Investors are worried about a global slowdown as central bankers take a hard line against inflation, looking to cool the economy by raising interest rates.
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By: Ella Koeze
Stocks slid on Thursday, adding to a brutal downdraft that has been fueled by investors’ unceasing concerns about the health of the economy and dragging Wall Street to its lowest point since late 2020.
The backdrop for Thursday’s selling was the same as it has been for weeks: Investors fear a recession as central bankers take a hard line against inflation, looking to cool the economy by raising interest rates. Stocks have whipsawed all year, tracking shifting forecasts for inflation, interest rates and growth, but the latest wave of selling has pulled major indexes in the United States to new lows for the year.
On Thursday, the S&P 500 fell 2.1 percent, its sharpest daily drop in over two weeks, a loss that means the index has fallen in seven of the last eight trading days and plunged more than 6 percent in that period. After a 24 percent decline this year, the S&P 500 is trading at levels last seen in November 2020.
The nervousness among investors was evident in other markets as well, and shares in Europe, government bonds and oil prices were all lower.
An economic firestorm in Britain over the past few days added to the turmoil in global markets, after the British government announced last week a new tax-cut plan that sent bond markets into a tailspin as investors worried about a surge in borrowing. Government bonds, considered a safe investment, plummeted in value in the wake of that announcement, raising widespread concern about the ability of the financial system to withstand the shock.
Such tremendous volatility in bond prices over the past week has become a hallmark of financial markets this year, as rapidly rising interest rates have led to sharp changes in the value of government debt. It took an intervention on Wednesday by the Bank of England, which pledged to buy British government bonds on “whatever scale is necessary,” to calm down investors.
By Thursday, trading in government bonds in both Britain and the United States was calmer, though still uneasy, and yields rose as prices fell. In the United States, the yield on the 10-year Treasury note rose to about 3.76 percent, after briefly crossing 4 percent on Wednesday for the first time since October 2008. In Britain, the yield on the 10-year gilt, or bond, also rose, to 4.14 percent.
While the chaotic response to Britain’s spending plan added a new layer of concern, the main driver of Wall Street’s unease this month — and for most of the year — has been the threat posed by inflation that’s running at its fastest pace in four decades.
The Federal Reserve, led by Jerome H. Powell, has been adamant about its intention to cool the economy, suggesting that it is willing to do so even if it means tipping the country into a recession. Fed officials are hopeful that they will be able to bring inflation down to their 2 percent target rate without triggering an economic downturn, but investors and economists are skeptical.
Analysts say the market’s worry won’t end until central bankers see that the economy is slowing down — which in turn might prompt the Fed to pause its interest-rate raising campaign.
“That’s about the only thing that’s going to slow the Fed is if unemployment starts rising very, very rapidly,” said Victoria Greene, chief investment officer at G Squared Private Wealth.
Though broad measures of economic activity in the United States show that growth has been somewhat anemic this year, there are few signs that the labor market is slowing sharply. Economists expect the government to report on Oct. 7 that employers added about 250,000 jobs in September, a survey by Bloomberg showed, and that the unemployment rate held steady at 3.7 percent.
Investors will get a number of other economic updates in the days ahead, including more data on Friday on inflation in Europe and the United States. On Thursday, Germany reported that consumer prices there rose at a 10.9 percent annual rate as energy and food costs soared.
The pan European Stoxx 600 index fell 1.7 percent, and the London’s FTSE 100 fell 1.8 percent. Tokyo’s Nikkei 225 rose 0.95 percent, and Hong Kong’s Hang Seng fell 0.49 percent.
The price of West Texas Intermediate crude oil fell 92 cents, settling at $81.23 a barrel.
Joe Rennison contributed reporting.
Annual change in Germany’s Harmonized Index of Consumer Prices
By The New York Times
Consumer prices in Germany rose by double digits over the year through September as energy and food costs soared, leading the government in Berlin to impose a cap on natural gas prices amid growing anger from people and businesses squeezed by accelerating inflation.
Inflation rose at a 10.9 percent annual pace in September, up from 8.8 percent the month before, official data released on Thursday showed. It was the first time since the creation of the euro, in 1999, that the bloc’s largest economy recorded such a large leap in prices. In fact, by some measures, it was the highest rate of inflation that Germany had seen since 1951, well before the reunification of the former East and West.
Energy prices rose nearly 44 percent in September, the biggest contributor to the higher-than-expected overall result, and have broken successive records since Russia invaded Ukraine in February.
Rebates on public transportation and for gas that had helped limit price increases over the summer expired at the end of August, contributing to the jump, economists said, but they warned that prices had not yet peaked. The country’s four leading economic research institutes are predicting the German economy will contract in 2023, before recovering the following year.
“The high energy and food prices, which are likely to rise further in the coming year, are causing significant losses in purchasing power,” said Torsten Schmidt, the head of economic research at the Leibniz Institute for Economic Research.
The rapid German inflation will complicate efforts by the European Central Bank to get price increases under control. The E.C.B. has been raising interest rates aggressively to tame inflation across the eurozone, where some member states, including the Baltics, have already reached double-digit inflation.
The latest data on consumer prices in the eurozone will be released on Friday; economists expect the annual pace of inflation to have hit 9.6 percent in September, according to FactSet, up from 9.1 percent in August.
This month, the E.C.B. increased its key rate by three-quarters of a percentage point, matching its largest rise since the euro’s founding. Traders and economists expect a similar increase at the central bank’s next meeting, in late October. Germany’s inflation data present an “upside risk” to Friday’s eurozone numbers, Claus Vistesen of Pantheon Macroeconomics wrote in a research note. The eurozone rate could hit 10 percent, he wrote, which would be “more than enough” to justify another rate increase of three-quarters of a point.
The German government announced a package of subsidies worth 200 billion euros ($195 billion) on Thursday, in addition to proposing a limit on how much individuals and industrial users will have to pay for natural gas. The goal is to “cushion rising energy costs and the most severe consequences for consumers and businesses,” the government said.
“Prices have to come down,” Chancellor Olaf Scholz told reporters on Thursday when announcing the package, flanked by his economy and finance ministers. “To make prices drop, we are rolling out a wide defense shield.”
Details about how the price cap will work have not yet been announced.
A key measure of U.S. economic output grew more slowly in the first half of the year than previously believed, government data released Thursday showed.
Revisions brought two measures of output closer together, but it still isn’t clear whether the economy is shrinking or growing.
Note: Adjusted for inflation.
Source: Bureau of Economic Analysis
By Ella Koeze
Gross domestic income, adjusted for inflation, grew at a 0.8 percent annual rate in the first quarter of the year and barely grew at all — at just a 0.1 percent rate — in the second, the Commerce Department said Thursday. That was sharply weaker than the 1.8 percent and 1.4 percent growth rates reported in earlier estimates.
Gross domestic product, a better-known measure of inflation-adjusted output, shrank during both periods, at a 1.6 percent rate in the first quarter and a 0.6 percent rate in the second. Those figures were unchanged from earlier estimates.
Taken together, the two measures suggest economic growth was at best anemic in the first half of the year. At worst, the economy had been shrinking for two consecutive quarters, a common, though unofficial, definition of a recession. An average of the two measures, which some economists consider more reliable than either individual figure, shows that output shrank slightly in the first half of the year.
The conflicting signals sent by the two measures of output in recent quarters had been something of an economic mystery because, in theory, the two indicators should be identical. G.D.P. measures the value of all the goods and services produced and sold in the country; the lesser-known gross domestic income measures all the money earned by individuals, businesses and other organizations. Because one person’s spending is someone else’s income, the two figures should add up to the same amount.
In practice, the two measures rarely align perfectly because they are derived from different data sources. Recently, however, they diverged sharply, which government statisticians attributed in part to the big shifts in economic activity caused by the pandemic, as well as difficulty accounting for the huge aid programs enacted to combat it. Before the latest revisions, government data showed gross domestic income as $773 billion larger than gross domestic product in the second quarter of this year, a gap of nearly 4 percent.
The updated data released Thursday helped narrow the gap to 1.3 percent. Gross domestic income was revised downward both last year and this year, mostly because workers’ earnings grew less than previously believed. Gross domestic product was revised upward in 2020 and 2021, mostly because of stronger consumer spending, especially on services, as well as increased exports.
Those upward revisions to G.D.P. years mean that the recovery, taken as a whole, looks stronger than earlier figures suggested. They indicate that G.D.P. returned to its prepandemic growth path at the end of last year, a remarkably rapid recovery from the deep pandemic recession.
More recently, however, the fastest inflation in decades has knocked the wind out of the economy’s sails. In the third quarter, which ends on Friday, most forecasters believe G.D.P. has grown, but only barely. A forecasting model from the Federal Reserve Bank of Atlanta, which has not yet been updated to reflect the revised data, estimates that G.D.P. grew at just a 0.3 percent rate in the third quarter.
The revisions are part of an annual process in which the government incorporates more complete data from the Internal Revenue Service, state unemployment insurance systems and other sources that aren’t available in time for the Commerce Department’s quarterly estimates. The updates affect data going back five years, although the changes to earlier years were mostly small.
A stunning rebuke from the International Monetary Fund this week underscored one of the biggest risks of the new British government’s plan to slash taxes on high earners, Jim Tankersley reports for The New York Times: It could exacerbate rapid inflation and destabilize markets at a precarious economic moment.
The International Monetary Fund joins a chorus of bankers, investors and officials who say the tax cuts could stoke consumer demand by giving people more money to spend, pushing high prices even higher. Many economists say British officials are ignoring the lessons of the most recent bout of tax cuts — those engineered by former President Donald J. Trump.
Liz Truss, Britain’s new prime minister, has staked her fledgling government on a package of tax cuts and deregulation meant to energize the economy. It includes a five-percentage-point cut in the country’s top income tax rate, which applies to those earning more than 150,000 pounds, or about $164,000, a year.
Mr. Trump also delivered “massive tax cuts” in 2017. Empirical research on the early results of those cuts suggests that they mostly helped the economy by temporarily increasing consumer demand, an outcome that could prove particularly damaging in the high-inflation environment that Britain and much of the world are experiencing.