This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting on July 27.
Text removed from the July statement is in red with a horizontal line through the middle.
Text appearing for the first time in the new statement is in red and underlined.
Black text appears in both statements.
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“Is a global recession imminent?” asks a new report by the World Bank. The answer—that one very well might be—will not be a surprise to manufacturers. In August, global manufacturing output shrank relative to the month before, and new orders fell for the second month in a row, according to JPMorgan Chase, a bank. As economic woes mount, worse could be ahead, for factories and the broader economy.Last year, industry enjoyed an epic boom. Consumers, bolstered by generous covid-19 relief, splashed out on goods, and the easing of lockdowns allowed factories to make up lost ground. The value of manufacturing output leapt to over $16trn, representing the highest share of global gdp in nearly two decades. Roaring industry powered a banner year for the world economy, with overall global output rising by 6.1%, the fastest pace on record, despite supply-chain problems. A softening of demand was inevitable as life became more normal, and spending shifted from goods back to services. But even service-sector activity looks disappointing of late, and manufacturing troubles reflect much bigger shocks. The most serious is the energy-price crunch caused by Russia’s war in Ukraine. Industrial production in the euro zone fell by 2.4% in July relative to the year before. Firms across the continent have had to idle plants in the face of energy costs which render production uneconomical—a cold winter would bring even more pain. The beleaguered Chinese economy is also a problem. Manufacturers struggling with “zero-covid” policies and a property-market bust were hit by an additional shock over the summer, as intense drought impeded shipping and dealt a blow to hydropower. Data from Caixin, a business publication, show that Chinese manufacturing sales shrank in August compared with the previous month. The performance of economies which typically export lots of goods and components to China also spell trouble. South Korean production swooned over the summer, for instance, as its exports to China tumbled. The drag from high energy costs and a limping Chinese economy has been reinforced by tightening monetary policy. Surging demand for goods over the past two years overtaxed the capacity of factories, ships and ports, pushing inflation up. High prices have proven remarkably persistent—thanks in part to the shock of the war in Ukraine—so central banks are taking aggressive action. Such synchronous tightening has occurred rarely over the past half century, notes the World Bank, and resembles the positioning which triggered a global recession in 1982. For now, manufacturers in India and South-East Asia have resisted global headwinds. That may reflect efforts to diversify supply chains away from China. Through the first seven months of 2022, China’s exports of goods to America were up by 18% compared with the year before. Exports from India were up by 30%, however, while those from Vietnam were up by 33%, Indonesia by 41% and Bangladesh by 50%. Yet their fortunes are ultimately roped to the world economy as a whole; if it continues to weaken, even relatively insulated places will find it difficult to avoid a slump. A global recession is not a foregone conclusion. Manufacturing suffered in 2015-16 and in 2019, and in both cases the economy avoided a downturn. But in these periods, policy changed dramatically to prevent slackening growth from snowballing. In the middle of the decade, the Federal Reserve raised rates far more slowly than it had led markets to expect—and China opened a firehose of stimulus. In 2019, the Fed pivoted to rate cuts even as President Donald Trump’s tax plan swelled American deficits, boosting the world economy. There is little immediate hope for similar reversals. China is wedded to its zero-covid policies for now, meaning new stimulus would do little to boost growth. Recently Fed officials have told markets they should expect American interest rates to rise higher and stay there for longer—even if this pushes the economy towards recession. Indeed, so long as American consumer spending remains robust, the Fed will probably feel that its inflation-fighting work is unfinished. The safe bet is that conditions will get worse before they get better. But how much worse? The World Bank presents three scenarios for next year. The baseline is one consistent with the current consensus outlook for global growth, of about 1.5% per person, but which is probably not consistent with central banks’ desired reduction in inflation—and which is thus almost certainly too optimistic. In a second, “sharp downturn” scenario, central banks have to work harder to arrest inflation but still fail to restore price stability, and global growth decelerates to 0.8%. The third is one in which significant, synchronous monetary tightening induces a recession, such that global output shrinks by about 0.4%. Either of the latter scenarios would be bitter for countries still recovering from the covid downturn. Debt loads around the world remain alarmingly high, and many country’s economies lag below their pre-pandemic trendline. Their leaders will be watching the slowdown in global manufacturing with considerable trepidation. ■ More
The CEOs of the biggest U.S. retail banks, including JPMorgan Chase’s Jamie Dimon and Wells Fargo’s Charlie Scharf, are set to testify before the Democrat-led House Financial Services Committee.
The hearing is called “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks” will begin 10 a.m. E.T.
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The CEOs of the biggest U.S. retail banks, including JPMorgan Chase’s Jamie Dimon and Wells Fargo’s Charlie Scharf, are set to testify before the Democrat-led House Financial Services Committee.
The hearing is called “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks” will begin at 10 a.m. E.T.
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The Federal Reserve is widely expected to raise its benchmark interest rate by 0.75 percentage point at its meeting that concludes Wednesday.
Other items markets will be watching include quarterly economic and rate projections and Chairman Jerome Powell’s post-meeting news conference.
Judging by recent market action and commentary, the expectation is for a hawkish hard line.
Construction workers outside the Marriner S. Eccles Federal Reserve Building, photographed on Wednesday, July 27, 2022 in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images
There’s not a lot of mystery surrounding Wednesday’s Federal Reserve meeting, with markets widely expecting the central bank to approve its third consecutive three-quarter point interest rate hike.
That doesn’t mean there isn’t considerable intrigue, though.
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While the Fed almost certainly will deliver what the market has ordered, it has plenty of other items on its docket that will catch Wall Street’s attention.
Here’s a quick rundown of what to expect from the rate-setting Federal Open Market Committee meeting:
Rates: In its continuing quest to tackle runaway inflation, the Fed almost certainly will approve a 0.75 percentage point hike that will take its benchmark rate up to a target range of 3%-3.25%. That’s the highest the fed funds rate has been since early 2008. Markets are pricing in a slight chance for a full 1 percentage point increase, something the Fed has never done since it started using the fed funds rate as its primary policy tool in 1990.
Economic outlook: Part of this week’s meeting will see Fed officials issue a quarterly update of their interest rate and economic outlook. While the Summary of Economic Projections is not an official forecast, it does provide insight into where policymakers see various metrics and interest rates heading. The SEP includes estimates for GDP, unemployment and inflation as gauged by the personal consumption expenditures price index.
The “dot plot” and the “terminal rate”: Investors will be most closely watching the so-called dot plot of individual members’ rate projections for the rest of 2022 and subsequent years, with this meeting’s version extending for the first time into 2025. Included in that will be the projection for the “terminal rate,” or the point where officials think they can stop raising rates, which could be the most market-moving event of the meeting. In June, the committee put the terminal rate at 3.8%; it’s likely to be at least half a percentage point higher following this week’s meeting.
Powell presser: Fed Chairman Jerome Powell will hold his usual news conference following the conclusion of the two-day meeting. In his most notable remarks since the last meeting in July, Powell delivered a short, sharp address at the Fed’s annual Jackson Hole, Wyoming, symposium in late August emphasizing his commitment to bringing down inflation and in particular his willingness to inflict “some pain” on the economy to make that happen.
New kids on the block: One slight wrinkle at this meeting is the input of three relatively new members: Governor Michael S. Barr and regional Presidents Lorie Logan of Dallas and Susan Collins of Boston. Collins and Barr attended the previous meeting in July, but this will be their first SEP and dot plot. While individual names are not attached to projections, it will be interesting to see whether the new members are on board with the direction of Fed policy.
The big picture
Put it all together, and what investors will be watching most closely will be the meeting’s tone – specifically how far the Fed is willing to go to tackle inflation and whether it is concerned about doing too much and taking the economy into a steeper recession.
Judging by recent market action and commentary, the expectation is for a hawkish hard line.
“Fighting inflation is job-one,” said Eric Winograd, senior economist at AllianceBernstein. “The consequences of not fighting inflation are greater than the consequences of fighting it. If that means recession, then that’s what it means.”
Winograd expects Powell and the Fed to stick to the Jackson Hole script that financial and economic stability are wholly dependent on price stability.
In recent days, markets have begun to relinquish the belief that the Fed will only hike through this year then start cutting possibly by early or mid-2023.
“If inflation is really stubborn and stays high, they may just have to grit their teeth and have a recession that lasts for a while,” said Bill English, a professor at the Yale School of Management and former senior Fed economist. “It’s a very tough time to be a central banker right now, and they’ll do their best. But it’s hard.”
The Fed has accomplished some of its goals toward tightening financial conditions, with stocks in retreat, the housing market slumping to the point of a recession and Treasury yields surging to highs not seen since the early days of the financial crisis. Household net worth fell more than 4% in the second quarter to $143.8 trillion, due largely to a decline in the valuation of stock market holdings, according to Fed data released earlier in September.
However, the labor market has stayed strong and worker pay continues to rise, creating worries over a wage-price spiral even with gasoline costs at the pump in retreat. In recent days, both Morgan Stanley and Goldman Sachs conceded that the Fed may have to raise rates into 2023 to bring down prices.
“The kind of door that the Fed is trying to get through, where they slow things down enough to get inflation down but not so much that they cause a recession is a very narrow door and I think it has gotten narrower,” English said. There’s a corresponding scenario where inflation stays stubbornly high and the Fed has to keep raising, which he said is “a very bad alternative down the road.”
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“We think the volume of G9 next year will exceed what we have achieved for P7, which makes it one of our top-selling vehicles,” Xpeng President Brian Gu told CNBC’s Eunice Yoon this week.
The company formally launched its G9 SUV on Wednesday.
The P7 was Xpeng’s first sedan, launched in May 2020, which quickly outsold the company’s existing G3 SUV that launched in December 2018.
Xpeng showed off its forthcoming G9 SUV at the Chengdu auto show in August 2022.
China News Service | China News Service | Getty Images
BEIJING — Chinese electric car start-up Xpeng’s newest model will likely sell better than its most popular car to date, according to Brian Gu, the company’s president and honorary vice chairman.
The company formally launched its G9 SUV on Wednesday. The car has been slated to begin deliveries in October.
“We think the volume of G9 next year will exceed what we have achieved for P7, which makes it one of our top-selling vehicles,” Gu said in an interview with CNBC’s Eunice Yoon this week.
The P7 was Xpeng’s first sedan, launched in May 2020, which quickly outsold the company’s existing G3 SUV that launched in December 2018. The P7 ranked 10th among all new energy passenger cars — excluding SUVs — sold in China during the first eight months of this year, according to the China Passenger Car Association.
More than 123,000 P7 cars have been delivered as of the end of August — nearly twice as many as the cumulative delivery of roughly 67,000 G3s, according to CNBC calculations of Xpeng data.
Last year, Xpeng began deliveries of another sedan, the P5, which has notched cumulative deliveries of more than 37,000 cars as of the end of August, the data analysis showed.
The G9 comes with Xpeng’s latest assisted driving system, which Gu said will perform even better than in a prior model’s because the new SUV includes high-power Nvidia Orin chips.
With just five minutes of charging at an Xpeng station, he said the new car can add 200 kilometers of driving range.
However, rival Chinese electric car start-ups Nio and Li Auto also have new SUVs rolling out to customers this fall.
The market is now “very competitive,” Gu said. “We need to come up with better and cooler products to resume that growth.”
Foot traffic is less than half of what we’ve seen before the summer.
President, Xpeng
Store foot traffic drops
But Gu said that since summer, overall electric car sales have not been as robust as they were at the beginning of the year. He pointed to a number of factors, including anticipation of new products, Covid-induced store closures and hesitant consumers.
“Foot traffic is less than half of what we’ve seen before the summer,” he said.
Read more about electric vehicles from CNBC Pro
As others at his company and in the industry have said, Gu said Xpeng was not affected by the latest U.S. restrictions on Nvidia sales to Chinese companies.
“It does not apply to us because we don’t use that kind of chips,” Gu reiterated.
“I think obviously, the cloud or data center partners that we work with, they need to think about how to continue to secure such capabilities,” he said. “It’s not something that we are worried about, but obviously we need to make sure that we have these capabilities supplied to us.”
— CNBC’s Arjun Kharpal contributed to this report.
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Check out the companies making headlines before the bell:
General Mills (GIS) – General Mills shares gained 1.8% in the premarket after the food producer reported a better-than-expected quarterly profit and raised its full-year sales forecast. The company expects to benefit from higher prices and strong demand for cereal, snacks and pet food.
Stitch Fix (SFIX) – Stitch Fix slid 5.9% in premarket trading after reporting a wider-than-expected quarterly loss and issuing a weak forecast. The online clothing styling company expects sales to fall over the short term as the number of active customers declines. Canaccord Genuity downgraded the stock to “hold” from “buy”, noting a tough macroeconomic environment complicates the company’s efforts to effect a turnaround.
Beyond Meat (BYND) – Beyond Meat suspended Chief Operating Officer Doug Ramsey after he was involved in a physical altercation over the weekend which resulted in third-degree battery and terroristic threatening charges. The maker of plant-based meat alternatives said Jonathan Nelson, senior vice president of manufacturing operations, will take over Ramsey’s duties on an interim basis. Beyond Meat fell 1.1% in premarket trading on top of a 6% slide Tuesday, its sixth consecutive down day.
Defense stocks – Shares of defense contractors are rising in the premarket after Russian President Vladimir Putin mobilized more troops to Ukraine in what’s seen as a major escalation of the Ukraine war. Among stocks on the move: Lockheed Martin (LMT), up 2%, Northrop Grumman (NOC), up 1.3%, Raytheon Technologies (RTX), up 1.2%, and L3Harris Technologies (LHX), up 1.5%.
Estee Lauder (EL) – Estee Lauder gained 1.7% in off-hours trading after Goldman Sachs raised its rating on the cosmetics maker’s shares to “buy” from “neutral”, and increased its price target to $303 from $298. Goldman cited recent share price weakness for the move and said uncertainty surrounding the impact of China’s “zero-Covid” policy is already reflected in the stock’s price.
Coty (COTY) – Coty jumped 3.9% in the premarket after the cosmetics maker announced its strategy to double skincare product sales by fiscal 2025. The news comes ahead of the company’s event for investors this morning.
Aurora Cannabis (ACB) – Aurora Cannabis reported a breakeven quarter, on an adjusted basis, surprising analysts who predicted a quarterly loss. The Canada-based cannabis producer saw overall revenue come in slightly below expectations but registered a 35.4% increase in international medical cannabis revenue compared with a year earlier. Aurora Cannabis lost 2.1% in premarket action.
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For European businesses, “we talk about a complete readjustment of our view on China over the last six months,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China.
Foreign direct investment from the EU into China dropped by 11.8% in 2020 from a year earlier, according to the chamber’s position paper. More recent figures weren’t available.
European businesses that have remained in China increasingly face an environment in which “ideology trumps the economy,” the chamber’s position paper said in its executive summary.
Foreign direct investment from Germany to China grew by about 30% in the first eight months of the year from a year ago, China’s Ministry of Commerce said Monday.
Vcg | Visual China Group | Getty Images
BEIJING — European businesses in China are revaluating their market plans after this year’s Covid controls further isolated the country from the rest of the world, said Joerg Wuttke, president of the European Union Chamber of Commerce in China.
China’s stringent Covid policy has restricted international travel, and business activity — especially after a two-month lockdown this year in Shanghai.
The tough measures of the last two years initially helped China recover more quickly from the pandemic’s shock compared to other countries.
But the policy increasingly contrasts with a world that’s increasingly relaxing many Covid restrictions.
For European businesses, “we talk about a complete readjustment of our view on China over the last six months,” Wuttke told reporters at a briefing for the chamber’s annual China position paper, released Wednesday.
He said the lockdowns and uncertainty for businesses have turned China into a “closed” and “distinctively different” country that might prompt companies to leave.
So far, most companies haven’t left — only some very small ones, Wuttke said. But he pointed out the chamber isn’t able to survey businesses that decided not to enter China at all.
I’ve been here on and off 40 years and I’ve never seen anything like this, where all of a sudden ideological decision-making is more important than economic decision-making.
Joerg Wuttke
president, EU Chamber of Commerce in China
Foreign direct investment from the EU into China dropped by 11.8% in 2020 from a year earlier, according to the chamber’s position paper. More recent figures weren’t available.
“While there are still ‘a select group of high-profile multinational companies ready to make billion dollar splashes,’ the trend of declining FDI is unlikely to reverse while European executives are heavily restricted from travelling to and from China to develop potential greenfield projects,” the paper said.
China’s economy grew by 2.5% in the first half of the year, well below the official target of around 5.5%. Beijing indicated in late July the country might not reach that target.
Meanwhile, authorities have showed little sign of removing the so-called dynamic zero-Covid policy.
China has reduced quarantine time for international and domestic travelers. But sporadic lockdowns, whether of the tourist island of Hainan or the city of Chengdu, has kept business uncertainty elevated.
Wuttke said he expects the earliest China could open its borders is late 2023, based on the time needed to vaccinate enough of the population.
‘Ideology trumps the economy’
European businesses that have remained in China increasingly face an environment in which “ideology trumps the economy,” the chamber’s position paper said in its executive summary.
“I’ve been here on and off 40 years and I’ve never seen anything like this, where all of a sudden, ideological decision-making is more important than economic decision-making,” Wuttke said. “And maybe that’s also amplified by voices from the outside, America[n] sanctions, America cutting off China, so I can understand partly why self-reliance is so high on the agenda.”
He was referring to China’s push in the last few years to build up its own tech and other industries.
Meanwhile, among other measures, the U.S. has restricted its companies from supplying key components to Chinese tech companies such as Huawei.
Read more about China from CNBC Pro
The chamber did not specifically state what this ideology consisted of, but said China’s Covid policy embodies the country’s “move away from the rest of the world.”
The policy has not changed despite many lengthy, candid conversations with Chinese government officials, Wuttke said.
“I think these people, they are torn between what they see has to be done, could be done,” he said. “Then [there’s] a very stern, very clear directive from the top of, this is how it has to be, that’s the ideology. And how can you challenge ideology?”
Chinese President Xi Jinping said earlier this month that the country has “continued to respond to Covid-19 and promote economic and social development in a well-coordinated way,” according to a paraphrase of his remarks shared by China’s Ministry of Foreign Affairs.
While Xi said “China has entered a new development stage,” he maintained that “China’s door of opening-up and friendly cooperation will always be open to the world,” according to the release. His remarks came during his first trip abroad since the pandemic began – to Kazakhstan and Uzbekistan – during which he met with leaders of several countries in the region.
Over the last few years, the Chinese leader has sought to rally the country around the ruling Communist Party and his plans for the “great rejuvenation of the Chinese nation.” Xi is set to consolidate his power at a major political meeting next month.
China’s big market
Foreign businesses already in China are generally staying put for now.
Even if China’s economy grows more slowly, its size and the low base “actually makes a convincing case [for foreign businesses], we’re still going to make it,” Wuttke said.
Some, especially German auto giants, are investing more.
For the first eight months of the year, foreign direct investment from Germany rose by about 30% from a year earlier — faster than the 23.5% pace recorded for the first seven months, China’s Ministry of Commerce said Monday.
However, the ministry did not release updated figures for investment from the U.S., which official data showed had grown by about 36% in the first seven months of the year.
Foreign businesses can still find specific areas of opportunity.
China is improving local market access, albeit in areas where locals already dominate or are “desperate” for foreign investment, Wuttke said. “Otherwise, frankly, I would stop producing this paper.”
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It’s a move that would likely cause panic on Wall Street.
But Wells Fargo Securities’ Michael Schumacher suggests the Federal Reserve is raising rates too slowly, telling CNBC’s “Fast Money” he would seriously consider a 150 basis point hike this week if he were Chair Jerome Powell.
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“The Fed knows what the destination is. So it’s got the funds rate now, the upper bound, is 2.5%. Very likely it gets to 4%-plus this year,” the firm’s head of macro strategy said on Tuesday. “Why not just rip off the Band-Aid. Let’s get there in one day. But of course, the Fed won’t do that.”
He acknowledges it would be a tough maneuver to pull off without violently shaking markets. The key is policymakers need to convince investors the historical jump in rates is frontloaded, according to Schumacher.
“It would do a huge move and then stop or stop pretty soon. The big fear in the market would be ‘oh my goodness, they’ve done a record-sized move. What’s going to happen next month or the month after that? We’ve better get out of the way,'” said Schumacher. “It would require incredibly good communication and confidence or the result: Carnage. And nobody wants that.”
Based on this month’s CNBC Fed Survey, the Street believes the Fed will lift rates by 75 basis points on Wednesday. It would be the Fed’s fifth hike this year.
Arrows pointing outwards
Schumacher believes the Street has the September meeting rate forecast right. But he warns it’s likely Powell will be more hawkish during Wednesday’s news conference due to hot inflation.
“When you consider the last 10-plus years, we’ve had incredibly easy monetary policy for most of that time. Super-stimulative fiscal policy in a lot of cases, especially the U.S. So, doing a very quick U-turn — I suspect it’s going to be very rocky. It has been rocky already,” noted Schumacher. “To think that it would somehow go smoothly from here is probably a big leap.”
The Dow, S&P 500 and Nasdaq on Tuesday fell one percent and are down three out of the last four sessions. Since the July Fed meeting, the Dow and Nasdaq are off about 5% while the S&P is down 4%.
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And Treasury yields are rapidly climbing. The 2-year Treasury Note yield hit its highest level since 2007. It’s a place Schumacher is recommending to investors for relative safety.
“Look at the front end of the U.S. Treasury curve. You’ve got the 2-year treasury yielding just about 4%. It’s gone up enormously,” Schumacher said. “If you think about the real yield, which a lot of people in the bond market focus on, it’s probably not a bad place to hide out. Take a short duration position, sit there for a few months [and] see what the Federal Reserve does and then react.”
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