© Reuters. FILE PHOTO: Vegetables are pictured at a produce shop at Reading Terminal Market after the inflation rate hit a 40-year high in January, in Philadelphia, Pennsylvania, U.S. February 19, 2022. REUTERS/Hannah Beier/File Photo
By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer sentiment deteriorated in October, with households expecting higher inflation over the next year, but labor market strength was likely to continue supporting consumer spending.
The third straight monthly decline in sentiment reported by the University of Michigan on Friday was across nearly all demographic groups and likely reflected a rise in gasoline prices, which has since reversed. Consumers’ 12-month inflation expectations increased to a five-month high.
Sentiment was also likely hurt by violence in the Middle East, with the cutoff date for the survey Oct. 11, days after Palestinian Islamist group Hamas launched its attack on Israel. Other factors that could have weighed on morale include the continuing strike in the automobile industry and political dysfunction in Washington.
“There were a lot of reasons sentiment could have fallen, given different geopolitical events and the macro picture being highly uncertain, but the movements in sentiment are pretty volatile and don’t necessarily move in line with broader spending,” said Shannon Seery, an economist at Wells Fargo in Charlotte, North Carolina. “Our forecast for spending is a continued slowdown rather than a collapse.”
The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 63.0 this month compared with 68.1 in September. Economists polled by Reuters had forecast a preliminary reading of 67.2.
So far there has not been a strong correlation between sentiment and consumer spending, which continues to be driven by higher wages from a tight labor market. Consumers still have excess savings accumulated during the COVID-19 pandemic. The economy created 336,000 jobs in September.
The survey’s reading of one-year inflation expectations increased to 3.8% this month from 3.2% in September. This was the highest reading since May 2023 and remained well above the 2.3% to 3.0% range seen in the two years before the pandemic.
The five-year inflation outlook rose to 3.0% from 2.8% in the prior month, staying within the narrow 2.9% to 3.1% range for 25 of the last 27 months. Federal Reserve officials are closely watching inflation expectations as they contemplate the future course of monetary policy.
Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range.
Stocks on Wall Street gave up some gains on the inflation expectations data. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.
But the news on inflation was not all downbeat.
A separate report from the Labor Department showed import prices barely rising in September as a strong dollar depressed prices of non-petroleum products, which over time will help to lower domestic inflation.
Import prices edged up 0.1% last month after climbing 0.6% in August. Economists had forecast import prices, which exclude tariffs, would gain 0.5%.
“The stronger U.S. dollar on the back of higher bond yields may be in danger of pricing American exports out of world markets, but it is doing one good thing, which is tamping down the prices of imported goods coming into the country and aiding the Fed’s inflation fight,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
Prices for imported fuel rose 4.4% after advancing 8.8% in August. Imported food prices dropped 1.3%. Excluding petroleum, import prices decreased 0.3%.
In the 12 months through September, import prices dropped 1.7% after falling 2.9% in August. Annual import prices have now declined for eight straight months.
While data this week showed producer and consumer prices rising more than expected in September, underlying inflation remained moderate. That trend, together with a rise in U.S. Treasury yields is expected to discourage the Fed from raising interest rates next month.
Excluding fuels and food, import prices slipped 0.1% after dropping 0.3% in August. These so-called core import prices decreased 1.1% on a year-on-year basis in September, reflecting the dollar’s strength against the currencies of the United States’ main trading partners.
The dollar has gained about 1.95% on a trade-weighted basis so far this year. The cost of imported capital goods fell 0.1% for a second straight month in September.
Prices for imported motor vehicles, parts and engines also dipped 0.1%, while those of consumer goods excluding automobiles were unchanged. The cost of goods imported from China dropped 0.3% after being unchanged in the previous month.
They fell 2.6% on a year-on-year basis in September, the largest decline since October 2009. Prices of goods imported from Canada increased 0.8%, but declined 6.7% on a year-on-year basis. Mexican goods import prices rose 3.7% year-on-year.
“Declining import prices for consumer goods and auto parts should minimize the risk of a resurgence in consumer inflation,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:) in Charlotte, North Carolina.
JPMorgan CEO Jamie Dimon warns of recession and high interest rates
NEW YORK – JPMorgan Chase (NYSE:) CEO Jamie Dimon has issued a stark warning about the potential for a global economic downturn, emphasizing the need for preparedness amid rising inflation and economic headwinds. According to media reports today, Dimon cautioned that high-interest rates, which could peak at 7%, may lead to a soft landing or even a mild recession as the global economy seeks to stabilize after the pandemic.
Dimon pointed out that while the U.S. has managed to avoid a recession throughout 2023, it’s crucial not to expect an endless economic boom. He highlighted that severe risks stemming from the pandemic’s aftermath could significantly impact both U.S. and global markets. Wall Street and international investors are paying close attention to Dimon’s experienced-based insights as they face an uncertain financial climate.
Further complicating the economic landscape, Dimon drew attention to the U.S. economy’s “addiction” to debt and central bank liquidity injections, likening it to “heroin.” He argued that pandemic-era stimulus measures have created an economic “sugar high,” with artificially boosted consumer spending and stock market values. Although these efforts helped prevent a depression, he warned against underestimating the persistence of inflationary pressures and anticipates more interest rate hikes.
Dimon also suggested that significant drops in global corporate profits could be on the horizon as economies attempt to return to normalcy without government stimulus. Additionally, he underscored geopolitical tensions, particularly in the Middle East, as potential triggers for market disruptions that could further complicate the economic recovery.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
China has more space to cut reserve ratio instead of interest rates, says ex-official
© Reuters. FILE PHOTO: Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo
BEIJING (Reuters) – China is likely to implement proactive fiscal policy next year as there is still a need for the world’s second-biggest economy to realise stable growth, a former central banker was cited as saying in state-owned media on Sunday.
The comment comes as the economy struggles for momentum after being hobbled by lengthy pandemic-busting measures, while market watchers fear severe debt woe among major property developers could spill over to other sectors.
“It is expected that next year China will continue to implement positive fiscal policy, monetary policies that are in line with positive fiscal policy, with a relatively large policy space to lower the reserve requirement ratio,” Sheng Songcheng, a former statistics and analysis director of the People’s Bank of China, said in comments reported by Shanghai Securities News.
With interest rates and loan prime rates at low levels, there is more space to cut banks’ reserve requirement ratio (RRR) than to cut interest rates, Sheng said.
The central bank lowered the RRR in September for the second time this year to boost liquidity and support economic recovery. Analysts expect another cut by year-end.
The weighted average RRR for financial institutions was around 7.4% after the cut.
China is prudent in cutting interest rates as its monetary policy needs to consider internal and external balance, Sheng said.
“It is expected that the interest rate differential between China and the U.S. will enter a period of stabilisation, so the (yuan) is likely to maintain a mild appreciation trend, but the appreciation is limited.”
‘Way too early’ to declare victory over inflation, says ECB’s Nagel
© Reuters. Joachim Nagel, President of Germany’s federal reserve Bundesbank addresses the media during the bank’s annual news conference in Frankfurt, Germany March 1, 2023. REUTERS/Kai Pfaffenbach/File Photo
NICOSIA (Reuters) – Euro zone inflation will carry on declining in the months ahead but at a slower pace, Bundesbank President Joachim Nagel was quoted as telling Cypriot newspaper Kathimerini on Sunday.
Euro zone inflation eased to 2.4% in November from 2.9% in October, well below expectations for a third straight month and fuelling market speculation that European Central Bank (ECB) rates could come down quicker than the bank now guides.
“We have not yet won the fight against inflation,” said Nagel, who visited Cyprus last week. He described inflation as a ‘stubborn, greedy beast’ and said the next phase of wrestling it down would be more difficult.
“Add in a scenario where an escalation of geopolitical tensions could imply higher inflation and it becomes clear that it would be way too early to declare victory over high inflation rates,” said Nagel, an influential voice on the ECB’s rate setting Governing Council.
“I can’t tell whether interest rates have already reached their peak. On the ECB Governing Council we decide on interest rates on a meeting by meeting basis following our data-dependent approach.”
Nagel added that the outlook for inflation was tempered by a weakening of dampening base effects and the phasing out of measures to cap high energy prices in many European countries. He also pointed to an expected continuation of strong wage growth.
“All in all, I expect inflation to carry on declining, but at a slower pace and with possible bumps along the way,” Nagel said.
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