Finance

European stocks and bonds have had a lot to deal with in recent years, not least war, an energy crisis and surging inflation. Now things are looking up. Germany’s DAX index of shares has added 11% since the start of November. Yields on French ten-year government bonds have dropped from 3.5% in October to 2.8%. Even Italian yields briefly fell below 4%, from 5% in mid-October. Investors are upbeat in part because inflation is falling faster than expected. Yet their mood also reflects a grimmer reality: the economy is so weak that surely interest-rate cuts are not far away.image: The EconomistWill policymakers follow through? In November inflation stood at just 2.4%, within a whisker of the European Central Bank’s 2% target. Markets are pricing in two cuts by June, and another three by October, to bring down the main rate to 2.75%, from 4% (see chart 1). Economists are less sure—they expect only the first cut by June. “The most recent inflation number has made a further rate increase rather unlikely,” admitted Isabel Schnabel, a hawkish member of the ecb’s executive board, recently. But there have been no hints of cuts. Certainly nobody expects one at the meeting on December 14th. At a time when Europe’s economy is weakening quickly, officials risk being slow to react.There are two reasons for particular concern. The first is wage growth. Initially, euro-zone inflation was driven by rising energy prices and snarled supply chains, which pushed up the price of goods. Since pay deals are often agreed for a number of years in Europe’s unionised labour market, wages and prices of services took longer to respond. As a result, by the third quarter of 2023 German real wages had fallen to roughly their level in 2015. Now they are recovering lost ground. Similarly, Dutch collectively bargained wages grew by almost 7% in October and November, compared with a year earlier, even as inflation hovered around zero. Overall wage growth in euro-zone countries is about 5%.image: The EconomistIf such wage growth continues, inflation might tick up in 2024—the ECB’s great fear. Yet there are signs that it has already started to slow. Indeed, a hiring platform, tracks wages in job advertisements. It finds that pay growth on listings has come down (see chart 2), suggesting that wages will soon follow. Moreover, wage growth does not always lead to inflation. Corporate profits, which saw a bump in 2022 when demand was high and wages were low, might take a hit. There is some indication that margins have started to shrink.The second reason for concern is the health of the overall economy. It has struggled with weak international demand, including from China, and high energy prices. Now surveys suggest that both manufacturing and services are in a mild recession. A consumption boom in parts of Europe is already fading: monetary policy itself is weighing on bigger debt-financed purchases and mortgage-holders are scaling back to meet larger monthly payments.Declining market interest rates ought to ease financial conditions for both consumers and investors, and therefore reduce the need for the ecb’s officials to move quickly. However, there is a catch. As Davide Oneglia of TS Lombard, a research firm, points out, these lower market interest rates mostly reflect falling inflation, and so do not produce lower real rates. As a result, they are unlikely to do all that much to stimulate demand.There is one more reason for policymakers to get a move on. Interest-rate changes affect the economy with a delay: it takes time for higher rates to alter investment and spending decisions, and thus to lower demand. The full brunt of changes in rates usually takes a year or more to be felt, which means that many of the ecb’s rate rises are still to feed through. Policymakers have probably tightened too much.The flip side is that rate cuts in the next few months would not affect the economy until towards the end of 2024, by which time few analysts expect inflation still to be a problem and many expect the economy still to be struggling. By then, the ECB’s policymakers will want to be close to the bloc’s “neutral” interest rate, which is somewhere between 1.5 and 2%, reckons Mr Oneglia, lest they continue to push down demand. Starting early would mean that the ecb would avoid having to cut too aggressively during the summer of 2024.January’s inflation data could be volatile, in part because government-assistance schemes introduced during the energy crisis are being phased out. An increase would make the ECB even more cautious. Wage data is published with a long lag in Europe, and officials are often reluctant to rely on real-time indicators, such as the data published by Indeed. That is why economists do not expect rate cuts until June, much later than suggested by current market pricing. The ECB was too slow to react to rising inflation. Now it runs the risk of being too slow on the way down as well. ■ More

The consumer price index rose 3.1% in November from 12 months earlier, down from 3.2% in October, the U.S. Bureau of Labor Statistics said.
Inflation is gradually moderating. Lower gasoline prices were the biggest downward force in November, economists said.
Housing costs have been stubbornly high but should soon pull back.

Kentaroo Tryman | Maskot | Getty Images

Inflation declined slightly last month on the back of weaker prices at the gasoline pump and a broader easing of price pressures throughout the U.S. economy, experts said.
The consumer price index in November increased 3.1% from 12 months earlier, down from 3.2% in October, the U.S. Bureau of Labor Statistics said Tuesday.

“There is still a lot of disinflationary pressure in the system,” which will likely drive inflation even lower heading into 2024, said Sarah House, senior economist at Wells Fargo Economics.
The CPI is a key barometer of inflation, measuring how quickly the prices of things from fruits and vegetables to haircuts and concert tickets are changing across the U.S. economy.

The November reading is a significant improvement on the pandemic-era peak of 9.1% in June 2022 — the highest rate since November 1981. Prices are therefore rising much more slowly than they had been, and in some cases even falling outright.
“Inflation is still on the high side of what I think everyone would feel comfortable with, but it’s coming back down to earth steadily but surely,” said Mark Zandi, chief economist at Moody’s Analytics.

The U.S. Federal Reserve aims for a 2% annual inflation rate over the long term.

“I expect by this time next year we’ll be back within spitting distance of the target,” Zandi said.

Gasoline prices declined again

As in October, gasoline prices were a big contributor to falling inflation in November, economists said.
Gasoline prices dropped 6% in November, according to Tuesday’s CPI report. They had dropped 5% in October.
Average nationwide prices for regular-grade gasoline declined by about 24 cents a gallon between Oct. 30 and Dec. 4, to $3.23 a gallon from $3.47, according to weekly data published by the U.S. Energy Information Administration.
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By comparison, in August and September, gasoline was a major contributor to increases in overall inflation readings. In August, for example, prices at the pump spiked 10.6% largely due to dynamics in the market for crude oil, which is refined into gasoline.
Those supply-and-demand dynamics can “change in a minute,” and therefore declining gas prices may not persist, said Mark Hamrick, senior economic analyst at Bankrate. “But you take it where you can get it.”

What’s happening under the surface

Energy prices can whipsaw inflation readings due to their volatility. Likewise with food.
That’s why economists like to look at a measure that strips out these prices when assessing underlying inflation trends.
This pared-down measure — known as the “core” CPI — was flat in November relative to October, holding steady at an annual rate of 4%.

Shelter — the average household’s biggest expense — has accounted for nearly 70% of the total increase in core CPI over the past year, according to the Bureau of Labor Statistics. Housing inflation declined slightly in November, to 6.5% relative to a year earlier, and has fallen from a peak of over 8% in March 2023, according to bureau data.
Shelter inflation has been stubbornly high but should soon start to throttle back significantly given a softening in national rent prices, Zandi said. That trend should continue into the new year given rising vacancy rates and ample supply hitting the market, he added.
Other categories with “notable” increases in the past year include motor vehicle insurance, the price of which increased 19.2%; recreation, including admission to movies, concerts and sporting events, 2.5%; personal care, 5.2%; and new vehicles, 1.3%, according to the bureau.

Why inflation is returning to normal

At a high level, inflationary pressures — which have been felt globally — are due to an imbalance between supply and demand.
For example, energy prices spiked in early 2022 after Russia invaded Ukraine amid fears of a supply disruption in energy commodities, such as oil.
Supply chains were snarled when the U.S. economy restarted during the Covid-19 pandemic, driving up prices for goods. Meanwhile, demand was strong as consumers, flush with cash from government stimulus and staying home for a year, spent liberally. Wages grew at their fastest pace in decades, pushing up businesses’ labor costs.

Now, those pressures have largely eased, economists said. Supply chains have normalized, and the labor market has cooled.
The Federal Reserve has raised interest rates to their highest level since the early 2000s to slow the economy. This policy tool makes it more expensive for consumers and businesses to borrow, and can therefore tame inflation as demand wanes amid those higher financing costs.
Easing inflation is welcome news for households. The average household lost buying power for over two years as high inflation outpaced wage growth, but that trend has reversed in the last several months.
Average hourly wages have increased 0.8% in the past year after accounting for inflation, the bureau said Tuesday.
“Having real wages turn positive does help provide some ammunition for consumers, many of whom are still [financially] stressed,” Hamrick said. More

Nearly a third, 32%, of Gen Z adults and 40% of millennials say an honest conversation about your finances and long-term goals should happen before a relationship gets serious, according to the 2023 Planning & Progress study by Northwestern Mutual.
“Millennials and Gen Z [are] living through a lot of different events, perhaps very, very quickly. It’s making it a really important conversation for them,” said certified financial planner Kyle Menke, founder and CEO of Menke Financial, a Northwestern Mutual-affiliated firm. 

Anchiy | E+ | Getty Images

While most Americans say couples should talk about money honestly before living together, Gen Z and millennials believe the conversation should happen way sooner.
Nearly a third, 32%, of Gen Z adults and 40% of millennials say an honest conversation about your finances and long-term goals should happen before a relationship gets serious, according to the 2023 Planning & Progress study by Northwestern Mutual.

The study is based on 2,740 online interviews among U.S. adults conducted between Feb.17 and March 2.
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These two generations have experienced several bouts of market and economic turmoil during their formative years, from the Great Recession of 2007-09 to the Covid-19 pandemic.
“Millennials and Gen Z [are] living through a lot of different events, perhaps very, very quickly. It’s making it a really important conversation for them,” said certified financial planner Kyle Menke, founder and CEO of St. Petersburg, Florida-based Menke Financial, a Northwestern Mutual-affiliated firm. 

Money, while certainly not the most important thing in life, has a significant impact on a lot of different areas.

Kyle Menke
Certified financial planner

Why it’s important to have a relationship money talk

Being open and honest with your partner should be central in the language of love, experts say, and that includes talking about money.

Across all generations, 72% of Americans believe couples should talk about their finances before living together, Northwestern Mutual found.
“Money, while certainly not the most important thing in life, has a significant impact on a lot of different areas,” Menke said.
For instance, your prospective partner may spend and manage their money completely different from you, said CFP Sophia Bera Daigle, the founder of Gen Y Planning in Austin, Texas. She’s also a member of the CNBC Financial Advisor Council.
“Not enough people think about that before they move in together and before they start to think about a life with this person,” Daigle previously told CNBC.

More than a third, 32%, of Gen Z couples have found it difficult to strike a balance of how to split expenses when they have different incomes, Northwestern Mutual found. Similarly, 31% say they have different tolerance levels for financial risk, which has made investment decisions complicated.
A February survey by Bread Financial found that 64% of couples say they are “financially incompatible” with their partners, with 18% of Gen Z and 17% of millennials citing the incompatibility as a primary reason to break up.
Having the money conversation early on in the relationship can help you figure out if the other person’s habits and goals align with yours, Menke said.

“Finding out if you are compatible has a lot to do with the success of long-term relationships,” he said. 
If partners make it a habit of talking about money, their financial compatibility may improve as time goes by. Northwestern Mutual found that couples who have been together for five years are more likely to report becoming more financially compatible. Baby boomers were the most likely to see eye to eye on their finances. 
“Baby boomers have had these conversations, whether it was prior to marriage or after marriage. At some point, those conversations came up and they worked through those pieces,” Menke said. “It’s important that clients are having those conversations right out of the gate.”Don’t miss these stories from CNBC PRO: More

The FCA to investment platforms with concerns over the way they deal with interest earned on customers’ cash balances.
The regulator accused some firms of “double dipping,” charging clients fees for holding cash while also retaining a portion of their interest payments in a higher rate environment.

A logo for the Financial Conduct Authority (FCA).
Chris Ratcliffe | Bloomberg | Getty Images

British investment platforms Hargreaves Lansdown and AJ Bell saw their shares plunge on Tuesday after a U.K. regulator warned 42 firms that it may intervene on fees and interest charges.
Hargreaves Lansdown shares were down more than 7% by late morning trade, while AJ Bell fell more than 8% after the Financial Conduct Authority announced it had written to investment platforms with concerns over the way they deal with interest earned on customers’ cash balances.

The FCA recently surveyed the 42 companies and found that the majority retained some of the interest earned on these cash balances. The regulator said this may not reasonably reflect the cost to those companies of managing clients’ cash.
Many also charged fees to customers for holding cash, known as “double dipping,” the FCA said in a statement Tuesday, adding that companies have been told to cease this practice by the end of February or risk regulatory intervention.
“Rising rates mean greater returns on cash. Investment platforms and SIPP operators need now to ensure how much of the interest they retain and, for those who are double dipping, how much they’re charging customers holding cash, results in fair value,” said Sheldon Mills, the FCA’s executive director of consumers and competition.
“If they cannot make that case, they need to make changes. If they don’t, we’ll intervene.”
CNBC contacted both Hargreaves Lansdown and AJ Bell for comment.

AJ Bell declined to comment, but CNBC understands the firm does not charge a platform fee on cash and would therefore be outside the FCA’s crosshairs on “double-dipping.”
Hargreaves Lansdown said it does not undertake the practice of “double-dipping” but would “continue to work actively with the regulator following today’s letter to further review our practices.”
A spokesman said the firm is “aligned with the FCA’s focus to ensure good value and outcomes for clients and undertook a broad and rigorous assessment of its practices including a review of its Fair Value Assessments earlier this year.” More

Michael Milken attends Prostate Cancer Foundation’s Dinner At Daniel on November 19, 2019 at Daniel in New York City.
Paul Bruinooge | Patrick McMullan | Getty Images

Famed investor Michael Milken expects the Federal Reserve will move slowly on monetary policy — if history is any guide.
In fact, the Milken Institute founder expects the central bank will be sure to tamp out inflation before starting to cut rates so as to avoid a repeat of the 1970s, when inflation ran high in the double digits, Milken said Monday on CNBC’s “Last Call.” He was speaking from the Hope Global Forum in Atlanta.

“History, as you know, repeats in different ways,” Milken said. “In the ’70s, the Fed moved too early. And so yes, we came out of that ’74, ’75, ’76 period. But we had massive inflation at the end of the ’70s once again, with overnight rates up to 21%.”
“And so I think my view right now is the Fed is probably going to err a little bit on discipline today to see what’s occurred,” Milken added.
Inflation and interest rates ran high in the early 1970s before the Federal Reserve dialed back policy. This stop-and-go approach ultimately did not quell rising prices, however.
Fed Chair Jerome Powell will announce the central bank’s latest monetary policy decision Wednesday, when investors will review his comments for signs into when the central bank is expecting to start cutting rates.
In the 1980s, Milken was known as the king of junk bonds. The financier was an early pioneer of leveraged buyouts and, in 1990, pleaded guilty to securities fraud and tax violations. In 2020, he was pardoned by President Donald Trump.

— CNBC’s Yun Li contributed reporting.
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As of the end of November, the National Stock Exchange of India was valued at $3.989 trillion versus Hong Kong’s $3.984 trillion.
India’s Nifty 50 index has jumped nearly 16% so far this year and is headed for its eighth straight year of gains.
Hong Kong’s benchmark Hang Seng index has plunged 18% year to date, making it the worst performing major Asia-Pacific market.

A security guard walks past the National Stock Exchange of India building in Mumbai, India.
Dhiraj Singh | Bloomberg | Getty Images

India’s stock market value has overtaken Hong Kong’s to become the seventh largest in the world as optimism about the country’s economic prospects grow.
As of the end of November, the total market capitalization of the National Stock Exchange of India was $3.989 trillion versus Hong Kong’s $3.984 trillion, according to data from the World Federation of Exchanges.

India’s Nifty 50 index reached another record high on Monday. It has jumped nearly 16% so far this year and is headed for its eighth straight year of gains. In contrast, Hong Kong’s benchmark Hang Seng index has plunged 18% year to date.
India has been a standout market this year in the Asia-Pacific region. Increased liquidity, more domestic participation and improving dynamics in the global macro environment in the form of falling U.S. Treasury yields have all boosted the country’s stock markets.

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The world’s most populous country also heads into general elections next year, which analysts predict could be another victory for the ruling nationalist Bharatiya Janata Party.
“For the general election, opinion polls and recent state elections indicate that the incumbent BJP-led government may secure a decisive win, which could trigger a bull run in the first three to four months of the year on expectations of policy continuity,” HSBC strategists said in a client note.
HSBC said banks, health care and energy are the best positioned sectors for next year.

Sectors such as autos, retailers, real estate and telecoms are also relatively well positioned for 2024, while fast-moving consumer goods, utilities and chemicals are among those HSBC categorized as unfavorable.

Hong Kong lags

In early November, the Hong Kong government said it expects the economy to grow 3.2% in 2023, trimming its GDP growth outlook from the 4% to 5% forecast in August.
The city’s government has warned that increasing geopolitical tensions and tight financial conditions continue to weigh on investments, exports of goods and consumption sentiment. Consumer confidence has also suffered in Hong Kong.
“Hong Kong’s economy is poised for a soft landing in 2024 as annual real GDP growth moderates to around 2% from 2023’s 3.5%,” said economists at DBS.
“Central to this recovery is mainland tourism revival, fortifying retail and catering sectors.”
China has set a growth target of 5% for 2023. Its third quarter-GDP came in at 4.9%, lifting hopes that the world’s second-largest economy will meet or even exceed expectations. More

Shares of HP dipped more than 1% in after-hours trading Monday following the news.
Berkshire still owns 51.5 million shares of HP, worth about $1.6 billion.

Warren Buffett tours the floor ahead of the Berkshire Hathaway Annual Shareholder’s Meeting in Omaha, Nebraska.
David A. Grogan | CNBC

Warren Buffett’s conglomerate Berkshire Hathaway has reduced its stake in HP to 5.2%, according to a regulatory filing released Monday night.
The conglomerate previously had a nine-day selling streak in mid-September through early October, bringing down the bet on the printer and PC maker to about 10%.

Shares of HP dipped more than 1% in after-hours trading Monday following the news.
Berkshire still owns 51.5 million shares of HP, worth about $1.6 billion based on Monday’s close of $30.37. The Omaha-based investing giant is still the third-largest institutional shareholder of HP, only behind BlackRock and Vanguard, according to FactSet.
Last month, HP issued first-quarter profit guidance that came below Wall Street estimates, according to LSEG, formerly known as Refinitiv. However, the firm kept its full-year earnings outlook, signaling that the demand in the personal computers market could still be recovering.
Berkshire initially bought the tech hardware stock in April 2022. The bet, however, hasn’t been lucrative as the stock is still below the level where it was first bought. Shares are up 13% this year, underperforming the Nasdaq Composite, which has rallied nearly 38%.

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Many Buffett watchers had already suspected that the Oracle of Omaha’s intention is to dump the stake entirely.

The 93-year-old investment icon views stock holdings as pieces of businesses, so he typically closes out a position once he starts selling.
“We don’t trim positions. That’s just not the way we approach it any more than if we buy 100% of a business,” he once said.Don’t miss these stories from CNBC PRO: More

Wells Fargo received an official notice from the Consumer Financial Protection Bureau on problems with its use of mortgage rate discounts, sources said.
Wells Fargo hired a law firm to grill mortgage bankers whose sales included high levels of the discounts, said the sources.
Several banks received MRAs about lending practices last year, the CFPB said without naming any of the institutions.
In their industry review, regulators found “statistically significant disparities” in the rates in which Black and female borrowers got pricing exceptions compared with other customers.

People pass by a Wells Fargo bank on May 17, 2023 in New York City.
Spencer Platt | Getty Images

Wells Fargo was snared in an industrywide probe into mortgage bankers’ use of loan discounts last year, CNBC has learned.
The discounts, known as pricing exceptions, are used by mortgage personnel to help secure deals in competitive markets. At Wells Fargo, for instance, bankers could request pricing exceptions that typically lowered a customer’s APR by between 25 abd 75 basis points.

The practice, used for decades across the home loan industry, has triggered regulators’ interest in recent years over possible violations of U.S. fair lending laws. Black and female borrowers got fewer pricing exceptions than other customers, the Consumer Financial Protection Bureau has found.
“As long as pricing exceptions exist, pricing disparities exist,” said Ken Perry, founder of a Washington-based compliance firm for the mortgage industry. “They’re the easiest way to discriminate against a client.”
Wells Fargo received an official notice from the CFPB called an MRA, or Matter Requiring Attention, on problems with its discounts, said people with knowledge of the situation. It’s unclear if regulators accused the bank of discrimination or sloppy oversight. The bank’s internal investigation on the matter extended into late this year, said the people.
Wells Fargo, until recently the biggest player in U.S. mortgages, has repeatedly felt regulators’ wrath over missteps involving home loans. In 2012, it paid more than $184 million to settle federal claims that it charged minorities higher fees and unjustly put them into subprime loans. It was fined $250 million in 2021 for failing to address problems in its mortgage business, and more recently paid $3.7 billion for consumer abuses on products including home loans.
The behind-the-scenes actions by regulators at Wells Fargo, which hadn’t been reported before, happened in the months before the company announced it was reining in its mortgage business. One reason for that move was the heightened scrutiny on lenders since the 2008 financial crisis.

Wells Fargo later hired law firm Winston & Strawn to grill mortgage bankers whose sales included high levels of the discounts, said the people, who declined to be identified speaking about confidential matters.

‘Proud’ bank

In response to this article, a company spokeswoman had this statement:
“Like many in the industry, we take into consideration competitor pricing offers when working with our customers to get a mortgage,” she said. “As part of our renewed focus on supporting underserved communities through our Special Purpose Credit Program, we have spent more than $100 million over the last year to help more minority families achieve and sustain homeownership, including offering deep discounts on mortgage rates.”
Wells Fargo was “proud to be the largest bank lender to minority families,” she added.
The bank later had this additional statement: “While we cannot comment on any regulatory matters, we don’t discriminate based on race, gender or age or any other protected basis.”

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Wells Fargo stock vs the Financial Select Sector SPDR Fund

Regulators have ramped up their crackdown on fair lending violations recently, and other lenders besides Wells Fargo have been involved. The CFPB launched 32 fair lending probes last year, more than doubling the investigations it started since 2020.
Several banks received MRAs about lending practices last year, the agency said without naming any of the institutions. The CFPB declined to comment for this article.

‘Statistically significant’

The issue with pricing exceptions is that by failing to properly track and manage their use, lenders have run afoul of the Equal Credit Opportunity Act (ECOA) and a related anti-discrimination rule called Regulation B.
“Examiners observed that mortgage lenders violated ECOA and Regulation B by discriminating against African American and female borrowers in the granting of pricing exceptions,” the CFPB said in a 2021 report.
The agency found “statistically significant disparities” in the rates in which Black and female borrowers got pricing exceptions compared with other customers.
After its initial findings, the CFPB conducted more exams and said in a follow-up report this year that problems continued.
“Institutions did not effectively monitor interactions between loan officers and consumers to ensure that the policies were followed and that the loan officer was not coaching certain consumers and not others regarding the competitive match process,” the agency said.

Honor system

In other cases, mortgage personnel failed to explain who initiated the pricing exception or ask for documents proving competitive bids actually existed, the CFPB said.
That tracks with the accounts of multiple current and former Wells Fargo employees, who likened the process to an “honor system” because the bank seldom verified whether competitive quotes were real.
“You used to be able to get a half percentage off with no questions asked,” said a former loan officer who operated in the Midwest. “To get an additional quarter point off, you’d have to go to a market manager and plead your case.”
Pricing exceptions were most common in expensive housing regions of California and New York, according to an ex-Wells Fargo market manager who said he approved thousands of them over two decades at the company. In the years the bank reached for maximum market share, top producers chased loan growth with the help of pricing exceptions, this person said.

Change of policy

In an apparent response to the regulatory pressure, Wells Fargo adjusted its policies at the start of this year, requiring hard documentation of competitive bids, said the people. The move coincided with the bank’s decision to focus on offering home loans only to existing customers and borrowers in minority communities.
Many lenders have made pricing exceptions harder for loan officers to get and improved documentation of the process, though the discounts haven’t disappeared, according to Perry.
JPMorgan Chase, Bank of America and Citigroup declined to comment when asked whether they had received MRAs or changed their internal policies regarding rate discounts.
— With reporting from CNBC’s Christina Wilkie.
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