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    U.S. Economy Grew at 3.3% Rate in Latest Quarter

    The increase in gross domestic product, while slower than in the previous period, showed the resilience of the recovery from the pandemic’s upheaval.The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized.Gross domestic product, adjusted for inflation, grew at a 3.3 percent annual rate in the fourth quarter, the Commerce Department said on Thursday. That was down from the 4.9 percent rate in the third quarter but easily topped forecasters’ expectations and showed the resilience of the recovery from the pandemic’s economic upheaval.The latest reading is preliminary and may be revised in the months ahead.Forecasters entered 2023 expecting the Federal Reserve’s aggressive campaign of interest-rate increases to push the economy into reverse. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, G.D.P. grew 3.1 percent, up from less than 1 percent the year before and faster than the average for the five years preceding the pandemic. (A different measure, based on average output over the full year, showed annual growth of 2.5 percent in 2023.)“Stunning and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We’ll take the win.” More

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    Wall Street’s Bond ‘Vigilantes’ Are Back

    The financial world has been debating if market appetite for buying U.S. debt is near a limit. The ramifications for funding government priorities are immense.Typically, the esoteric inner workings of finance and the very public stakes of government spending are viewed as separate spheres.And bond trading is ordinarily a tidy arena driven by mechanical bets about where the economy and interest rates will be months or years from now.But those separations and that sense of order changed this year as a gargantuan, chaotic battle was waged by traders in the nearly $27 trillion Treasury bond market — the place where the U.S. government goes to borrow.In the summer and fall, many investors worried that federal deficits were rising so rapidly that the government would flood the market with Treasury debt that would be met with meager demand. They believed that deficits were a key source of inflation that would erode future returns on any U.S. bonds they bought.So they insisted that if they were to keep buying Treasury bonds, they would need to be compensated with an expensive premium, in the form of a much higher interest rate paid to them.In market parlance, they were acting as bond vigilantes. That vigilante mindset fueled a “buyers’ strike” in which many traders sold off Treasuries or held back from buying more.The basic math of bonds is that, generally, when there are fewer buyers of bonds, the rate, or yield, on that debt rises and the value of the bonds falls. The yield on the 10-year Treasury note — the benchmark interest rate the government pays — went from just above 3 percent in March to 5 percent in October. (In a market this large, that amounted to trillions of dollars in losses for the large crop of investors who bet on lower bond yields earlier this year.)Since then, momentum has shifted to a remarkable degree. Several analysts say some of the frenzy reflected mistimed and mispriced bets regarding recession and future Federal Reserve policy more than fiscal policy concerns. And as inflation retreats and the Fed eventually ratchets down interest rates, they expect bond yields to continue to ease.But even if the sell-off frenzy has abated, the issues that ignited it have not gone away. And that has intensified debates over what the government can afford to do down the road.Federal debt compared with the size of the U.S. economy neared peak levels during the pandemicFederal debt held by the public — the amount of interest-generating U.S. Treasury securities held by bondholders — relative to gross domestic product

    Note: Gross federal debt held by the public is the sum of debt held by all entities outside the federal government (individuals, businesses, banks, insurance companies, state governments, pension and mutual funds, foreign governments and more.) It also includes debt owned by the Federal Reserve.Source: Federal Reserve Bank of St. LouisBy The New York TimesUnder current law, growing budget deficits increase the amount of debt the federal government must issue, and higher interest rates mean payments to bondholders will make up more of the federal budget. Interest paid to Treasury bondholders is now the government’s third-largest expenditure, after Medicare and Social Security.Powerful voices in finance and politics in New York, Washington and throughout the world are warning that the interest payments will crowd out other federal spending — in the realm of national security, government agencies, foreign aid, increased support for child care, climate change adaptation and more.“Do I think it really complicates fiscal policy in the coming five years, 10 years? Absolutely,” said the chief investment officer for Franklin Templeton Fixed Income, Sonal Desai, a portfolio manager who has bet that government bond yields will rise because of growing debt payments. “The math doesn’t add up on either side,” she added, “and the reality is neither the right or the left is willing to take sensible steps to try and bring that fiscal deficit down.”Fitch, one of the three major agencies that evaluate bond quality downgraded the credit rating on U.S. debt in August, citing an “erosion of governance” that has “manifested in repeated debt limit standoffs and last-minute resolutions.”Yet others are more sanguine. They do not think the U.S. government is at risk of default, because its debt payments are made in dollars that the government can create on demand. And they are generally less certain that fiscal deficits played the leading role in feeding inflation compared with the shocks from the pandemic.Joseph Quinlan, head of market strategy for Merrill and Bank of America Private Bank, said in an interview that the U.S. federal debt “remains manageable” and that “fears are overdone at this juncture.”Samuel Rines, an economist and the managing director at Corbu, a market research firm, was more blunt — laconically dismissing worries that a bond vigilante response to debt levels could become such a financial strain on consumers and companies that it sinks markets and, in turn, the economy.“If you want to make money, yawn,” he said. “If you want to lose money, panic.”Interest payments for Treasuries have increased rapidlyFederal spending on interest payments to holders of Treasuries

    Note: Data is not adjusted for inflation.Source: U.S. Bureau of Economic AnalysisBy The New York TimesThe debate over public debt is as fierce as ever. And it echoes, in some ways, an earlier time — when the term “bond vigilantes” first emerged.In 1983, a rising Yale-trained economist named Ed Yardeni published a letter titled “Bond Investors Are the Economy’s Bond Vigilantes,” coining the phrase. He declared, to great applause on Wall Street, that “if the fiscal and monetary authorities won’t regulate the economy, the bond investors will” — by viciously selling off U.S. bonds, sending a message to stop spending at its heightened levels.On the fiscal side, Washington reined in spending on major social programs. (A bipartisan deal had actually been reached shortly before Mr. Yardeni’s letter.) On the monetary side, the Federal Reserve began a new series of interest rate increases to keep inflation at bay.The Treasury bond sell-off continued into 1984, but by the mid-1980s, bond yields had come down substantially. Inflation, while mild compared with the 1970s, averaged about 4 percent in the following years, a level not tolerable by contemporary standards. Yet interest payments on government debt peaked in 1991 as a share of the U.S. economy and then declined for several years.That sequence of events may be an imperfect guide to the Treasury bond market of the 2020s.This time around, the Peterson Foundation, a group that pushes for tighter fiscal policy, has joined with policy analysts, former public officials and current congressional leaders to push for a bipartisan fiscal commission aimed at imposing lower federal deficits. Many assert that “tough questions” and “hard choices” are ahead — including a need to slash the future benefits of some federal programs.But some economic experts say that even with a debt pile larger than in the past, federal borrowing rates are relatively tame, comparable with past periods.According to a recent report by J.P. Morgan Asset Management, benchmark bond yields will fall toward 3.4 percent in the coming years, while inflation will average 2.3 percent. Other analyses from major banks and research shops have offered similar forecasts.In that scenario, the “real” cost of federal borrowing, in inflation-adjusted terms — a measure many experts prefer — would probably be close to 1 percent, historically not a cause for concern.Adam Tooze, a professor and economic historian at Columbia University, argues that current interest rates are “not a cause for action of any type at all.”At 2 percent when adjusted for inflation, those rates are “quite a normal level,” he said on a recent podcast. “It is the level that was prevailing before 2008.”In the 1990s, when bond vigilantes helped prod Congress into running a balanced budget, real borrowing rates for the government were hovering higher than they are now, mostly around 3 percent. Government yields were historically low before recent riseThe inflation-adjusted rate for the 10-year Treasury note, a key market measure of “real” government borrowing cost, jumped well above its 2010s levels this year.

    Source: Federal Reserve Bank of ClevelandBy The New York TimesIn the broader context of the interest rate controversy, there is disagreement on whether to even characterize U.S. debt as primarily a burden.Stephanie Kelton, an economics professor at Stony Brook University, is a leading voice of modern monetary theory, which holds that inflation and the availability of resources (whether materials or labor) are the key limits to government spending, rather than traditional budget constraints.U.S. dollars issued through debt payments “exist in the form of interest-bearing dollars called Treasury securities,” said Dr. Kelton, a former chief economist for the U.S. Senate Budget Committee. She argues, “If you’re lucky enough to own some of them, congratulations, they’re part of your financial savings and wealth.”That framework has found some sympathetic ears on Wall Street, especially among those who think paying more interest on bonds to savers does not necessarily impede other government spending. While the total foreign holdings of Treasuries are roughly $7 trillion, most federal debt is held by U.S.-based institutions and investors or the government itself, meaning that the fruits of higher interest payments are often going directly into the portfolios of Americans.David Kotok, the chief investment officer at Cumberland Advisors since 1973, argued in an interview that with some structural changes to the economy — such as immigration reform to increase growth and the ranks of young people paying into the tax base — a debt load as high as $60 trillion or more in coming decades would “not only not be troubling but would encourage you to use more of the debt because you would say, ‘Gee, we have the room right now to finance mitigation of climate change rather than incur the expenses of disaster.’”Campbell Harvey, a finance professor at Duke University and a research associate with the National Bureau of Economic Research, said he thinks “there is a lot of misinformation” about current U.S. debt burdens but made clear he views them “as a big deal and a bad situation.”“The way I look at it, there are four ways out of this,” Mr. Harvey said in an interview. The first two — to substantially raise taxes or slash core social programs — are not “politically feasible,” he said. The third way is to inflate the U.S. currency until the debt obligations are worth less, which he called regressive because of its disproportionate impact on the poor. The most attractive way, he contends, is for the economy to grow near or above the 4 percent annual rate that the nation achieved for many years after World War II.Others think that even without such rapid growth, the Federal Reserve’s ability to coordinate demand for debt, and its attempts to orchestrate market stability, will play the more central role.“The system will not allow a situation where the United States cannot fund itself,” said Brent Johnson, a former banker at Credit Suisse who is now the chief executive of Santiago Capital, an investment firm.That confidence, to an extent, stems from the reality that the Fed and the U.S. Treasury remain linchpins of global financial power and have the mind-bending ability, between them, to both issue government debt and buy it.There are less extravagant tools, too. The Treasury can telegraph and rearrange the amount of debt that will be issued at Treasury bond auctions and determine the time scale of bond contracts based on investor appetite. The Fed can unilaterally change short-term borrowing rates, which in turn often influence long-term bond rates.“I think the fiscal sustainability discourse is generally quite dull and blind to how much the Fed shapes the outcome,” said Skanda Amarnath, a former analyst at the Federal Reserve Bank of New York and the executive director at Employ America, a group that tracks labor markets and Fed policy.For now, according to the Treasury Borrowing Advisory Committee, a leading group of Wall Street traders, auctions of U.S. debt “continue to be consistently oversubscribed” — a sign of steady structural demand for the dollar, which remains the world’s dominant currency.Adam Parker, the chief executive of Trivariate Research and a former director of quantitative research at Morgan Stanley, argues that concerns regarding an oversupply of Treasuries in the market are conceptually understandable but that they have proved unfounded in one cycle after another. Some think this time is different.“Maybe I’m just dismissive of it because I’ve heard the argument seven times in a row,” he said. More

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    The Stock and Bond Markets Are Getting Ahead of the Fed.

    Stock and bond markets have been rallying in anticipation of Federal Reserve rate cuts. But don’t get swept away just yet, our columnist says.It’s too early to start celebrating. That’s the Federal Reserve’s sober message — though given half a chance, the markets won’t heed it.In a news conference on Wednesday, and in written statements after its latest policymaking meeting, the Fed did what it could to restrain Wall Street’s enthusiasm.“It’s far too early to declare victory and there are certainly risks” still facing the economy, Jerome H. Powell, the Fed chair, said. But stocks shot higher anyway, with the S&P 500 on the verge of a new record.The Fed indicated that it was too early to count on a “soft landing” for the economy — a reduction in inflation without a recession — though that is increasingly the Wall Street consensus. An early decline in the federal funds rate, the benchmark short-term rate that the Fed controls directly, isn’t a sure thing, either, though Mr. Powell said the Fed has begun discussing rate cuts, and the markets are, increasingly, counting on them.The markets have been climbing since July — and have been positively buoyant since late October — on the assumption that truly good times are in the offing. That may turn out to be a correct assumption — one that could be helpful to President Biden and the rest of the Democratic Party in the 2024 elections.But if you were looking for certainty about a joyful 2024, the Fed didn’t provide it in this week’s meeting. Instead, it went out of its way to say that it is positioning itself for maximum flexibility. Prudent investors may want to do the same.Reasons for OptimismOn Wednesday, the Fed said it would leave the federal funds rate where it stands now, at about 5.3 percent. That’s roughly 5 full percentage points higher than it was in early in 2022. Inflation, the glaring economic problem at the start of the year, has dropped sharply thanks, in part, to those steep interest rate increases. The Consumer Price Index rose 3.1 percent in the year through November. That was still substantially above the Fed’s target of 2 percent, but way below the inflation peak of 9.1 percent in June 2022. And because inflation has been dropping, a virtuous cycle has developed, from the Fed’s standpoint. With the federal funds rate substantially above the inflation rate, the real interest rate has been rising since July, without the Fed needing to take direct action.But Mr. Powell says rates need to be “sufficiently restrictive” to ensure that inflation doesn’t surge again. And, he cautioned, “We will need to see further evidence to have confidence that inflation is moving toward our goal.”The wonderful thing about the Fed’s interest rate tightening so far is that it has not set off a sharp increase in unemployment. The latest figures show the unemployment rate was a mere 3.7 percent in November. On a historical basis, that’s an extraordinarily low rate, and one that has been associated with a robust economy, not a weak one. Economic growth accelerated in the three months through September (the third quarter), with gross domestic product climbing at a 4.9 percent annual rate. That doesn’t look at all like the recession that had been widely anticipated a year ago.To the contrary, with indicators of robust economic growth like these, it’s no wonder that longer-term interest rates in the bond market have been dropping in anticipation of Fed rate cuts. The federal funds futures market on Wednesday forecast federal funds cuts beginning in March. By the end of 2024, the futures market expected the federal funds rate to fall to below 4 percent.But on Wednesday, the Fed forecast a slower and more modest decline, bringing the rate to about 4.6 percent.Too Soon to RelaxSeveral other indicators are less positive than the markets have been. The pattern of Treasury rates known as the yield curve has been predicting a recession since Nov. 8, 2022. Short-term rates — specifically, for three-month Treasuries — are higher than those of longer duration — particularly, for 10-year Treasuries. In financial jargon, this is an “inverted yield curve,” and it often forecasts a recession.Another well-tested economic indicator has been flashing recession warnings, too. The Leading Economic Indicators, an index formulated by the Conference Board, an independent business think tank, is “signaling recession in the near term,” Justyna Zabinska-La Monica, a senior manager at the Conference Board, said in a statement.The consensus of economists measured in independent surveys by Bloomberg and Blue Chip Economic Indicators no longer forecasts a recession in the next 12 months — reversing the view that prevailed earlier this year. But more than 30 percent of economists in the Bloomberg survey and fully 47 percent of those in the Blue Chip Economic Indicators disagree, and take the view that a recession in the next year will, in fact, happen.While economic growth, as measured by gross domestic product, has been surging, early data show that it is slowing markedly, as the bite of high interest rates gradually does its damage to consumers, small businesses, the housing market and more.Over the last two years, fiscal stimulus from residual pandemic aid and from deficit spending has countered the restrictive efforts of monetary policy. Consumers have been spending resolutely at stores and restaurants, helping to stave off an economic slowdown.Even so, a parallel measurement of economic growth — gross domestic income — has been running at a much lower rate than G.D.P. over the last year. Gross domestic income has sometimes been more reliable over the short term in measuring slowdowns. Ultimately, the two measures will be reconciled, but in which direction won’t be known for months.The MarketsThe stock and bond markets are more than eager for an end to monetary belt-tightening.Already, the U.S. stock market has fought its way upward this year and is nearly back to its peak of January 2022. And after the worst year in modern times for bonds in 2022, market returns for the year are now positive for the investment-grade bond funds — tracking the benchmark Bloomberg U.S. Aggregate Bond Index — that are part of core investment portfolios.But based on corporate profits and revenues, prices are stretched for U.S. stocks, and bond market yields reflect a consensus view that a soft landing for the economy is a near-certain thing.Those market movements may be fully justified. But they imply a near-perfect, Goldilocks economy: Inflation will keep declining, enabling the Fed to cut interest rates early enough to prevent an economic calamity.But excessive market exuberance itself could upend this outcome. Mr. Powell has spoken frequently of the tightening and loosening of financial conditions in the economy, which are partly determined by the level and direction of the stock and bond markets. Too big a rally, taking place too early, could induce the Fed to delay rate cuts.All of this will have a bearing on the elections of 2024. Prosperity tends to favor incumbents. Recessions tend to favor challengers. It’s too early to make a sure bet.Without certain knowledge, the best most investors can do is to be positioned for all eventualities. That means staying diversified, with broad holdings of stocks and bonds. Hang in, and hope for the best. More

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    Fed Officials Hint That Rate Increases Are Over, and Investors Celebrate

    Stocks and bonds were buoyed after even inflation-focused Federal Reserve officials suggested that rates may stay steady.Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn.Several Fed officials — including two who often push for higher interest rates — hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Economic growth is cooling, reducing the urgency for additional moves.Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled “Something Appears to Be Giving,” an update on a previous speech that he had titled “Something’s Got to Give.”“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” Mr. Waller said. “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”Michelle Bowman, another Fed governor who also tends to be inflation-focused, said that she saw risks that factors like higher services spending or climbing energy costs could keep inflation elevated. She said that it was still her basic expectation that the Fed would need to raise rates further. Even so, she did not sound dead-set on such a move, noting that policy was not on a “preset course.”“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way,” Ms. Bowman said.Taken together with other recent remarks from Fed officials, the latest comments offer an increasingly clear signal that central bank policymakers may be finished with their campaign to increase interest rates in a bid to slow demand and cool inflation. Interest rates are already set to a range of 5.25 to 5.5 percent. The Fed’s next meeting will take place on Dec. 12-13, and investors are overwhelmingly betting that the central bank will hold rates steady, as policymakers did at their last two meetings.Investors appeared buoyed by the Fed officials’ comments. Higher interest rates raise costs for consumers and companies, typically weighing on markets. The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, fell noticeably on Tuesday morning, extending its drop through the afternoon. Yields fall as prices rise. The move initially provided a tailwind to the stock market, helping lift the S&P 500 from its earlier fall to a gain of 0.4 percent, before the rally eased and the index drifted lower to an eventual rise of 0.1 percent.Fed officials have been nervously watching continued strength in the economy: Gross domestic product expanded at a breakneck 4.9 percent annual rate in the third quarter. The concern has been that continued solid demand will give companies the wherewithal to continue raising prices quickly.But recently, job growth has eased and consumer price inflation has shown meaningful signs of a broad-based slowdown. That is giving policymakers more confidence that their current policy setting is aggressive enough to wrestle price increases fully under control.Still, as both Mr. Waller and Ms. Bowman made clear, Fed officials are not yet ready to definitively declare victory — data could still surprise them. And while a recent run-up in longer-term interest rates had been helping to cool the economy, the move has already begun to reverse as investors predict a gentler Fed policy path.The 10-year Treasury yield, one of the most important interest rates in the world, has fallen drastically in recent weeks after shooting up in previous months, curtailing a sell-off in the stock market and lifting investor optimism. But higher stock prices and cheaper borrowing costs could prevent growth and inflation from slowing as quickly.“The recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job,” Mr. Waller said on Tuesday. More

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    How High Interest Rates Sting Bakers, Farmers and Consumers

    Home buyers, entrepreneurs and public officials are confronting a new reality: If they want to hold off on big purchases or investments until borrowing is less expensive, it’s probably going to be a long wait.Governments are paying more to borrow money for new schools and parks. Developers are struggling to find loans to buy lots and build homes. Companies, forced to refinance debts at sharply higher interest rates, are more likely to lay off employees — especially if they were already operating with little or no profits.Over the past few weeks, investors have realized that even with the Federal Reserve nearing an end to its increases in short-term interest rates, market-based measures of long-term borrowing costs have continued rising. In short, the economy may no longer be able to avoid a sharper slowdown.“It’s a trickle-down effect for everyone,” said Mary Kay Bates, the chief executive of Bank Midwest in Spirit Lake, Iowa.Small banks like Ms. Bates’s are at the epicenter of America’s credit crunch for small businesses. During the pandemic, with the Fed’s benchmark interest rate near zero and consumers piling up savings in bank accounts, she could make loans at 3 to 4 percent. She also put money into safe securities, like government bonds.But when the Fed’s rate started rocketing up, the value of Bank Midwest’s securities portfolio fell — meaning that if Ms. Bates sold the bonds to fund more loans, she would have to take a steep loss. Deposits were also waning, as consumers spent down their savings and moved money into higher-yielding assets.Higher Interest Rates Are Here More

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    Exxon Acquires Pioneer Natural Resources for $60 Billion

    The acquisition of Pioneer Natural Resources, Exxon’s largest since its merger with Mobil in 1999, increases the company’s presence in the Permian basin in Texas and New Mexico.Exxon Mobil announced on Wednesday that it was acquiring Pioneer Natural Resources for $59.5 billion, doubling down on fossil fuel production even as many global policymakers grow increasingly concerned about climate change and the oil industry’s reluctance to shift to cleaner energy.After decades of investing in projects around the world, the deal would squarely lodge Exxon’s future close to its Houston base, with most of its oil production in Texas and offshore in the Gulf of Mexico and along the coast of Guyana.By concentrating its production close to home, Exxon is effectively betting that U.S. energy policy will not move against fossil fuels in a major way even as the Biden administration encourages automakers to switch to electric vehicles and utilities to make the transition to renewable energy.Exxon executives have said that in addition to producing more fossil fuels, the company is building a new business that will capture carbon dioxide from industrial sites and bury the greenhouse gas in the ground. The technology to do that remains in an early stage and has not been successfully used on a large scale.“The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a standalone basis,” said Darren Woods, Exxon’s chief executive.American oil production has reached a record of roughly 13 million barrels a day, around 13 percent of the global market, but growth has slowed in recent years. Despite a wave of consolidation among oil and gas companies, and higher oil prices after the Russian invasion of Ukraine last year, producers are having a more difficult time finding new locations to drill.The Pioneer deal is a sign that it is now easier to acquire an oil producer than to drill for oil in a new location.Exxon, a refining and petrochemical powerhouse, needs a lot more oil and gas to turn into gasoline, diesel, plastics, liquefied natural gas, chemicals and other products. Much of that oil and gas is likely to come from the Permian basin, the most productive U.S. oil and gas field, which straddles Texas and New Mexico and where Pioneer is a major player.Exxon’s $10 billion Golden Pass terminal near the Texas-Louisiana border is scheduled to begin shipping liquefied natural gas to the rest of the world next year. Gas bubbles up with oil from the Permian basin, making the basin all the more valuable for exports as Europe weans itself from Russian gas.The Pioneer deal would be Exxon’s largest acquisition since it bought Mobil in 1999. It is bigger than the company’s ill-fated $30 billion acquisition of XTO Energy, a major natural gas producer, in 2010. Exxon had to write off much of that investment later when natural gas prices collapsed from the high levels that prevailed when it bought XTO.By buying Pioneer now, when the U.S. oil benchmark is around $83 a barrel, Exxon is counting on prices remaining relatively high in the next few years.Exxon has been careful in recent years to invest modestly in new production as it raised its dividends and bought back more of its own stock. Buying Pioneer would add production, a big change in its strategy.The acquisition would make Exxon the dominant player in the Permian basin, far outpacing Chevron, its biggest rival.Pioneer has been a darling of Wall Street investors as it has capitalized on the shale drilling boom. Scott Sheffield, its chief executive, got the company out of Alaska, Africa and offshore fields while buying up shale operations in the Permian at cheap prices. By 2020, it had become one of the biggest American drillers, with relatively low cost production.Mr. Sheffield is retiring at the end of the year. His company has a market value of about $50 billion, roughly one-eighth the size of Exxon. Many of its oil and gas fields are still untapped.“While the company has a solid succession plan in place, oil and gas markets have been volatile and the capital available to traditional oil and gas companies in the U.S. has been limited,” said Peter McNally, an analyst at Third Bridge, a research and analytics firm.The deal would be Exxon’s first major acquisition since Mr. Darren Woods became chief executive in 2017, replacing Rex Tillerson, who went on to become secretary of state.Exxon, which reported a record profit of $56 billion last year, is flush with cash that it could invest in Pioneer’s untapped fields. Since Exxon is also a large producer in the Permian, analysts say the merger would bring greater efficiencies in operations of both companies.This is just the latest in a series of mergers and acquisitions in the oil industry in recent years. But it has been consolidating. Occidental Petroleum acquired Anadarko Petroleum four years ago for nearly $40 billion, a deal that made Occidental a major competitor to Exxon and Chevron in the Permian basin. Pioneer spent more than $10 billion buying two other Permian producers, Parsley Energy and DoublePoint Energy, in 2021.Exxon bought Denbury, a Texas energy company that owns pipelines that can transport carbon dioxide, for $4.9 billion this year. More

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    Why the Jobs Report Might be Pivotal for a Jittery Stock Market

    Stocks are sliding, government bond yields are soaring, and investors are reacting strongly to incremental economic information, parsing it for even the slightest hints about the path ahead. .Such sensitivity among investors has left markets jittery — veering between fears that the economy is running too hot and worries about a downturn so sharp that the country tumbles into recession.The squeamishness is most apparent in the $25 trillion market for U.S. Treasuries, where yields on government bonds have risen to highs not seen since 2007. Though the jump in bond yields in part reflects bets on a strong economy, the moves have fanned out into the stock market, too. For stock investors, higher yields are generally a negative — and the S&P 500 index is on track for its fifth consecutive weekly decline.After the government reported on Friday that employers added 336,000 jobs in September, sharply higher than economists had expected, stock futures, which allow investors to bet on the market before the official start of trading, dropped and government bond yields rose near a 16-year high.It’s all about interest rates.There are many different interest rates that matter. There is the rate that the Federal Reserve sets, which is a target for overnight borrowing costs. There are consumer and corporate borrowing rates, like those on credit cards or mortgages. And then there are government debt yields, which partly track the Fed’s policy rate but stretch out over much longer periods and factor in other information such as inflation and economic growth.Arguably the most important of these rates is the yield on the 10-year Treasury bond, a measure of what it would cost the U.S. government to borrow money from investors for 10 years, but also a crucial input to virtually every other long-term interest rate in the world, making it a cornerstone of the global financial system.It also influences how companies are valued and, therefore, it holds sway over the stock market. Higher treasury yields indicate higher costs for consumers and businesses, which typically weigh on the market.This week, the yield on the 10-year Treasury bond rose above 4.80 percent, its highest level since 2007, from 4.57 percent at the end of last week. After coming off that high point in the days before the jobs data was released, the yield quickly snapped back above 4.8 percent after the report on Friday. S&P 500 futures pointed to another decline, adding to a 1.6 percent loss for the week. The S&P 500 is down about 7 percent in the more than two months that the yield has been rising.Rates have been rising for a while. What’s so scary now?The Fed has been raising interest rates for roughly 18 months, but the yield on 10-year Treasuries had remained fairly steady for the first half of 2023, oscillating in a range of 3.5 to 4 percent.Over that period, the S&P 500 rallied nearly 20 percent, buoyed by better-than-expected corporate profits, slowing inflation, a resilient economy and greater consensus about the end of the Fed’s rate-raising cycle.But persistently strong economic data has led to higher expectations for growth, while concerns that inflation could remain stubbornly too high have raised expectations that the Fed may have to keep rates elevated for longer than previously thought to finish the job of taming prices. As a result, in early August, the yield on the 10-year bond began a swift ascent.That move has upended some of the market’s long-held assumptions. After a period of relative stability, investors are re-evaluating what higher rates could mean for consumers and companies, catalyzing a sell-off in the stock market. The S&P 500 slumped nearly 5 percent in September, its worst month of the year so far.Add in a sharply appreciating dollar — also tied to rising interest rates — and wild swings in the cost of oil, and the outlook for the economy has become more uncertain.“All these things thrown into a blender — the uncertainty and the speed of how things are moving — is what has kept the market uneasy,” said George Goncalves, head of U.S. macro strategy at MUFG Securities.Is congressional turmoil a factor?The recent brush with a government shutdown and the removal of Kevin McCarthy as House speaker on Tuesday did not rattle markets on their own, but it did highlight the government’s instability, a few months after narrowly averting a potentially devastating debt default.Rising interest rates have compounded concerns about the government’s finances, with the prospect of high rates focusing attention on the rising costs of servicing the United States’ mammoth debt pile and persistent budget deficits.At the moment, unemployment is low and the economy is performing better than many expected. Should growth slow, the fiscal challenge facing Washington will intensify, said Ajay Rajadhyaksha, global chairman of research at Barclays.And assuming no cuts in spending and that rates remain elevated, Mr. Goncalves said, higher deficits could beget higher yields, which in turn could push deficits higher. More

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    Rates Are Jumping on Wall Street. What Will It Do to Housing and the Economy?

    A run-up in longer-term interest rates could help the Federal Reserve get the economic cool-down it wants — but it also risks a bumpy landing.Heather Mahmood-Corley, a real estate agent, was seeing decent demand for houses in the Phoenix area just a few weeks ago, with interested shoppers and multiple offers. But as mortgage rates pick up again, she is already watching would-be home buyers retrench.“You’ve got a lot of people on edge,” said Ms. Mahmood-Corley, a Redfin agent who has been selling houses for more than eight years, including more than five in the area.It’s an early sign of the economic fallout from a sharp rise in interest rates that has taken place in markets since the middle of the summer, when many home buyers and Wall Street traders thought that borrowing costs, which had risen rapidly, might be at or near their peak.Rates on longer-term government Treasury bonds have been climbing sharply, partly because investors are coming around to the belief that the Federal Reserve may keep its policy rate higher for longer. That adjustment is playing out in sophisticated financial markets, but the fallout could also spread throughout the economy.Higher interest rates make it more expensive to finance a car purchase, expand a business or borrow for a home. They have already prompted pain in the heavily indebted technology industry, and have sent jitters through commercial real estate markets.The increasing pressure is partly a sign that Fed policy is working: Officials have been lifting borrowing costs since March 2022 precisely because they want to slow the economy and curb inflation by discouraging borrowing and spending. Their policy adjustments sometimes take a while to push up borrowing costs for consumers and businesses — but are now clearly passing through.New homes for sale in Mesa, Ariz. Mortgage rates are flirting with 8 percent, up from less than 3 percent in 2021.Caitlin O’Hara for The New York TimesYet there is a threat that as rates ratchet higher across key parts of financial markets, they could accidentally wallop the economy instead of cooling it gently. So far, growth has been resilient to much higher borrowing costs: Consumers have continued to spend, the housing market has slowed without tanking, and businesses have kept investing. The risk is that rates will reach a tipping point where either a big chunk of that activity grinds to a halt or something breaks in financial markets.“At this point, the amount of increase in Treasury yields and the tightening itself is not enough to derail the economic expansion,” said Daleep Singh, chief global economist at PGIM Fixed Income. But he noted that higher bond yields — especially if they last — always bring a risk of financial instability.“You never know exactly what the threshold is at which you trigger these financial stability episodes,” he said.While the Fed has been raising the short-term interest rate it controls for some time, longer-dated interest rates — the sort that underpin borrowing costs paid by consumers and companies — have been slower to react. But at the start of August, the yield on the 10-year Treasury bond began a relentless march higher to levels last seen in 2007.The recent move is most likely the culmination of a number of factors: Growth has been surprisingly resilient, which has led investors to mark up their expectations for how long the Fed will keep rates high. Some strategists say the move reflects growing concerns about the sustainability of the national debt.“It’s everything under the sun, but also no single factor,” said Gennadiy Goldberg, head of interest rate strategy at TD Securities. “But it’s higher for longer that has everyone nervous.”Whatever the causes, the jump is likely to have consequences.Higher rates have already spurred some financial turmoil this year. Silicon Valley Bank and several other regional lenders imploded after they failed to protect their balance sheets against higher borrowing costs, causing customers to pull their money.Policymakers have continued to watch banks for signs of stress, especially tied to the commercial real estate market. Many regional lenders have exposure to offices, hotels and other commercial borrowers, and as rates rise, so do the costs to finance and maintain the properties and, in turn, how much they must earn to turn a profit. Higher rates make such properties less valuable.The yield on the 10-year Treasury bond in August began a relentless march higher to levels last seen in 2007.Hiroko Masuike/The New York Times“It does add to concerns around commercial real estate as the 10-year Treasury yield rises,” said Jill Cetina, an associate managing director at Moody’s Investors Service.Even if the move up in rates does not cause a bank or market blowup, it could cool demand. Higher rates could make it more expensive for everyone — home buyers, businesses, cities — to borrow money for purchases and expansions. Many companies have yet to refinance debt taken out when interest rates were much lower, meaning the impact of these higher interest rates is yet to fully be felt.“That 10-year Treasury, it’s a global borrowing benchmark,” said Greg McBride, chief financial analyst for Bankrate.com. “It’s relevant to U.S. homeowners, to be sure, but it’s also relevant to corporations, municipalities and other governments that look to borrow in the capital markets.”For the Fed, the shift in long-term rates could suggest that its policy setting is closer to — or even potentially at — a level high enough to ensure that the economy will slow further.Officials have raised rates to a range of 5 to 5.25 percent, and have signaled that they could approve one more quarter-point increase this year. But markets see less than a one-in-three chance that they will follow through with that final adjustment.Mary Daly, president of the Federal Reserve Bank of San Francisco, said markets were doing some of the Fed’s work for it: On Thursday, she said the recent move in longer-term rates was equivalent to “about” one additional interest rate increase from the Fed.Yet there are questions about whether the pop in rates will last. Some analysts suggest there could be more room to rise, because investors have yet to fully embrace the Fed’s own forecasts for how long they think rates will remain elevated. Others are less sure.“I think we’re near the end of this tantrum,” Mr. Singh said, noting that the jump in Treasury yields will worsen the growth outlook, causing the Fed itself to shift away from higher rates.“One of the reasons that I think this move has overshot is that it’s self-limiting,” he said.Plenty of people in the real economy are hoping that borrowing costs stabilize soon. That includes in the housing market, where mortgage rates are newly flirting with an 8 percent level, up from less than 3 percent in 2021.In Arizona, Ms. Mahmood-Corley is seeing some buyers push for two-year agreements that make their early mortgage payments more manageable — betting that after that, rates will be lower and they can refinance. Others are lingering on the sidelines, hoping that borrowing costs will ease.“People take forever now to make a decision,” she said. “They’re holding back.”” More