Economy

NEW YORK (Reuters) -The U.S. stock market’s strong start to the year faces a major test next week in a stretch packed with big tech earnings, the Federal Reserve’s monetary policy meeting and the closely-watched employment report. The S&P 500 is up nearly 3% since the end of December and stands near record highs, driven in part by expectations of a U.S. economic “soft-landing” in which growth remains stable while inflation cools. A thicket of potentially market-moving events may test that optimism. Those include earnings from Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) on Tuesday, the conclusion of the Federal Reserve meeting on Wednesday, and Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) results on Thursday. Friday closes out the week with the nonfarm payrolls report and earnings from Meta Platforms (NASDAQ:META). Through it all, “the market is going to be looking for confirmation that we’re in a soft landing,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. “As long as growth remains in the sweet spot here … the market will keep grinding up.”Earnings will be a major focal point, with five of the massive “Magnificent Seven” growth and technology stocks that have powered markets higher for much of the last year reporting next week. Collectively, the market capitalization of Alphabet, Microsoft, Apple, Amazon and Meta account for nearly 25% of the S&P 500, giving them an outsize influence on the performance of the broader index. While most of the group has continued to rise in 2024, shares of electric-carmaker Tesla (NASDAQ:TSLA) are down more than 26% year-to-date, leaving it among the worst performers in the S&P 500 for the year so far. By the same token, chipmaker Nvidia (NASDAQ:NVDA) has ridden burgeoning excitement over artificial intelligence to a nearly 23% gain this year.”There’s not this monolithic performance among those stocks anymore,” said Liz Ann Sonders, chief investment strategist at Charles Schwab (NYSE:SCHW). “If there is a downside to earnings … that could take the bloom off the rose” for the market as a whole.Companies in the S&P 500 are reporting earnings 4.2% above expectations, in line with the long-term average and below the average of 5.7% for the prior four quarters, according to LSEG data. The Fed meeting and Fed Chairman Jerome Powell’s subsequent press conference could also sway markets. Some investors now reassessing earlier expectations for rate cuts this year following strong economic data and statements from Fed officials that suggested that rate cuts may not be as aggressive as expected, said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments. Investors have pushed expectations for the Fed’s first cut of the cycle to May, from March. Markets are now pricing 135 basis points in cuts by the end of the year, down from over 160 basis points expected in December. While the Fed is expected to leave rates unchanged next week, investors will be looking for signs of whether the central bank believes it has come far enough in its inflation fight to begin reducing borrowing costs sooner rather than later.”The Fed commentary next week could create some risk of expectations for the first rate cut getting pushed out even further into the year, and that may be negative to where the market is priced right now,” said Wade. “There is more confidence in the market that we are going to navigate through a soft landing. I’m still not totally convinced of that.” Markets will also be looking for signs that the Fed is planning on making changes to its quantitative tightening program, which has contributed to monetary policy tightening by sapping liquidity in the Treasury market. Investors will also watch for word from the Treasury Department over its estimates for future funding and auction sizes, which will come on Monday and Wednesday. Concerns over Treasury supply due to deficit spending have helped lift bond yields. The 10-year Treasury has been hovering near its highest yield since mid-December. At the end of the week, U.S. employment data might have to walk a fine line to satisfy investors. A sharp drop in employment could suggest that the 525 basis points of rate increases delivered by the Fed since 2022 are finally starting to bite, while stronger-than-expected hiring could bolster the case for the central bank to keep rates elevated in order to prevent an inflationary rebound.As it stands, evidence of economic strength has surprised investors in recent weeks. U.S. growth came in stronger than expected in the fourth quarter, data showed earlier this week, as the economy shrugged off predictions of a recession by growing 2.5% in 2023. Overall, next week is “the largest ‘event-risk’ week ahead in recent memory,” wrote Nomura strategist Charlie McElligott. More

WASHINGTON (Reuters) – U.S. prices rose marginally in December, keeping the annual increase in inflation below 3% for a third straight month, bolstering expectations that the Federal Reserve will start cutting interest rates this year.But the timing of the anticipated rate cut is uncertain, with the report from the Commerce Department on Friday also showing consumer spending surging at the end of 2023 as Americans splurged on goods and services over the holidays. Financial markets have pushed the odds of a March rate cut to below 50% in a nod to the economy’s continued resilience. The U.S. central bank is expected to keep its policy rate unchanged at the current 5.25%-5.50% range at its meeting next week.”The inflation trajectory is improving, giving the Fed leeway to cut rates this year,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:LPLA) in Charlotte, North Carolina. “However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished.'”The personal consumption expenditures (PCE) price index increased 0.2% last month after dropping 0.1% in November, the Commerce Department’s Bureau of Economic Analysis said. Food prices rose 0.1% and the cost of energy products increased 0.3%.In the 12 months through December, the PCE price index advanced 2.6%, matching November’s gain. The inflation readings were in line with economists’ expectations. Excluding the volatile food and energy components, the PCE price index climbed 0.2% after rising 0.1% in November. The so-called core PCE price index increased 2.9% year-on-year, the smallest gain since March 2021, after rising 3.2% in November. The Fed tracks the PCE price measures for its 2% inflation target. Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target. Core services prices excluding housing, the primary concern for policymakers, rose 0.3%. They increased 3.3% year-on-year after advancing 3.5% in November.Some economists argue that core inflation is already on target. Measured on an annualized basis, core inflation rose at a 1.5% rate over the past three months and increased at a 1.9% pace in the last six months. The government reported on Thursday that core PCE inflation advanced at a 2.0% rate in the fourth quarter after a similar rise in the July-September period. Economists said Fed officials were likely to place more weight on the fourth-quarter inflation reading as the quarterly data ironed out month-to-month volatility.”Inflation at 2.0% on a quarter-on-quarter basis, for two quarters in a row, is a good reason to start cutting rates,” said Chris Low, chief economist at FHN Financial in New York. “The year-on-year core CPI at 2.9% gives the Fed cover to wait a few months longer and still fulfill (Chair Jerome) Powell’s prediction the Fed will cut rates before inflation reaches 2%.”Stocks on Wall Street were mixed. The dollar slipped against a basket of currencies. U.S. Treasury prices fell. STRONG CONSUMER SPENDINGThough prospects of a March rate cut have diminished, a reduction in borrowing costs is still expected by June. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.Easing inflation along with rising wages from a tight labor market and households tapping their savings combined to boost consumer spending and support the overall economy. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.7% after rising 0.4% in November amid gains in both goods and services.Spending on goods surged 0.9% as Americans stepped up purchases of new light trucks, clothing and footwear as well as recreational goods and vehicles. They also spent more on gasoline, furniture and household equipment.Services outlays rose 0.6%, lifted by financial service charges, fees and commissions, housing and utilities, recreation, hospital and outpatient care, and gambling. When adjusted for inflation, overall consumer spending increased 0.5% in December after a similar rise in the prior month. The solid increase in the so-called real consumer spending puts consumption on a higher growth path heading into the first quarter.The Atlanta Fed started its tracking estimate for first-quarter GDP growth at a 3.0% rate.”It is early to have a precise estimate of what first-quarter GDP will look like at this point, but the trajectory for consumers and across many other economic indicators looks at least decent late last year,” said Daniel Silver, an economist at JPMorgan in New York.The data was included in the fourth quarter’s advance gross domestic product report published on Thursday. Consumer spending increased at a strong 2.8% rate last quarter, accounting for the bulk of the economy’s 3.3% growth pace.The pace of growth in consumer spending is, however, likely to moderate in the months ahead. Personal income increased 0.3% in December after rising 0.4% in November. Income at the disposal of households after accounting for inflation and taxes rose 0.1% after a solid 0.5% increase in November. As a result, some of the surge in spending was funded from savings. The saving rate dropped to a one-year low of 3.7%, from 4.1% in November.Lower-income households are believed to be using credit cards to finance purchases. But higher borrowing costs are making it harder for some to keep up with their debt payments.A reduction in government money flowing to household is also anticipated. While these factors could slow spending, economists do not expect the economy to slide into recession this year as lower inflation boosts household purchasing power. Rising stock market prices were also seen underpinning spending.”We continue to expect a solid consumer spending performance in 2024, but momentum may be a little more subdued than the robust 2.2% advance in 2023,” said Gregory Daco, chief economist at EY-Parthenon in New York. More

Sri Lanka is aiming to negotiate a debt restructuring with holders of its defaulted US dollar bonds within “a couple of months”, the bankrupt south Asian nation’s central bank governor said, despite complaints by private creditors that they are being left in the dark.Nandalal Weerasinghe, head of the Central Bank of Sri Lanka, told the Financial Times that “we need to reach an agreement within a couple of months” on restructuring the $13bn of debt as he dismissed worries that negotiations have become bogged down.“There’s a lot of interest from private creditors to finish this as soon as possible,” Weerasinghe said. “But because of the procedure it takes a certain time . . . We also want to do that fast,” he added.Two years after a currency crisis led Sri Lanka to default on its debt, President Ranil Wickremesinghe’s government is preparing for elections later this year amid signs the economy is recovering.But a resolution of Sri Lanka’s default has gone on much longer than had widely been expected, reflecting what investors see as the breakdown of the international framework for resolving sovereign debt disputes. Zambia and other countries are also still struggling with delays to the restructuring of their debts because of complexity introduced by the rise of China as a significant lender to the developing world and disagreements between Beijing and other creditors on debt relief.Last year Wickremesinghe’s government negotiated preliminary deals to restructure about $10bn in debts that were due to bilateral creditors led by China, Japan and India. It also secured a restructuring of local currency debts, helping Sri Lanka to continue accessing $3bn in rescue loans from the IMF.Nandalal Weerasinghe, head of the Central Bank of Sri Lanka: ‘There’s a lot of interest from private creditors to finish this as soon as possible’ More

MILWAUKEE (Reuters) -U.S. Treasury Secretary Janet Yellen said on Friday that Treasury officials visiting Beijing recently received assurances that Chinese banks are “doing well” despite turmoil in the country’s financial and real estate markets, adding that she did not see large spillovers to the U.S. economy at this stage.Yellen told reporters during a visit to a Milwaukee job training center that a U.S.-China Economic Working Group would meet in Beijing shortly for larger discussions on China’s economic situation.The Financial Working Group met last week and U.S. Treasury officials “focused on pressures in the financial sector, in the banking sector, stemming from debt problems of local governments and the real estate sector,” Yellen said. “They received assurances that banks in China are doing well.”Chinese financial markets, however, sold off heavily this week as investors both international and domestic grow frustrated with the Chinese government’s reluctance to take bold measures to shore up the economy amid a protracted crisis in its real estate sector and debt pressures.Asked about the potential for spillovers from China’s turmoil to the U.S. economy, Yellen said that there could be impact.”If growth slows to Asian countries that are important trade partners, we may see some spillovers. But I don’t think they’re going to be very large,” she said.Regarding calls to confiscate hundreds of billions of dollars in frozen Russian assets, Yellen said she expected G7 finance ministers to soon receive a report reviewing potential legal justifications and risks associated with seizing the funds and diverting them to aid Ukraine.Asked if the report would be ready by the end of February, Yellen said: “We’re working to do it quickly.”She has previously said that an international law justification agreed by G7 countries would be needed and that the U.S. Congress would need to pass legislation to enable seizure of Russian assets held in the U.S. More

FRANKFURT (Reuters) – The holding by a top investor in Deutsche Bank, Douglas Braunstein of Hudson (NYSE:HUD) Executive Capital, dropped to 0.92% from 3.18%, according to a filing on Friday.Braunstein, a former finance chief of JP Morgan Chase (NYSE:JPM), invested in Deutsche in 2018, backing Chief Executive Christian Sewing’s efforts to turn around Germany’s biggest bank and making him one its largest shareholders.Braunstein declined to comment on the reason for the reduction.Deutsche Bank, whose shares have risen 35% since Braunstein’s investment was announced, said in a statement it was aware of the move, “which we understand is an in-kind distribution to certain” limited partners.Deutsche Bank reports fourth-quarter earnings on Feb. 1.(This story has been corrected to show that the holding dropped to 0.92% from 3.18%, in paragraph 1) More

A widely predicted recession never showed up. Now, economists are assessing what the unexpected resilience tells us about the future.The recession America was expecting never showed up.Many economists spent early 2023 predicting a painful downturn, a view so widely held that some commentators started to treat it as a given. Inflation had spiked to the highest level in decades, and a range of forecasters thought that it would take a drop in demand and a prolonged jump in unemployment to wrestle it down.Instead, the economy grew 3.1 percent last year, up from less than 1 percent in 2022 and faster than the average for the five years leading up to the pandemic. Inflation has retreated substantially. Unemployment remains at historic lows, and consumers continue to spend even with Federal Reserve interest rates at a 22-year high.The divide between doomsday predictions and the heyday reality is forcing a reckoning on Wall Street and in academia. Why did economists get so much wrong, and what can policymakers learn from those mistakes as they try to anticipate what might come next?It’s early days to draw firm conclusions. The economy could still slow down as two years of Fed rate increases start to add up. But what is clear is that old models of how growth and inflation relate did not serve as accurate guides. Bad luck drove more of the initial burst of inflation than some economists appreciated. Good luck helped to lower it again, and other surprises have hit along the way.“It’s not like we understood the macro economy perfectly before, and this was a pretty unique time,” said Jason Furman, a Harvard economist and former Obama administration economic official who thought that lowering inflation would require higher unemployment. “Economists can learn a huge, healthy dose of humility.”Economists, of course, have a long history of getting their predictions wrong. Few saw the global financial crisis coming earlier this century, even once the mortgage meltdown that set it off was well underway. We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

On the face of it, the Houthi militants’ attacks on ships in the Red Sea are like a supersized version of the Ever Given incident in 2021. When the container ship got stuck in the Suez Canal and blocked it for six days, there was a lot of talk then about the fragility of globalisation and chokepoints in supply chains.In the event, the problem went away. Apart from some running-down of inventories and an unpleasant short-term earnings hit for some companies, globalisation survived just fine. Similarly, although the Houthi attacks threaten a humanitarian catastrophe for the millions of Yemenis and Sudanese dependent on imported food and other aid, they seem unlikely to have a disastrous impact on global trade. 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 container shipping industry is running at low capacity, with many ships due to be launched in the next couple of years, meaning it can absorb the cost of longer journeys around the southern cape of Africa even if trouble in the Red Sea persists. “There’s so much shipping capacity coming on stream that in the long run the increase in rates evens out,” says Ryan Petersen, chief executive of the freight forwarding and logistics company Flexport. Indeed, the post-cold war surge in goods trade, which has either exceeded or kept pace with GDP growth, has now survived a whole series of supply shocks: the security clampdown following the September 11 attacks in 2001, the Sars and avian flu outbreaks of the 2000s, the Icelandic ashcloud in 2010 which closed much of Europe’s airspace, the Covid pandemic and Russia’s invasion of Ukraine. 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 sharp rise in freight rates and port snarl-ups in 2021-22, which have now dissipated, were more to do with a surge of consumer demand as the world recovered from the initial shock of Covid, not supply shocks to the trading system.Many factors explain this remarkable resilience, but an important one is the role America has played over recent decades in keeping shipping lanes open, particularly by clearing them of pirates. It has not done so entirely alone; its anti-piracy campaign off Somalia, for example, has attracted help from dozens of other countries. But the Center for Global Development think-tank says the US contributes 0.2 per cent of gross national income to protect international waters, as against an average of 0.015 per cent of the world’s 40 most powerful countries. The Houthis’ attacks are more severe than those of Somalian pirates, but the most pressing danger, given they are backed by a powerful state like Iran, is as a possible trigger or harbinger of large-scale regional wars to come. The risk of such a conflagration is rising, be it the Middle East, Chinese military aggression against Taiwan, or permanent destabilisation of the EU’s eastern border by ongoing conflict in Ukraine. An eruption in any of these areas might really send globalisation into reverse — and put in stark contrast the world’s reliance on a military superpower to uphold it.None of this is new. Historically, naval forces have deployed to create or maintain trade routes, but the flipside is that maritime wars or rivalries have an unpleasant habit of interrupting world trade. In previous centuries the saying was that “trade followed the flag” — commerce went alongside colonial expansion — and the distinction between the merchant and military navy was often blurred. Oliver Cromwell, when he was Lord Protector of England, Scotland and Ireland in the mid-17th century, used naval power to protect and extend trade in a more systematic way than previously. He deployed the English navy against the Netherlands to challenge its dominance over maritime trade, and also used naval power — backed directly by the state, not merely private adventurers under an official charter — to seize Jamaica from Spain and gain an imperial foothold in the Caribbean.By the 19th century, when the Royal Navy was the world’s largest, it was also performing something of a public good by suppressing piracy around the globe. The years 1870 to 1914 were famously the first golden age of globalisation. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.But the dark side of sea power revealed itself. The imperial naval rivalry between Britain and Germany in the late 19th and early 20th centuries contributed substantially to the outbreak of the first world war which ended the golden age.That episode has some echoes now. The US Navy has for decades been the most dominant maritime force in the world, but rivalry between armed powers is threatening globalisation again. China, the US’s main geopolitical and commercial rival, has been building up its forces and now has the world’s largest navy — though without the global network of hubs and bases from which the US operates. 299Number of ships in the US Navy, down from a peak of 594 in 1987In any case, the obvious locus of a destabilising conflict is just 150km off the Chinese coast. Despite efforts to diversify semiconductor production by the US and the EU, Taiwan remains an indispensable centre of the world’s chip industry and major node in its value network. Given the use of high-end semiconductors in military and intelligence use, this makes its technological and manufacturing capability of strategic as well as economic importance. Any conflict involving Taiwan is as likely to involve a Chinese maritime blockade as a full-on land invasion. The US’s capacity to maintain open sea lanes will be stretched if blockages become more politically-motivated and long-lasting. After the second world war and the Vietnam war, the size of the US Navy peaked in 1987 with 594 ships. That was when the US launched Operation Earnest Will, one of the largest naval operations since second world war. It aimed to protect oil supplies moving through the Gulf, which were coming under attack during the Iran-Iraq war.Although the Houthi attacks on ships threaten a humanitarian catastrophe for the millions of Yemenis and Sudanese dependent on imported food and other aid, they seem unlikely to have a disastrous impact on global trade More

The Fed will hold its next policy meeting on Jan. 30-31, and while it is expected to maintain its policy rate in the current 5.25%-5.50% range, data on inflation, jobs and consumer spending is bringing the prospects of rate cuts into better focus. Here is a guide to some of the numbers shaping the policy debate:INFLATION (PCE released Jan. 26; next release CPI Feb. 13)The personal consumption expenditures (PCE) price index, by which the Fed measures inflation, rose 0.2% in December from the prior month, in line with economists expectations’ and translating to an annualized pace in keeping with the Fed’s 2% target. On a three-month and six-month annualized basis, underlying core PCE inflation excluding food and energy prices is running below target, the data showed, and from a year ago the increase was 2.9%, the smallest rise since March 2021. Meanwhile a report earlier this month showed the consumer price index (CPI) jumped 3.4% on a year-on-year basis in December from 3.1% in the prior month, while the core rate edged down to 3.9% from 4.0%, stronger-than-expected readings that underscored the bumpy path back to the Fed’s target.Fed officials will look to annual revisions on the CPI due to be released on Feb. 11 for further clues on the path of inflation; revisions last year undid what had looked like progress seen until that point. RETAIL SALES (Released Jan. 17; next release Feb. 15):Retail sales rose 0.6% in December, yet another in what has been a string of “upside surprises” the economy delivered over the course of 2023. The surge in spending foreshadowed the far-stronger-than-expected 3.3% estimate for annualized fourth-quarter GDP growth released on Jan. 25. Fed policymakers have been anticipating signs the aggressive rate hikes they delivered from March 2022 to July 2023 are trimming overall demand for goods and services, but that progress has been hard to detect. EMPLOYMENT (Released Jan. 5, next release Feb. 2):The economy created 216,000 jobs in December, beating economists’ expectations and up from 173,000 in the prior month, although there were some signs of a gradual cooldown.The unemployment rate remained unchanged at 3.7%, but that was due to 676,000 people leaving the labor force, almost erasing the gains in participation since February. Household employment fell sharply and the workweek was on average slightly shorter than in November. The employment report also included the tally for last year’s job gains. The economy added 2.7 million jobs in 2023, a sharp drop from the 4.8 million positions created in 2022.Overall, the latest report remains consistent with the Fed’s view of an economy that can continue growing while inflation also ebbs. The pace of annual wage growth, however, picked up to 4.1% from 4.0%, higher than many Fed officials feel is consistent with price stability.Wage growth is still well above its pre-pandemic average and the 3.0%-3.5% range that most policymakers view as consistent with the Fed’s 2% inflation target.JOB OPENINGS (Released Jan. 3, next release Jan. 30):Fed Chair Jerome Powell keeps a close eye on the U.S. Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person who is without a job but looking for one. The ratio had been falling steadily towards its pre-pandemic level, but in November remained close to 1.4-to-1, still above the 1.2-to-1 level seen before the health crisis. Other aspects of the survey, like the quits rate, have edged back to pre-pandemic levels. More