Economy

Futures that settle to the Fed’s policy rate in December showed traders now see about a 24% chance the Fed will raise its benchmark short-term interest rate by a quarter of a percent at its last meeting of the year, to a range of 5.5%-5.75%. Before the report, which showed a surge in consumer spending drove growth in U.S. gross domestic product to an annualized 4.9% rate last quarter, the rate-future contracts had priced in about a 30% chance of an interest-rate hike this year. Economists polled by Reuters had expected a 4.3% GDP growth rate. Other data published Thursday, though, suggested the kind of slowdown the Fed has been aiming for with its interest-rate hikes to date. Core inflation cooled to a 2.4% rate, from a previous pace of 3.7%, and the tally of workers continuing to claim unemployment insurance rose to its highest since May.”Investors should not be surprised that the consumer was spending in the final months of the summer,” said LPL Financial (NASDAQ:LPLA)’s Jeffrey Roach. “The real question is if the trend can continue in the coming quarters and we think not.” More

Gross domestic product, a measure of all goods and services produced in the U.S., rose at a 4.9% annualized pace in the third quarter, ahead of the 4.7% estimate.
The sharp increase came due to contributions from consumer spending, increased inventories, exports, residential investment and government spending.
While the report could give the Fed some impetus to keep policy tight, traders were still pricing in no chance of an interest rate hike when the central bank meets next week.

The U.S. economy grew even faster than expected in the third quarter, buoyed by a strong consumer in spite of higher interest rates, ongoing inflation pressures, and a variety of other domestic and global headwinds.
Gross domestic product, a measure of all goods and services produced in the U.S., rose at a 4.9% annualized pace in the July-through-September period, up from an unrevised 2.1% pace in the second quarter, the Commerce Department reported Thursday.. Economists surveyed by Dow Jones had been looking for a 4.7% acceleration.

The sharp increase came due to contributions from consumer spending, increased inventories, exports, residential investment and government spending.
Consumer spending, as measured by personal consumption expenditures, increased 4% for the quarter after rising just 0.8% in Q2. Gross private domestic investment surged 8.4% and government spending and investment jumped 4.6%.
Spending at the consumer level split fairly evenly between goods and services, with the two measures up 4.8% and 3.6%, respectively.
The GDP increase marked the biggest gain since the fourth quarter of 2021.
Markets reacted little to the news, with stock market futures negative heading into the open and Treasury yields mostly lower.

While the report could give the Federal Reserve some impetus to keep policy tight, traders were still pricing in no chance of an interest rate hike when the central bank meets next week, according to CME Group data. Futures pricing pointed to just a 27% chance of an increase at the December meeting following the GDP release.
“Investors should not be surprised that the consumer was spending in the final months of the summer,” said Jeffrey Roach, chief economist at LPL Financial. “The real question is if the trend can continue in the coming quarters, and we think not.”
In other economic news Thursday, the Labor Department reported that jobless claims totaled 210,000 for the week ended Oct. 21, up 10,000 from the previous period and slightly ahead of the Dow Jones estimate for 207,000. Also, durable goods orders increased 4.7% in September, well ahead of the 0.1% gain in August and the 2% forecast, according to the Commerce Department.
At a time when many economists had thought the U.S. would be in the midst of at least a shallow recession, growth has kept pace due to consumer spending that has exceeded all expectations. The consumer was responsible for about 68% of GDP in Q3.
Even with Covid-era government transfer payments running out, spending has been strong as households draw down savings and ramp up credit card balances.
The gains also come despite the Federal Reserve not only raising rates at the fastest clip since the early 1980s but also vowing to keep rates high until inflation comes back to acceptable levels. Price increases have been running well ahead of the central bank’s 2% annual target, though the rate of inflation at least has ebbed in recent months.
The chain-weighted price index, which takes into accounts changes in consumer shopping patterns to gauge inflation, rose 3.5% for the quarter, up from 1.7% in Q2 and higher than the Dow Jones estimate for 2.5%.
Along with rates and inflation, consumers have been dealing with a variety of other issues.
The resumption of student loan payments is expected to take a bite out of household budgets, while elevated gas prices and a wobbly stock market are hitting confidence levels. Geopolitical tensions also pose potential headaches, with fighting between Israel and Hamas and the war in Ukraine posing substantial uncertainties about the future.
While the U.S. has proven resilient to the various challenges, most economists expect growth to slow considerably in the coming months. However, they generally think the U.S. can skirt a recession absent any other unforeseen shocks.
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The bank left its main policy rate at 4% and said current borrowing costs may be just enough to tame inflation if they stay at current levels for “sufficiently long”. The ECB did not make a change to its balance-sheet run off process, pledging to continue reinvesting bonds under its 1.7 trillion-euro Pandemic Emergency Purchase Programme until the end of next year. The euro offered little reaction to the initial decision, trading 0.2% lower against the dollar, while euro zone bank shares were in the red, but above session lows. MARKET REACTION: FOREX: The euro initially dropped against the U.S. dollar before paring some of that decline to last trade down 0.1% at $1.055.BONDS: Euro zone bond yields dropped and the closely watched spread between Italian and German 10-year bond yields fell below 200 basis points. STOCKS: European stocks recouped some of their losses, with the STOX 600 index last down 0.2% and banks down 0.3%, having fallen earlier by as much as 0.7% on the day.COMMENTS:MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK RESEARCH, LONDON: “For the first time since summer 2022, the ECB has not hiked policy rates any further. The ECB says that patience is now key. Only by keeping rates at the current restrictive level for sufficiently long can it be sure that inflation will get back to target. The question is, how long is sufficiently long?”JULIEN LAFARGUE, CHIEF MARKET STRATEGIST, BARCLAYS PRIVATE BANK, LONDON: “As expected, the ECB decided to leave interest rates unchanged while reiterating the ‘higher for longer’ narrative. It hasn’t provided any further colour as to how it will handle the winding down of the PEPP. Going into the press conference there are two key questions: What does the ECB intend to do with its balance sheet and the various programs it is still running? And when will the ECB acknowledge that inflation has come down enough to ease back its monetary policy stance?With a rapidly deteriorating macroeconomic landscape, as shown by October PMIs, in our view the ECB will have to tread very carefully going into 2024 and will have no choice but to lower interest rates.”DANIELE ANTONUCCI, CHIEF INVESTMENT OFFICER, QUINTET PRIVATE BANK, LONDON: “Today’s ECB decision confirmed our view that interest rates are likely to have reached a plateau. Inflation is still expected to stay elevated, but it dropped further lately, and most gauges of underlying inflation have continued to ease.At the same time, it’s also becoming more evident that the economy is slowing. We expect a mild recession in the euro area over the coming months.These two dynamics, slowly declining inflation but still above target and weakening economic activity, suggest that we’re at peak rates. But, as the inflation battle isn’t fully won yet, we expect the ECB to keep rates restrictive for some time to ensure there’s no inflation resurgence.”RICHARD GARLAND, CHIEF INVESTMENT STRATEGIST, OMNIS INVESTMENTS:”The ECB has officially joined the Pause Party of central bankers in wait-and-watch mode. This makes sense – inflation is falling quite sharply and they had signalled last month that the direction of travel for rates will be sideways. ‘Higher for longer’ is also be a mantra the ECB will be keen to repeat for a while, ensuring their work to date won’t be undone by markets anticipating rate cuts too soon.”DEREK HALPENNY, HEAD OF RESEARCH GLOBAL MARKETS EMEA, MUFG, LONDON:”No big surprises, they are emphasizing that the impact of monetary policy is very clear – the word ‘forceful’ was used. No change in the description of inflation, which means we should get a relatively balanced press conference.””The PEPP guidance is unchanged, we certainly didn’t expect a formal change, and so it’s more about whether there’s a discussion about the balance sheet, and we’ll only know that when someone asks the question in the Q&A.”DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON: “The decision by the ECB to keep rates on hold was well flagged, and therefore came as no surprise to investors. Although the messaging in the press release remained largely unchanged, with an ongoing emphasis on data dependency, and the need to ensure that inflation returns to target, it seems clear that the rate hiking cycle is over.”MARCUS BROOKES, CHIEF INVESTMENT OFFICER, QUILTER INVESTORS, LONDON:”It seems… that Christine Lagarde does believe that 4% is the ceiling for rates this time around and should help moderate inflation further, although much of that is out of their control. There remain several risks that may keep inflation stubbornly high, including increasing wage growth and the uncertainty in the Middle East, which is pushing up energy prices. Going forward, like other central banks, it will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again.””However, given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again. The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now.”FRANCESCO PESOLE, FX STRATEGIST, ING, LONDON:”The statement is very similar to the one in September. Obviously, they had to acknowledge the fact that inflation dropped, which was also what they expected but ultimately, they are still trying to hang on to some sort of hawkish bias saying that inflation remains too high.” “There were some expectations they would discuss some changes to PEPP, we’ll see if they mention it in the press conference.”COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:”The decision/accompanying statement were little changed from the last meeting and very much in line with expectations and hence the market was little changed in the wake of the decision, leaving the U.S. data as the driver.”ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM:”Before the meeting, speculation was rife that the ECB might increase minimum reserve requirements for banks, or bring forward the start date of quantitative tightening of the pandemic bond portfolio. Neither happened.””The statement was mostly about positive inflation surprises and a further weakening of demand. Thus, we see some relief in bonds.” “I find it disappointing that the ECB didn’t put emphasis on negative growth surprises. PMIs suggest the eurozone is in a recession since the summer. That would be the third time in a row that the ECB continued to raise rates even though the economy was already contracting (2008, 2011, present). And each time, if they had done basic monetary analysis, they would have known that they had over-tightened.” (Reporting the Markets Team; Compiled by Yoruk Bahceli; Editing by Amanda Cooper) More

ISTANBUL (Reuters) -Turkey’s central bank raised its policy rate by 500 basis points to 35% as expected on Thursday, tightening aggressively for a third straight month as it steps up efforts to rein in inflation that has soared for years. The bank’s policy committee repeated it is ready to raise rates further as needed to curb inflation, which climbed to an annual rate of 61.53% in September and is expected to rise into next year. The one-week policy repo rate has risen by 2,650 basis points since June and most analysts anticipate the central bank (CBRT) will tighten further in order to narrow the gap with inflation. “Bang on the consensus. The CBRT delivers again. It feels like we will see another two 500bps hikes now to year end, with policy rates likely ending at 45%,” said Timothy Ash, senior strategist at BlueBay Asset Management.The central bank said it “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour.”The lira weakened slightly to 28.156 against the dollar after the announcement. It has weakened some 70% in two years, largely due to President Tayyip Erdogan’s long-standing opposition to high rates and influence over the central bank.In a Reuters poll, most economists predicted a 500 basis-point hike, while four forecast a 250-point hike and one 300. The bank said inflation readings were above expectations in the third quarter, with the strong course of domestic demand, the stickiness of services inflation and the deterioration in expectations putting upward pressure on inflation.However, it said the underlying trend in monthly inflation was evaluated as being on course to decline. POLICY U-TURNErdogan chose former Wall Street banker Hafize Gaye Erkan as central bank chief after his May re-election. She has led a policy U-turn to relieve an economy strained by depleted FX reserves and surging inflation expectations. Erdogan’s previous support for low interest rates despite surging prices brought on a currency crisis in late 2021 and pushed inflation above 85% last year. Inflation is seen ending this year at 68%.In past years, Erdogan has repeatedly slammed tight monetary policy, describing himself as an enemy of interest rates, but he has recently said tight policy will help bring down inflation.The lira weakened again this summer as the new economic team under Finance Minister Mehmet Simsek eased the state’s grip on foreign exchange markets and moved away from unorthodox policies and regulations. It has lost one-third of its value this year.The central bank itself has tightened credit selectively and started to began rolling back a costly scheme, adopted to halt the late-2021 currency crash, that protects lira deposits against foreign exchange depreciation. More

Tighter monetary policy and escalating geopolitical tensions have held back corporate dealmaking, putting pressure on some of Wall Street’s biggest banks to announce layoffs and other cost cuts.”On the M&A front, we think that the market is bottoming out,” CEO Peter Orszag told Reuters in an interview. “Client discussions have been turning more constructive over the past several months,” with a lag before deals are announced and completed, said Orszag, who took the helm earlier this month.Lazard reported an adjusted profit of $10 million, or 10 cents per share, in the three months ended Sept. 30, compared with $106 million, or $1.05 per share, a year earlier.Analysts on average expected a profit of 16 cents per share, according to LSEG data. Lazard’s bigger rivals, JPMorgan Chase & Co (NYSE:JPM) and Morgan Stanley, reported weakness in investment banking earlier this month.As the downturn wears on, Lazard may dismiss bankers as part of its annual review process, while seeking to retain its best-performers, Orszag said.”We’re going to be aggressive in the culling process to make sure that we’re upgrading productivity,” he added. Revenue from its financial advisory franchise, which has long been the bigger of Lazard’s two main segments, fell below the asset management unit’s revenue for the first time since the first quarter of 2021. Revenue at Lazard’s financial advisory segment fell 42% to $261 million in the third quarter, while its asset management arm’s revenue was almost flat at $262 million, compared to last year. The bank will pursue potential targeted acquisitions in asset management to complement its existing business, Orszag said. More

(Reuters) -Wall Street’s main indexes were poised to open lower on Thursday, as megacap stocks remained under pressure from elevated Treasury yields, while investors took stock of recent Big Tech earnings and a mixed batch of economic data.Even after its third-quarter results beat expectations, Meta Platforms (NASDAQ:META) dropped 4.1% in premarket trading as the Facebook parent forecast 2024 spending above estimates and suggested the Middle East conflict could dampen fourth-quarter sales.The 10-year Treasury yield hovered near the 5% mark even after a pullback, dragging megacaps Tesla (NASDAQ:TSLA) and Microsoft (NASDAQ:MSFT) down 1.5% and 0.2%. Amazon.com (NASDAQ:AMZN) shed 1.1% ahead of its results, due after the closing bell.Google-parent Alphabet (NASDAQ:GOOGL) lost 2.2%, adding to its 9.5% tumble on Wednesday after it posted disappointing cloud services revenue.On the data front, the U.S. economy grew at its fastest pace in nearly two years in the third quarter, again defying dire warnings of a recession that have lingered since 2022.Durable goods rose 4.7% in September, higher than the estimated 1.7%, while jobless claims climbed to 210,000 in the week ended Oct. 21, versus the expected 208,000.”Jobless claims came in worse than expected, which gives the Fed some level of cover to stay put and not do anymore either in November or hopefully in December, then you have core PCE prices, which adds to that narrative,” said Thomas Hayes, chairman at Great Hill Capital LLC.”The Fed looks at jobs and inflation as to whether they’re going to tighten even more. So, in the case of GDP, good news is good news and it’s a Goldilocks morning of economic data.”Traders added to bets the Federal Reserve will keep policy on hold through this year and will begin interest rate cuts in mid-2024.Further on earnings, United Parcel Service (NYSE:UPS) dipped 4.2% after lowering its full-year revenue forecast.Hasbro (NASDAQ:HAS) slid 12.3% after the maker of “Transformers” action figures cut its annual revenue forecast. Mattel (NASDAQ:MAT) tumbled 11.7% after the Barbie doll-maker warned of slowing demand for the industry heading into the crucial holiday season.Southwest Airlines (NYSE:LUV) dropped 2.2% following a 30% fall in third-quarter profit on soaring labor and fuel costs.So far, 80% of the 146 S&P 500 companies that have reported results have beat earnings expectations, LSEG data showed on Wednesday.At 8:49 a.m. ET, Dow e-minis were down 30 points, or 0.09%, S&P 500 e-minis were down 16.5 points, or 0.39%, and Nasdaq 100 e-minis were down 91.75 points, or 0.63%.All the three major U.S. stock indexes slumped in the previous session, with the S&P 500 closing below the closely watched 4,200 level, while the Nasdaq touched a five-month low.On the geopolitical front, Israel said its ground forces had pushed into Gaza overnight to attack Hamas targets. Israeli Prime Minister Benjamin Netanyahu said the country was “preparing for a ground invasion” that could be one of several.Among other stocks, Ford Motor (NYSE:F) advanced 2.4% after reaching a tentative labor deal with the United Auto Workers union to end a strike. More

WASHINGTON (Reuters) -The U.S. economy grew at its fastest pace in nearly two years in the third quarter as higher wages from a tight labor market helped to power consumer spending, again defying dire warnings of a recession that have lingered since 2022.Gross domestic product increased at a 4.9% annualized rate last quarter, the fastest since the fourth quarter of 2021, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of third-quarter GDP growth. Economists polled by Reuters had forecast GDP rising at a 4.3% rate.Estimates ranged from as low as a 2.5% rate to as high as a 6.0% pace, a wide margin reflecting that some of the input data, including September durable goods orders, goods trade deficit, wholesale and retail inventory numbers were published at the same time as the GDP report.The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%.While the robust growth pace notched last quarter is unlikely sustainable, it was testament to the economy’s resilience despite aggressive interest rate hikes from the Federal Reserve. Growth could slow in the fourth quarter because of the United Auto Workers strikes and the resumption of student loan repayments by millions of Americans.Most economists have revised their forecasts and now believe that the Fed can engineer a “soft-landing” for the economy, pointing to strength in worker productivity and moderation in unit labor costs growth in the second quarter, which they expected carried through into the July-September period. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was the main driver.A strong labor market is providing underlying support to spending. Though wage growth has slowed, it is rising a bit faster than inflation, lifting households’ purchasing power. Labor market resilience was highlighted by a separate report from the Labor Department on Thursday, showing the number of people filing new claims for state unemployment benefits rose to a seasonally adjusted 210,000 during the week ending Oct. 21 from 200,000 in the prior week.The GDP data likely has no impact on near-term monetary policy amid a surge in U.S. Treasury yields and a stock market selloff, which have tightened financial conditions. Financial markets expect the Fed to keep interest rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group’s (NASDAQ:CME) FedWatch. Since March, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range. More

The European Central Bank’s key interest rate will remain at 4% as it opted to pause in October after 10 consecutive hikes.
The ECB repeated its message that rates at current levels would help bring inflation to target if “maintained for a sufficiently long duration.”
The Bank of England, Swiss National Bank and U.S. Federal Reserve all held rates steady in September.

The European Central Bank headquarters.
Daniel Roland | Afp | Getty Images

The European Central Bank ended its run of interest rate hikes on Thursday, despite new upside risks to inflation from oil markets amid the Israel-Hamas war.
The key rate is set to remain at a record high of 4%, where it was brought through 10 consecutive hikes that began in July 2022 and brought rates back into positive territory for the first time since 2011.

The Governing Council said recent information confirmed its medium-term outlook for inflation to reach 2.1%.
“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease,” it said in a statement.
Markets had priced in a more than 98% chance of a hold, after the ECB gave a strong indication at its previous meeting that rates had peaked.
The euro was 0.15% lower against the British pound at 1:40 p.m. London time, declining slightly after the announcement. The European currency was 0.2% down against the U.S. dollar.
The move in September was described as a dovish rise, as the ECB said rates had reached levels that would substantially contribute to the fight against inflation, if “maintained for a sufficiently long duration.”

It repeated this message on Thursday, and said its decision making remains data-dependent.
The ECB’s decision is in line with major central banks around the world, which are widely considered to have already reached or to be on the brink of peak interest rates. The Bank of England, Swiss National Bank and U.S. Federal Reserve all opted to hold in September.

Higher for longer

ECB officials have in interviews stressed a ‘higher for longer’ message on rates, while insisting that an inflationary shock could spur them to hike again, as they seek to dampen market expectations of rate cuts starting in the middle of next year.
The central bank needs monetary policy to remain sufficiently tight to meet its current inflation forecasts of 5.6% this year, 3.2% next year and 2.1% in the “medium term.”
However, the ECB must also reckon with persistently weak business activity and tepid euro zone growth forecasts of 0.7% in 2023 and 1% in 2024, as former EU powerhouse Germany stagnates.
The bank is also assessing volatility in the bond market, where yields have risen sharply, reflecting a global sell-off.
Marcus Brookes, chief investment officer at Quilter Investors, said risks to inflation remained in wage growth and in energy prices going up as a result of uncertainty in the Middle East.
“Going forward, like other central banks, it will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again,” Brookes said in an emailed note.
“However, given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again. The pressure will quickly shift to cutting rates given the lack of economic growth.” More