Investors Grow More Confident Fed Will Pull Off a Soft Landing
Mutual funds and hedge funds are putting money in stocks that would benefit from slowing inflation, falling rates
3 min
A few months ago, Wall Street rebuffed the idea that the Federal Reserve would be able to pull off a soft landing.
Now, a growing crowd is betting on exactly that happening.
Mutual funds and hedge funds managing roughly $4.8 trillion in assets have been putting money into stocks that stand to benefit from inflation cooling, interest rates going down and the U.S. economy avoiding a recession, according to an analysis by Goldman Sachs Group Inc.
The investors have larger-than-average positions in shares of industrial, materials and energy companies, Goldman’s analysis found. All three groups tend to be sensitive to changes in the economy, meaning investors’ bets should eventually pay off if the U.S. can avoid a deep and prolonged downturn, or a “hard landing.”
Recent data have offered investors some hope for that scenario. The labour market has remained strong, with the unemployment rate clocking in at a historically low 3.7% last month. Consumer spending is up. And there are signs that inflation is easing. Consumer prices rose 7.7% last month, a brisk clip but nevertheless the smallest year-over-year gain since January.
It is looking increasingly likely that the U.S. will be spared “the typical scar tissue of a steep economic downturn,” Katie Nixon, chief investment officer for Northern Trust Wealth Management, said in written comments.
The debate still rages on Wall Street, of course, and other investors say a deeper recession could be looming.
There are additional challenges remaining—one of them being a red-hot labour market. In a speech last month, Federal Reserve Chair Jerome Powell implied that wages are still growing too quickly to allow inflation to return to the central bank’s 2% target.
Investors might get some clarity on both inflation and the Fed’s thinking in coming days.
The Labor Department will release its November reading for the consumer-price index Tuesday. The report will offer the Fed its last look at inflation before it announces its final interest-rate decision of the year on Wednesday.
The central bank is widely expected to raise rates by half a percentage point. That would mark its smallest rate increase since March, when it began tightening monetary policy once again. But a surprisingly strong inflation reading could throw into question the Fed’s plans to slow its pace of interest-rate increases in 2023. Stocks fell Friday and suffered weekly losses after data showed producer prices rose more than expected in November.
“Everybody is going to be looking at the direction of that CPI number,” said Brian Overby, senior markets strategist at Ally. “As long as we’re going in the right direction, it doesn’t even have to be a big number to the downside.”
History doesn’t favour the Fed. Data from the central bank show the economy fell into recession nine of the past 12 times the Fed tightened monetary policy.
A downturn would likely put more pressure on an already beaten-down market.
Stocks are up significantly from their October lows. Butthe S&P 500 is still down 17% for the year, on course for its worst annual performance since the 2008 financial crisis.
The stock market has typically fallen roughly 30% in recessions going back to 1929, according to Dow Jones Market Data.
Still, analysts and economists at a number of firms, including Goldman Sachs, BMO Wealth Management and Credit Suisse Group AG, are predicting the economy will be able to avoid a hard landing next year.
“The most significant challenges to consumer spending are most likely in the past,” Goldman economist Joseph Briggs wrote in a note. The bank expects inflation to continue moderating next year, but the unemployment rate rising only to around 4.1% from the current 3.7%.
Whether there winds up being a recession or not, many say they are in agreement on one thing: Markets are likely to remain volatile for some time.
“2022 wasn’t a picnic, but it was clear that [the Fed] had to tighten policy,” said Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute.
The Fed’s path over the coming months—and consequently, the markets’ outlook—looks less straightforward, Mr. Smart said.
He added that, in the near term, he is recommending that clients hold on to extra cash to navigate swings in the markets.
“It depends on how low inflation will go and how long it will take to get there. And that determines what kind of potential damage will come along the way,” Mr. Smart said.
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
What this ‘median’ 7-figure price tag scores across Australia.
