Economy

NEW YORK (Reuters) – The Federal Reserve’s last monetary policy meeting of 2023 and a U.S. inflation report in coming days should test a stock market rally that some view as stretched following weeks of gains. Bets the Fed will begin cutting interest rates sooner than expected have fueled a surge in U.S. equities, which received a tailwind from a rapid decline in Treasury yields. The S&P 500 up nearly 20% in 2023 after a monthly gain in November that was its biggest of the year. Yet some investors believe the rise in stocks has left markets more vulnerable to reversals if consumer prices do not keep cooling or the Fed is less dovish than expected.The S&P 500 rose 0.2% this week, marking its sixth-straight weekly increase, the longest such winning streak in about four years. The index stands at its highest closing level since March 2022.”There is some optimism priced in on earnings and the economy and the Fed, so that has taken us to this level,” said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute (WFII). With the S&P 500 near the top of its trading range, “we think there is a lot more potential for downside than upside.”The WFII has a 2024 price target for the S&P 500 of about 4,700, or about 2% above current levels.While the Fed is expected to keep rates steady on Wednesday for a third straight meeting, investors will watch for signs from policymakers that confirm the market’s view for rate cuts as early as March 2024. The Fed will also release its summary of economic projections, which will show officials’ rate expectations for next year.Friday’s stronger-than-expected jobs and consumer sentiment data, combined with a rise in yields, bolstered the case for those betting the Fed “could lean more hawkish” next week, said Quincy Krosby, chief global strategist for LPL Financial (NASDAQ:LPLA).The federal funds futures market on Friday was pricing in a 46% chance of a cut at the Fed’s March meeting, and a nearly 80% chance of a cut in May, according to the CME FedWatch tool.Many investors believe stocks can continue rising in the weeks and months ahead, with the S&P 500 just 4% from making a fresh all-time high.Past rate cycles have shown that stocks tend to climb during the period when monetary policy is “on hold.” The S&P 500 has gained an average of 5.1% in periods that the Fed has paused its rate-hiking cycle and before the central bank’s first cut, according to an analysis of nine such periods by ClearBridge Investments.The S&P 500’s rally has brought it back to around where it stood when the central bank last raised rates in July, “suggesting there could be upside” from current levels, ClearBridge strategists said in a Dec 4 blog post.At the same time, a period of strong gains often sees stocks continuing to push ahead for months, according to Ryan Detrick, chief market strategist at The Carson Group. The S&P 500’s 8.9% gain in November put it in the 20 best-performing months since 1950, Detrick wrote in a recent report. The index was higher a year later 80% of the time after those exceptional months, rising 13.3% on average, according to Detrick. Still, the market’s recent gains could warrant caution.Angelo Kourkafas, senior investment strategist at Edward Jones, said a hotter-than-expected number in consumer price data due out on Tuesday could drive a short-term pullback. Stocks jumped last month after the October consumer price index was unchanged for the first time in over a year, boosting expectations the Fed was done tightening. Investors will weigh the latest CPI data against recent numbers showing economic softening, including moderation in another key inflation gauge, the personal consumption expenditures price index. “There are enough data points that we have a trend established that we are moving in the right direction,” Kourkafas said. More

(Reuters) – California’s ambitious high-speed rail project that aims to move travelers from San Francisco to the Los Angeles basin in under three hours still faces significant funding challenges despite a $3.1 billion federal award.The White House on Friday announced $8.2 billion in federal funding for rail projects across the country, including the California project billed at the first U.S. speed rail project with speeds of 220 miles per hour.California Governor Gavin Newsom, who in October asked President Joe Biden to approve funding, said the award was “a vote of confidence in today’s vision and comes at a critical turning point, providing the project new momentum.”The administration also awarded $3 billion for a planned high speed rail line between Las Vegas and Los Angeles.Transportation Secretary Pete Buttigieg told reporters Thursday the California project “is facing a lot of the challenges that come with being the very first at anything” and added winning rail awards faced an “extraordinary level of scrutiny.” The costs for the California high-speed rail project, which voters approved $10 billion in 2008, have risen sharply and the authority has not identified key funding needed for the project that has faced numerous delays.The full San Francisco to Los Angeles project was initially estimated to cost around $40 billion but has now jumped to between $88 billion and $128 billion.The rail authority estimated costs for an initial 171-mile segment connecting Merced to Bakersfield rose from $25.7 billion to at least $32 billion and is hoping initial service will begin in 2030.The Obama administration awarded California $3.5 billion in 2010 and the state has dedicated another $4.2 billion to the project.California wants $8 billion in total from the Biden administration for the project after recently winning another $202 million in federal funds for grade separation projects. In 2021, the Biden administration restored funding for the California project after then-President Donald Trump pulled funding for the project, hobbled by delays and rising costs, calling it a “disaster.” Many Republicans in Congress want to bar the White House from awarding more funding to the project. More

Signa Development Selection AG, which invests in development projects in major urban centres, and further companies of the Signa Development group will apply for the opening of insolvency proceedings in the “very near term”. Signa Development Selection AG had appointed restructuring expert Erhard Grossnigg to join its board last week.Earlier on Friday, a person with knowledge of the matter had told Reuters that more companies of European property and retail giant Signa are expected to file for insolvency in the near future.The moves would be a further turn for the worse for the company that has become the biggest casualty so far of Europe’s property crash.Several Signa companies have filed for insolvency in the days since the Signa group holding company filed its own separate insolvency application last week, and more will come, said the person speaking on condition of anonymity.Last week’s insolvency filing by the Vienna-based holding company – with debts of around 5 billion euros ($5.4 billion) – was a dramatic stumble in the conglomerate’s two-decade history that underscored dimming prospects for the broader property sector.Signa Prime, an important division with holdings that include the Park Hyatt hotel in Vienna and the Elbtower skyscraper in Hamburg, is preparing an application for self-administrated insolvency, the Spiegel news magazine reported on Friday, citing unidentified sources.An insolvency application is expected within the next two weeks, according to the report.A Signa spokesperson didn’t immediately respond to a request for comment.($1 = 0.9274 euro) More

After the coffeehouse chain proposed terms for contract negotiations, Workers United, which represents 9,000 employees, said it was open to productive steps.Starbucks said Friday that it wanted to get back to the bargaining table after a deadlock of more than six months with the union that represents more than 9,000 of its workers.The company is proposing that bargaining continue with a set of organized stores in January, Sara Kelly, Starbucks’s vice president and chief partner officer, said in a letter to Lynne Fox, president of Workers United, the parent union of Starbucks Workers United.“We collectively agree, the current impasse should not be acceptable to either of us,” Ms. Kelly said in the letter. “It has not helped Starbucks, Workers United or, most importantly, our partners. In this spirit, we are asking for your support and agreement to restart bargaining.”Starbucks said it would like to conduct these meetings without audio or video recording “so that all participants are comfortable with open, honest discussions.” The union has previously fought for the negotiations to be conducted by videoconference so that more members could take part.Ms. Fox said in a statement that the union was reviewing the letter and still determining how to respond. “We’ve never said no to meeting with Starbucks,” she said. “Anything that moves bargaining forward in a positive way is most welcome.”Starbucks workers began organizing in 2021 with three Buffalo-area stores. Now more than 350 of the company’s roughly 9,300 corporate-owned stores in the United States are organized.In those two years, the coffee giant and its workers have sparred over issues ranging from Pride Month décor to accusations of company retaliation. The two sides have blamed each other for stalled talks since their last meeting on May 23.Most recently, workers at more than 200 stores walked out on Nov. 16, which fell on Starbucks’ promotional Red Cup Day.The union has filed hundreds of charges with the National Labor Relations Board complaining of unfair labor practices, with accusations including unjust firings and withholding certain health care benefits for organized workers. The agency itself has sided with workers in many of those disputes.The company has also sued the union over allegations of using the company’s intellectual property in pro-Palestinian messaging. More

BRUSSELS (Reuters) – EU countries and lawmakers are close to clinching a provisional deal on rules governing the use of artificial intelligence and an announcement could come in the next hour, people with direct knowledge of the discussions said on Friday.The two sides together with the European Commission, which proposed the rules two years ago, had been locked in negotiations since 0800 GMT, after having failed to find consensus during a nearly 24-hour debate the previous day. More

NEW YORK (Reuters) -A gauge of global stocks rose on Friday, on pace for its sixth straight week of gains, while U.S. Treasury yields shot higher after a strong U.S. jobs report forced markets to modify expectations for the timing of rate cuts by the Federal Reserve. U.S. job growth accelerated in November, with the Labor Department’s employment report showing nonfarm payrolls increased by 199,000 jobs last month, above the 180,000 estimate of economists polled by Reuters, after rising by an unrevised 150,000 in October. The unemployment rate fell to 3.7% from the near two-year high of 3.9% in October. Ahead of the payrolls report, a string of labor market data this week indicated some softening in the jobs market, while other reports in recent weeks showed a cooling of inflation and led markets to increase expectations the Federal Reserve would have the leeway to cut interest rates as soon as March. Expectations for a March cut of at least 25 basis points (bps) slipped to about 46%, according to CME’s FedWatch Tool, down from about 65% on Thursday. “I don’t think this gives the Fed the ability to pivot. It’s not weak enough,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management in Boston.”(Fed Chair Jerome) Powell’s going to push back on the market’s pricing of rate cuts. He’s likely to communicate that the Fed’s got to stay steady in restrictive territory for the time being.” Other data from the University of Michigan showed U.S. consumer sentiment improved much more than expected in December, snapping four straight months of declines, as households saw inflation pressures easing.On Wall Street, stocks closed higher after a choppy session with the S&P 500 closing at its highest level since March 2022, led by a 1.1% gain in energy (SPNY) shares as oil prices bounced. The Dow Jones Industrial Average rose 130.49 points, or 0.36%, to 36,247.87, the S&P 500 gained 18.78 points, or 0.41%, to 4,604.37 and the gained 63.98 points, or 0.45%, to 14,403.97.U.S. Treasury yields surged following the payrolls report. The yield on the benchmark U.S. 10-year Treasury note jumped 10 basis points to 4.23%, on track for its biggest one-day gain since Nov. 9. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, shot up by 14.5 basis points, its biggest daily jump since June 29, to 4.725%.European shares closed at their highest since February 2022 with the STOXX 600 index up 0.80%. MSCI’s gauge of stocks across the globe gained 0.29% and was poised for a sixth straight weekly gain, its longest streak in four years. Along with recent economic data, comments from Fed officials, including Chair Jerome Powell, have fueled investor speculation about the timing of the central bank’s pivot to a rate cut. The Fed’s next policy meeting is on Dec. 12-13, while the next policy announcement from the European Central Bank (ECB) is on Dec. 14. Expectations have also grown the ECB was at or near the end of its rate hike cycle and a cut may be on the horizon. In currencies, the dollar index, which tracks the greenback against a basket of six currencies, gained 0.29%, to 103.96 while the euro was down 0.29% on the day at $1.0761. Crude prices bounced after a recent slump but oil benchmarks were on track for a seven-week decline, the longest in five years, after Saudi Arabia and Russia lobbied OPEC+ members to join output cuts. U.S. crude settled up 2.73% at $71.23 per barrel and Brent settled at $75.84, up 2.42% on the day.Gold fell 1.27% to $2,002.56 an ounce after dropping to $1,994.49, its lowest since, Nov 24, as the dollar and yields climbed following the payrolls report. More

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The U.S. economy can take another win with a small “W” as it looks to navigate through what had been the highest inflation level in more than 40 years.
Despite a high level of anxiety heading into the Labor Department’s nonfarm payrolls report, the details were fairly benign.
Still, the solid report couldn’t dispense the lingering feeling that the economy isn’t out of the woods yet.
Key to whether the so-called landing is soft or hard will be the consumer, which collectively accounts for nearly 70% of all U.S. economic activity and has been pressured by inflation.

A UPS seasonal worker delivers packages on Cyber Monday in New York on Nov. 27, 2023.
Stephanie Keith | Bloomberg | Getty Images

November’s solid jobs report did not assure that the economy will come in for a soft landing, but it did help to clear the runway a little more.
After all, there’s nothing about a 3.7% unemployment rate and another 199,000 jobs that even whispers “recession,” let alone screams it.

At least for now, then, the U.S. economy can take another win with a small “W” as it looks to navigate through what had been the highest inflation level in more than 40 years — and a still-uncertain path ahead.
“Overall, the jobs market is doing its part to get us to a soft landing,” said Daniel Zhao, lead economist at jobs rating site Glassdoor. “It’s boring in all the right ways. That’s a welcome change after a few years of less-boring reports.”
Indeed, despite a high level of anxiety heading into the Labor Department’s nonfarm payrolls report, the details were fairly benign.
The level of job creation was just above the Wall Street estimate of 190,000. Average hourly earnings rose 4% from a year ago, exactly in line with expectations. The unemployment rate unexpectedly declined to 3.7%, easing worries that it could trigger a historically dead-on signal known as the Sahm Rule, which coordinates increases of the unemployment rate by half a percentage point to recessions.

Still, the solid report couldn’t dispense the lingering feeling that the economy isn’t out of the woods yet. The fear primarily comes from worries that the Federal Reserve’s aggressive interest rate increases haven’t exacted their full toll and still could trigger a painful downturn.

“The key uncertainty for the labor market in 2024 is whether job growth slows to a more sustainable pace, or whether the economy moves from monthly job gains to monthly job losses. The former would be consistent with the Fed’s soft-landing scenario, while the latter would mean recession,” said Gus Faucher, chief economist at PNC Financial Services. “PNC still thinks recession is the more likely outcome in 2024, but it is a close call.”

All about consumers and inflation

Key to whether the so-called landing is soft or hard will be the consumer, who collectively accounts for nearly 70% of all U.S. economic activity.
On that front, there was another round of good news Friday: The University of Michigan’s closely watched consumer sentiment survey showed that inflation expectations, a key economic variable for prices, plummeted in December. Respondents put one-year inflation expectations at 3.1%, a stunning 1.4 percentage point drop.
However, such gauges can be “fluky” and are not in line with some other signals coming from consumers, said Liz Ann Sonders, chief investment strategist at Charles Schwab. Debates over soft landings and inflation expectations and interest rate outlooks tend to miss bigger points, Sonders added.

Prior to 2023, Sanders and Schwab had been stressing the notion of “rolling recessions,” meaning that contractions could hit certain sectors individually while not dragging down the economy as a whole. The distinction may still apply heading into 2024.
“The recession versus soft landing debate sort of misses the necessary nuances of this unique cycle,” Sonders said. “A best-case scenario is not so much a soft landing, because that ship has already sailed for [some] segments. It’s that we continue to roll through such that if and when services gets hit more than the brief ding so far and it takes the labor market with it, you’re already in stabilization or recovery mode in areas that already took their big hits.”
Getting to the soft landing, then, likely will require navigating some of those peaks and valleys, none more so than establishing confidence that inflation really has been vanquished and the Fed can take its foot off the brake. Inflation, according to the Fed’s preferred gauge, is running at 3.5% annually, well above the central bank’s 2% goal, though is consistently falling.

Still nervous about rates

There was one other good piece of inflation news Friday: Rental costs nationally declined 0.57% in November and were down 2.1% year over year, the latter being the biggest slide in more than 3½ years, according to Rent.com.
However, one interesting development from the latest economic data was a bit less market confidence that the Fed will be cutting interest rates quite as aggressively as traders previously believed.
While the traders in the fed funds futures space still roundly expect that the Fed is done hiking, it now expects only about a 45% chance of a previously expected cut in March, according to CME Group data. Traders previously had been expecting 1.25 percentage points worth of cuts in 2024 but lowered that outlook as well to a toss-up with just a full point of decreases following the data releases.
That may in itself seem like only a nuanced change, but the move in pricing reflects uncertainty over whether the Fed keeps talking tough on inflation, or concedes that policy no longer needs to be as tight. The fed funds rate is targeted in a range between 5.25% and 5.5%, its highest level in more than 22 years.

“The key thing though, from a broader perspective, is that they can cut if the economy were to see more of a slowdown than we expect. Then the Fed could cut, could provide some support,” Jan Hatzius, chief economist at Goldman Sachs, said Friday on CNBC’s “Squawk on the Street.” “That means the risk of recession is in my view quite low.”
Goldman Sachs thinks there’s about a 15% chance of a recession next year.
If that forecast, which is about the standard probability given normal economic conditions, holds up, it will require continued strength in the labor market and for consumers.
Periods of labor unrest this year indicate, though, that not all may be well on Main Street.
“If things were going great, then people would not be marching in the cold and rain because they want more pay because the cost of living is going up,” said Giacomo Santangelo, an economist at job search site Monster.
Workers won’t need economists to tell them when the economy has landed, he added.
“The alleged definition of a soft landing is to bring inflation down to 2% to 2½% and have unemployment go up to that full employment level. That’s really what we’re looking for, and we’re not there yet,” Santangelo said. “When you’re on an airplane, you know what it feels like when a plane lands. You don’t need the person in the cockpit to come on and go, ‘Alright, we’re going to be landing now.”Don’t miss these stories from CNBC PRO: More