Inflation Increases Risk of Recession In Global Economy

The Federal Reserve’s bid to calm inflation by raising interest rates and withdrawing emergency stimulus programs is gearing up just as the global economy is displaying worrisome signs of weakness, aggravated by the war in Ukraine and covid’s continuing hold on industrial supply chains.

The risk, some economists said, is that the Fed and other central banks that are implementing similar anti-inflation policies may adjust too slowly to a complex and fast-changing global landscape.

However, the persistence of a tight labour market and high inflation pose concerns for the Biden administration and the Federal Reserve. This week, the US central bank raised its benchmark interest rate by 0.5 percentage points for the first time since 2000 — to a target range of between 0.75 and 1 per cent — to curb rising prices. Inflation in the US is currently running at a 40-year high.

Meanwhile, US stocks fell on Friday, extending sharp losses from the previous session, as signs of a tightening jobs market compounded inflation worries. European shares also declined, with the regional Stoxx 600 index losing almost 2 per cent, putting it on track to end the week more than 4 per cent down. London’s FTSE 100 lost 1.3 per cent and Germany’s Xetra Dax also fell 1.3 per cent.

The Nasdaq Composite, comprised of many of the largest US technology companies, closed down 5 per cent yesterday, in its biggest one-day decline since 2020. The blue-chip S&P 500 index also declined on Thursday with a 3.5 per cent loss. As the world continues to deal with the economic impact of the pandemic, the war in Ukraine is exacerbating inflationary problems.

Central banks are faced with the risk that controlling rising prices could lead to economic decline. The Bank of England warned yesterday that the UK economy was heading towards a recession and inflation would hit 10 per cent this year, as it lifted the interest rate to 1 per cent, the country’s highest level since 2009.

With UK prices likely to rise at their fastest rate in more than 40 years as sustained double-digit inflation becomes possible for the first time since the 1970s, the BoE — which is celebrating 25 years of independence this week — faces challenges that it has not encountered in the past quarter of a century, writes economics editor Chris Giles.

Line chart of CPI inflation and successive BoE forecasts, 2021-22 (%) showing The Bank did not expect to have to tackle double-digit inflation Latest news Ukraine urges Médecins Sans Frontières to evacuate wounded from Azovstal steel plant Glass Lewis advises Amazon shareholders to vote against pay policy German industry suffers biggest drop in output since start of pandemic For up-to-the-minute news updates.

Need to know: the economy China’s president Xi Jinping has reaffirmed his commitment to the country’s controversial zero-Covid strategy, warning against “any slackening” in the effort and vowing to crack down on criticism of the policy despite signs of damage to the economy. US homebuyers are stretching their budgets to buy new homes and rushing to strike deals to avoid higher mortgage financing costs, according to the latest industry data.

Mortgage rates have reached their highest levels in more than a decade, according to the recent Freddie Mac survey. Latest for the UK/Europe Momentum is building for the European Central Bank to raise interest rates in July to fight soaring inflation, after dovish policymakers indicated they were ready to accept an end to almost eight years of negative borrowing costs.

The EU is considering providing more time and money to Hungary to adapt to an embargo on Russian oil after talks on Brussels’ plans for imposing sanctions became “stuck”. Vodafone, the UK telecoms group under pressure from an activist investor, has strengthened its board with two appointments. They are Simon Segars, former chief executive of Arm, the UK-based chip business, and Delphine Cunci, an industry heavyweight in France.

Europe’s largest activist fund Cevian Capital has been pushing the mobile group to refresh its management, which it believes has insufficient experience. Help us compile our ranking of Europe’s Diversity Leaders. Employees and workplace experts are invited to complete a short survey to assess companies’ progress on inclusivity by June 12.

Coronavirus infections in England have fallen to their lowest level since the start of the year, according to official data published today, as the spread of the disease slows across the UK. Global latest US regulators have travelled to mainland China to discuss a potential compromise over audit disclosures that could stop around 270 Chinese companies from being delisted by New York exchanges, according to two people close to the matter.

Tomorrow you can hear Henry Kissinger, Chimamanda Ngozi Adichie and more at our inaugural US FTWeekend Festival in Washington, DC. Business German sportswear group Adidas has warned that its operating profit this year would be lower than previously expected, as the company struggles with disrupted supply chains, closed shops in China and rising costs.

Operating profit tumbled 38 per cent to €437mn in the first quarter as the company was hit by the economic fallout from China’s strict Covid policies. Australia’s biggest investment bank Macquarie Group profited from volatility on global commodity markets and record dealmaking, driving full-year net profit up 56 per cent from the previous year to a record high of A$4.7bn ($3.3bn).

British Airways has been forced to cut flight schedules further as it struggles to hire staff quickly enough to meet renewed demand for travel after culling nearly 10,000 jobs during the pandemic, raising concerns that the carrier could miss out on a bumper summer for European airlines. France has warmly welcomed Binance’s bid to put down roots in one of Europe’s top financial centres, drawing a deep divide with watchdogs in the UK that rejected the crypto giant.

Binance this week received a nod from French financial regulators, a move that clears the way for the crypto exchange to establish a significant presence in the G7 nation that could also help the company unlock access to other jurisdictions across Europe. Boeing will move its headquarters to the Washington, DC area from Chicago, bringing the company closer to federal lawmakers and rival defence contractors.

The move comes during a tumultuous period for the company, which has been subject to greater regulatory scrutiny following two fatal crashes of its 737 Max jet in 2018 and 2019 as well as the discovery of flaws in its 787 Dreamliner. Science round-up The true total global pandemic death toll was about 15mn by the end of 2021, based on an analysis of excess mortality, said the World Health Organization.

Source: Federal Reserve is raising interest rates even as the global economy struggles – The Washington Post

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A Recession is Now The Base Case Scenario For Wells Fargo

Wells Fargo slashed its economic outlook this week, with a year-end recession now the bank’s base case scenario as the Federal Reserve moves to tame red-hot inflation.

In an updated forecast, Wells Fargo cuts its 2022 GDP growth target to 1.5%, down from 2.2%, and slashed its 2023 target to a decline of 0.5%. The bank had previously predicted that gross domestic product, the broadest measure of goods and services produced in a nation, would expand by 0.4% next year.

Overall, Wells Fargo expects a total peak-to-trough contraction of 1.3% across three quarters. By comparison, the economy shrunk 10% during the very brief, but sharp, pandemic-induced recession in 2020. During the 2008 financial crisis, the economy fell by 3.8%.

In making the new projection, Wells Fargo noted that “consumer activity has weakened” considerably as the economy confronts new COVID-19 outbreaks and restrictions, sky-high inflation and a strong U.S. dollar, in addition to the Russian war in Ukraine and aggressive Fed monetary policy.

Economic growth in the U.S. is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.

Wells Fargo is not alone in its gloomy economic outlook; there are growing fears on Wall Street that the Fed may inadvertently trigger a recession with its war on inflation, which climbed by 8.3% in April, near a 40-year high. Other firms forecasting a downturn in the next two years include Bank of America, Fannie Mae and Deutsche Bank.

Fed policymakers already raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation. Chairman Jerome Powell recently pledged that officials will “keep pushing” until inflation falls closer to the Fed’s 2% target.

Still, he has acknowledged there could be some “pain associated” with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured. 

“It’s going to be a challenging task, and it’s been made more challenging in the last couple of months because of global events,” Powell said Wednesday during a Wall Street Journal live event, referring to the Ukraine war and COVID lockdowns in China.

But he added that “there are a number of plausible paths to having a soft or soft-ish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”

Source: A recession is now the base case scenario for Wells Fargo | Fox Business

Wells Fargo & Co. clients are coping well with inflation and rising interest rates, which hasn’t yet stressed business at the bank, according to Chief Financial Officer Mike Santomassimo.

“So far, so good,” he said Thursday in a Bloomberg Television interview. “Clients come into this both on the consumer side and the corporate side in a much better position than they would have in other rising-rate environments.”

Wells Fargo reported first-quarter results earlier in the day, missing Wall Street estimates on revenue and expenses. Non-interest expenses were $13.9 billion, higher than what analysts had forecast. Revenue declined, bringing net income down to $3.7 billion, the San Francisco-based lender said in a statement

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How To Protect Yourself From A Possible Recession

You may soon start hearing pundits talk about the dreaded term “recession.” It’s one of those words used by finance people that comes across as ominous and foreboding. When people discuss recessionary times, it conjures up fears of long lines at the gas station, a fading economy, high inflation, job losses and general malaise.

A recession is a decline in GDP for two or more consecutive quarters. Although it’s not a perfect science, there is an old joke about economists who often get things wrong— “He’s predicted nine of the past five recessions”—implying the prognosticator is merely guessing and missing the mark on too many occasions to be taken seriously.

The Signs Of An Upcoming Recession

The United States is starting to see some of the warning signs of a recession. When the stock market plummets by 20%, it’s called a “bear market” and the massive losses contribute to a recession, as people lose faith in the economy and curtail expenditures. When people invest in the market and realize substantial profits, there is a wealth effect created. The windfall from investing emboldens people to spend more money, as they are confident that the good times will last forever.

When dramatic declines in stocks, bonds and cryptocurrencies happen, it has the opposite effect. Fear and panic take hold. Risk-taking is over and people go into survival mode, ruthlessly curtailing expenses.

Another factor for a recession is that inflation is raging to 40-year highs, further causing Americans to lose confidence. To pour more cold water on the economy and stock market, the Federal Reserve plans on continuing to raise interest rates. There is a fear that all of the strides the U.S. has made since the economy reopened will evaporate.

Many, if not all, of the stock gains from the meme subreddit Wallstreetbets crowd over the last year have already been lost. The same holds true for other investors too. If you have a company-sponsored 401(k) plan or IRA account, don’t look at the statements, as it will ruin your day.

Deutsche Bank economists wrote in a report to clients last month, “We will get a major recession,” becoming the first major bank to bearishly predict a U.S. recession. Bank of America has publicly stated that the mood in financial markets has been “recessionary.” Goldman Sachs said the tight labor market has “has caused a meaningful increase in the risk of recession.”

What Happens In A Recession

Recessions are usually characterized by job losses. You may think to yourself that is not indicative of the current labor market. Within the past year, the job market has seen a robust recovery. Last Friday, the U.S. Department of Labor reported that 428,000 jobs were added in April, with the unemployment rate remaining steady at 3.6%.

Job openings hit a record 11.5 million in March. That same month, a historic 4.5 million people quit their jobs, showing that Americans feel confident enough to quit their positions, as they believe there are plenty of other opportunities available.

Nevertheless, depending upon how things progress, there could be further downsizings in other industries, as the U.S. has seen in the tech sector. As there has been so much hiring due to the buoyant economy, it could turn out the executives were too optimistic and now need to trim the staff.

Concerns over a slowing economy could take the steam out of the venture capital engines that have been producing numerous unicorn startups. The unprofitable outfits may not gain further funding and resort to layoffs.

What happens is that the U.S. could enter a situation in which things spiral downward. Rapidly rising unemployment is also another driver of a recession. As more people lose their jobs and business conditions deteriorate, those who find themselves in between roles will find it harder and take longer to procure a new role.

Fear Takes Over

It’s almost a self-fulfilling prophecy. Fear of a recession prompts businesses to cut costs to conserve financial assets. They want to have the cash to get through the rough patches. The aggressive cost-cutting measures usually include pay cuts and job losses. Unfortunately, this is a common occurrence. The economy goes through these boom-and-bust cycles fairly regularly. For many people, there are not many other choices than to hunker down and ride it out until better times arrive.

There is a behavioral component too. As there is an eroding level of confidence in the economic and financial system, demand for goods and services declines. There comes a point in which the business cycle reverses course, due to the toxic confluence of rising inflation, loss of faith, joblessness, plunging stock market and housing prices, followed by a fear of further losses, making the economy contract.

How To Get Through A Recession

Now is the time to hyperfocus on your job and career. Make sure your position is secure. Lock in any verbal agreements for a raise, promotion and bonus. It will be awkward and uncomfortable, but ask your boss about how stable the company is and where you fit in. Ask them if they view you as irreplaceable and a future rising star.

If the answers are not to your liking, don’t sulk. Take action. Immediately go into job-hunt mode. Get in touch with top recruiters in your space. Speak with career coaches and résumé writers. Start networking on LinkedIn. Now is not the time to be shy. Push yourself to ask everyone in your network for job leads and introductions.

If you lose your job, make sure you put money aside to get through the time between now and when you secure another position. Keep expenditures down and pay down your credit card and other balances that charge ludicrously high interest rates. Switch investments from risky assets to something more secure or dividend-paying.

Consider going back to school to learn a new profession that is marketable and pays well. This is what happened after the dot-com bubble burst, the financial crisis and the beginning of the pandemic. People took shelter, not only at home, but in colleges, MBA programs and law school.

They used the economic downturn to learn and earn more, once they’ve finished their education. You could also take on gig work, start a side hustle or pivot toward starting a business. Use the time wisely to reevaluate what you really want to do with your work-life.

I am a CEO, founder, and executive recruiter at one of the oldest and largest global search firms in my area of expertise

Source: Don’t Panic: How To Protect Yourself From A Possible Recession

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April Retail Sales Rise 0.9%, Even as Consumers Confront Sky-High Inflation

Americans ramped up their spending at retail stores in April, a sign that consumers are still weathering the inflationary storm even as prices continue to hover near a 40-year high.

Retail sales, a measure of how much consumers spent on a number of everyday goods, including cars, food and gasoline, rose 0.9% in April from the prior month, the Commerce Department said Tuesday. That was in line with expectations from Refinitiv economists, but it marked a noted slowdown from the upwardly revised 1.4% gain in March.

The so-called core retail sales, which exclude automobiles, gasoline, building materials and food services and are most closely correlated with the consumer spending aspect of the nation’s gross domestic product, rose 1% in April.

People walk through a shopping area in Manhattan on June 7, 2021, in New York City. (Angela Weiss/AFP via Getty Images / Getty Images)

The April advance – which is not adjusted for inflation, meaning that consumers may be spending the same but getting less bang for their buck – was led by a burst in spending at bars and restaurants as well as on vehicles, clothing, furniture and electronics.

Receipts at gas stations actually dropped last month as prices at the pump briefly fell from highs recorded in March. However, gas prices have since notched a new record, climbing to a national average of $4.52 per gallon, up from $3.04 one year ago.

“American consumers continued to spend more at retail stores in April, despite inflation as lower gasoline prices helped to boost spending on discretionary items,” said Tuan Nguyen, a U.S. economist at RSM. “But it won’t last long as gasoline prices reached a record high in May.”

Signage displays fuel prices at a Shell gas station in San Francisco, California, on March 7, 2022.  (David Paul Morris/Bloomberg via Getty Images / Getty Images)

There are other signs that inflation is beginning to weigh on consumers: Walmart reported earlier Tuesday that its profit took a beating in the first quarter of the year as the company grappled with soaring prices for everyday goods like food and fuel and higher costs from snarled supply chains.

The data comes as consumers face the worst inflation spike in decades The government reported last week that the consumer price index climbed 8.3% in April from the previous year, close to a four-decade high. The reading was much higher than economists expected and underscores that inflationary pressures in the economy remain strong.

Rising inflation is eating away at strong wage gains that American workers have seen in recent months: Real average hourly earnings decreased 0.1% in April from the previous month, as the inflation increase eroded the 0.3% total wage gain, according to the Labor Department. On an annual basis, real earnings actually dropped 2.6% in April.

Source: April retail sales rise 0.9%, even as consumers confront sky-high inflation | Fox Business

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Will Inflation And The Stock Market Conspire To Kill The 4% Rule?

1-23-1

A recent WSJ headline sent chills down the backs of every retiree—”Cut Your Retirement Spending Now, Says Creator of the 4% Rule.”

In the article, the WSJ quoted the father of the 4% rule, William Bengen, as saying that “there’s no precedent for today’s conditions.” Stock and bond prices are still at record highs. Mix in a reference to 8.5% inflation, and the WSJ starts to sound like an insurance salesperson pitching indexed annuities.

So are things really that bad? And do retirees need to rethink the 4% Rule? I don’t think so, and here’s why.

The 4% Rule is Now the 4.4% Rule

In the article, Mr. Bengen said he believes a safe initial withdrawal rate is 4.4%. Yes, that’s an increase from his initial findings in his 1994 paper.

In his 1994 paper, he assumed retirees invested in the S&P 500 and intermediate Treasury bonds. That’s it. Since then he expanded the asset classes to include mid-cap, small-cap, micro-cap and international stocks. This diversification caused him to increase the safe withdrawal rate from 4% to 4.7%. Because of the unprecedented conditions noted above, however, new retirees might want to start at 4.4%, he said.

As far as I can tell, the 4.4% rate is not based on data. Still, it represents a 10% increase, not decrease, from his initial 4% rule. That doesn’t sound so bad.

“The combination of 8.5% inflation with high stock and bond market valuations make it difficult to forecast whether the standard playbook will work for recent retirees,” said Bengen. He’s even gone so far as put 70% of his personal portfolio in cash. When the father of the 4% rule cashes out, shouldn’t we?

I don’t think so. For starters, it’s important to understand how Bengen developed the 4% Rule. He examined 50-year retirement periods dating back to 1926. For each, he identified the highest withdrawal rate one could take in the first year of retirement, adjusted for inflation in subsequent years, without running out of money for at least 30 years.

As you might imagine, every year had a different initial withdrawal rate. Some years the starting rate was twice what it was in others. Here’s the key point. He didn’t average all of these initial withdrawal rates to come up with the 4% rule. He took the absolute worst year—1968.

Here’s more on how the 4% Rule works.

What does this mean? It means the 4% Rule has survived the stock market crash of 1929, the Great Depression, WWII, the Korean War, the Vietnam War, the inflation of the 1970s and early 1908s, the 1987 market crash, 9/11, the Great Recession and Covid-19.

Stock Prices

No matter how difficult past times have been, current conditions feel awful in ways that history never can. One need look no further than Robert Shiller’s CAPE (cyclically adjusted price-to-earnings ratio) of the S&P 500 to raise concerns. It stands at roughly twice its average and at historic highs. It’s only been higher once, and that was during the tech bubble.

Yet as “unprecedented” as this may seem, it’s not for two reasons. First, most portfolios don’t have the same PE as the S&P 500, even if measured using CAPE. Add in mid-cap, small-cap and international stocks, and the PE comes down significantly.

Second, and more important, the CAPE of the S&P 500 would fall to average with a 50% decline in the S&P 500. This wouldn’t be fun, but it wouldn’t be unprecedented, either.

As noted above, the market lost 90% to kick off the Great Depression. And going back to the tech bubble, the market lost 9%, 12% and 22% from 2000 to 2002. That’s not quite a 50% total loss, but close. And from peak to trough during the Great Recession (2007-2009), the market lost more than 50%. The 4% Rule survived like a cockroach.

Bond Prices and Inflation

Bond yields were at historic lows. I say “were” because that’s no longer the case. The roughly 3% yield on the 10-year Treasury is still below average, but there are plenty of years dating back to the 1800s when they were lower. And when Bengen published his 1994 paper, TIPS were three years away and the first I bond was still four years away. So at least now we can keep up with inflation.

Here’s the key. The 4% Rule has survived Treasury yields as low as 1 to 2%. It also survived inflation of more than 13% and a decade of inflation at 6% or higher. And like the Energizer Bunny, it keeps going and going (or ticking for you Timex fans).

Final Thoughts

Some year might come along that is worse than 1968 for new retirees. Maybe 2022 will turn out to be a worse time to retiree since the late 60s. Perhaps in 30 years we’ll know that for 2022, the initial safe withdrawal rate was 4.2% instead of 4.4%.

But can we really predict that based on current conditions, when the 4% rule has survived much worse? I don’t think so.

Rob is a Contributing Editor for Forbes Advisor, host of the Financial Freedom Show, and the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of

Source: Will Inflation And The Stock Market Conspire To Kill The 4% Rule?

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