectations.
The report comes a day after the Labor Department reported that the consumer price index, a more widely followed inflation measure that shows what consumers actually pay for goods and services, had an increase of 0.2% for the month and 2.4% from a year ago.
Markets showed little reaction to the data, with stock market futures pointing slightly higher on Wall Street while Treasury yields rose on longer-duration securities.
Together, the releases indicate that inflation is off its blistering pace that peaked more than two years ago but still mostly holds above the Federal Reserve’s 2% target.
Within the PPI, a 0.2% decline in final demand goods prices offset a 0.2% increase in services. Excluding trade services from core PPI, the index increased 0.1%.

A 3% jump in deposit services costs pushed the services index higher, while professional and commercial equipment wholesaling prices tumbled 6.3%.
On the goods side, a 2.7% slide in final demand in energy was the main factor in the decrease. Similarly, the index for gasoline fell 5.6%, holding back gains on the goods index. Diesel fuel prices plunged 17.6%.
Fed officials in recent days have expressed confidence that inflation is heading back to target even though some aspects, such as shelter, food and vehicle costs, have held stubbornly higher. Minutes from the September central bank meeting indicated policymakers were divided over the decision to slash the Fed’s benchmark interest rate by half a percentage point.
Most officials say they expect to continue to cut as long as the data indicates. Markets anticipate the Fed to lower by a quarter percentage point at each of its two remaining meetings this year.

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The U.K. economy returned to growth in August following two consecutive months of stagnation, providing a slight boost for the Labour government.
The U.K. economy grew 0.2% in August on a month-on-month basis, flash figures published by the Office for National Statistics showed Friday.
The reading comes as Finance Minister Rachel Reeves is set to deliver her Autumn Budget at the end of this month.

Alexander Spatari | Moment | Getty Images

LONDON — The U.K. economy returned to growth in August following two consecutive months of stagnation, providing a slight boost as the Labour government prepares to deliver its first budget later this month.
The economy grew 0.2% on a month-on-month basis, flash figures published by the Office for National Statistics showed Friday, meeting expectations of economists polled by Reuters.

It follows an economic flatlining in June and July after the U.K. recorded modest but steady expansion in almost every month this year. Britain emerged from a shallow recession at the start of the year.
Over the three months to August, Britain’s economic growth also expanded 0.2%, compared with the 0.5% recorded in the three months to July.
“The UK economy had a remarkable run through the first few months of 2024, at least if the monthly GDP figures are to be believed. But those same figures now show that this strength was short-lived,” ING’s Developed Markets Economist James Smith said in a note shortly after the release.
“The bottom line is that the economy still seems to be growing at a reasonable pace, but the 0.6/0.7% quarterly GDP readings we became accustomed to in the first two quarters of the year are not going to be repeated in the second half of the year. We’re looking for 0.2% growth in the third quarter overall.”
Sterling rose slightly against the U.S. dollar following the release, trading up 0.05% at $1.3067 by 8:56 a.m. London time. U.K. government bond yields, meanwhile, ticked lower, with the 10-year trading around 4.211%, having climbed sharply over recent days.

The U.K.’s dominant services sector showed slight growth of 0.1% in the month to August, while production and construction output rose by 0.5% and 0.4%, respectively.
Finance Minister Rachel Reeves welcomed the data, saying returning the economy to growth is the government’s “number one priority.”
“While change will not happen overnight, we are not wasting any time on delivering on the promise of change,” she said in a statement. The new Labour administration was voted into power in July during snap elections.

All eyes on the budget

The reading comes as Reeves is set to deliver her Autumn Budget at the end of this month, with tax hikes and spending cuts expected as she tries to overcome an estimated £22 billion ($29 billion) black hole in the public finances. The Conservative opposition party, which led the country until snap elections earlier this year, deny the gap.
ING’s Smith said that if the U.K. Treasury was hoping the strong growth in the first half of the year would unlock some “extra fiscal headroom” in the budget, “it is likely to be left disappointed.”
“Remember the key here is what the Office for Budget Responsibility projects for the UK economy. And like the BoE, they are unlikely to take much inference from the GDP figures so far this year. Indeed, if anything the OBR forecasts already sit at the more optimistic end of the spectrum,” he added.
The government is pitching its vision for an era of “national renewal,” as it attempts to inject some optimism into the public psyche after painting a gloomy picture of the state of the economy.
Lindsay James, investment strategist at Quilter Investors, said Reeves faces a “tricky balancing” to ensure her decisions don’t stifle further economic growth.
“With interest rates beginning to fall, the responsibility has shifted from the Bank of England to Rachel Reeves, who must now make critical fiscal decisions. She and the Prime Minister have indicated that ‘pain’ is necessary for future prosperity, but there is a real risk of overcorrection at the expense of economic growth,” she said. More