Double-digit percentage drop will hit stocks in 2023: Morgan Stanley

A lot of two-way risk in the market right now, warns Morgan Stanley's Mike Wilson

Investors may be on the doorstep of a deep pullback.

Morgan Stanley’s Mike Wilson, who has an S&P 500 year-end target of 3,900 for next year, warns corporate America is getting ready to unleash downward earnings revisions that will pummel stocks.

“It’s the path. I mean nobody cares about what’s going to happen in 12 months. They need to deal with the next three to six months,” he told CNBC’s “Fast Money” on Tuesday. “That’s where we actually think there’s significant downside. So, while 3,900 sounds like a really boring six months. No… it’s going to be a wild ride.”

Wilson, who serves as the firm’s chief U.S. equity strategist and chief investment officer, believes the S&P could drop as much as 24% from Tuesday’s close in early 2023.

“You should expect an S&P between 3,000 and 3,300 some time in probably the first four months of the year,” he said. “That’s when we think the deacceleration on the revisions on the earnings side will kind of reach its crescendo.”

On Tuesday, the S&P 500 closed at 3,957.63, a 17% decline so far this year. Wilson’s year-end price target was 3,900 for this year, too.

“The bear market is not over,” he added. “We’ve got significantly lower lows if our earnings forecast is correct.”

And he believes the pain will be widespread.

“Most of the damage will happen in these bigger companies — not just tech, by the way. It could be consumer. It could be industrial,” Wilson said. “When those stocks had a tough time in October, the money went into these other areas. So, part of that rally has been driven just be repositioning from the money moving.”

Wilson’s forecast comes on the heels of prior pullback warnings on “Fast Money.” In July, he warned the June low was probably not the final move downward. On Oct. 13, the S&P 500 reached its 52-week low of 3491.58.

‘Not a time to sell everything’

Yet Wilson does not consider himself a full-fledge bear.

“This is not a time to sell everything and run for the hills because that’s probably not until the earnings come down in January [and] February,” he said.

Wilson expects bullish tailwinds to push stocks higher over the next few weeks.

“It’s our job to call these tactical rallies. We’ve got this one right,” Wilson said. “I still think this tactical rally has legs into year end.”

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Shopper turnout hit record over Black Friday weekend, trade group says

A customer searches for shoe products inside a Macy’s store during Black Friday sales on November 25, 2022 in Jersey City, New Jersey.

Kena Betancur | Getty Images

A record number of holiday shoppers – 196.7 million – flocked back to stores and hunted for deals from Thanksgiving Day to Cyber Monday, according to a survey by the National Retail Federation, which tracks the figure for in-person and online shopping.

The trade group did not estimate spending over the weekend, but said Tuesday that sales for the overall holiday shopping season are on track to meet its forecast. It anticipates that holiday sales will rise by 6% to 8% from last year to between $942.6 billion and $960.4 billion. Some of that increase will come from nearly four-decade high inflation.

The National Retail Federation defines the holiday season as November 1 through December 31. The sales forecast excludes spending at automobile dealers, gasoline stations and restaurants.

Shoppers spent an average of about $325 on holiday-related purchases over the weekend. That’s higher than last year’s average of $301.

NRF CEO Matt Shay said the weekend’s biggest takeaways are that Americans are eager to shop in-person again and that they’re hungry for big bargains. More than 122.7 million people visited brick-and-mortar stores over the weekend, a jump of 17% from 2021.

As inflation hits Americans’ wallets, he said, promotions have become a important motivator.

“Consumers are out shopping, but they’re out shopping when they see deals and when they get the promotions that meet what it is they’re looking for, and so you can get them engaged, but you’ve got to deliver value and price,” he said on a call with reporters.

Retailers have nevertheless been cautious about their holiday outlooks, particularly as families feel the pinch of inflation. Walmart has spoken about customers skipping over discretionary items and trading down to cheaper proteins like hot dogs and peanut butter. Target cut its forecast for the holiday quarter. And Best Buy said customers have had a higher interest in shopping during sales events.

So far, though, industry-watchers have reported a strong start to the shopping season. Figures from Adobe Analytics showed that online spending hit record highs on key days during the holiday shopping weekend. Black Friday sales hit $9.12 billion and Cyber Monday sales hit $11.3 billion, according to the company, which tracks sales on retailers’ websites.

On average, consumers said in the NRF survey that they are about halfway done with holiday shopping. That means retailers can expect more purchases in the weeks ahead, Shay said.

NRF said Tuesday that its tally of shoppers over the holiday weekend topped last year’s turnout of 179 million during the same period last year. The group, which began tracking the figure in 2017, had forecast a turnout of 166.3 million for this year.

A bigger turnout and record spending this holiday season could be a result of a variety of factors. It could indicate that consumers are willing to buy − but only if items are on deep discount. It could also signal a return to the pre-pandemic timetable of holiday shopping, with people concentrating their gift-buying around Black Friday and in the final sprint before Christmas Day.

Or it could portend a more challenging 2023. If Americans are funding shopping spree by slashing savings rates and tallying up big balances on credit cards or through ‘Buy Now Pay Later,’ that could leave them with less to spend in the months ahead.

The National Retail Federation, a major trade group, has taken a bullish stance on consumer spending — saying a strong job market has encouraged Americans to keep spending.

Shay also shook off concerns about a recession on Tuesday, but acknowledged another risk for retailers: the threat of a railway strike. While retailers may have most of their holiday merchandise, he said a work stoppage could be a blow to consumer confidence.

“We think that the holiday season would be the worst possible time,” he said.

We haven't seen a drop in demand over inflation concerns, says Ledbury CEO

Black Friday online sales to hit new record, expected to top $9 billion

A Black Friday sale sign in the clothing department of the Macy’s flagship store on Black Friday in New York, US, on Friday, Nov. 25, 2022.

Jeenah Moon | Bloomberg | Getty Images

This will likely end up the biggest Black Friday ever online.

Overall online sales for the day after Thanksgiving are expected to top $9 billion, according to Adobe, which tracks sales on retailers’ websites. That would be a record.

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Through 6 p.m. ET, shoppers spent $7.28 billion at websites. That number could balloon to as much as $9.2 billion before the day is done, Adobe said.

The record-breaking spending comes on the heels of a strong day of Thanksgiving shopping, in which consumers shelled out an all-time high $5.29 billion online, up 2.9% year-over-year. Typically, shoppers spend about $2 billion to $3 billion online in a day, according to Adobe. 

The company said shoppers were picking up Apple products such as watches and AirPods, smart speakers and televisions, espresso machines, and gaming consoles, as well as toys from Funko, Hatchimals and Squishmallows.

Adobe noted that mobile shopping also hit a record high this year, with sales from smartphones accounting for 55% of online sales on Thanksgiving Day. These sales are expected to account for 53% of total Black Friday sales, the company predicts.

Additionally, strong discounts enticed inflation-weary consumers to put more items in their carts. The average order volume was up 12% during the season. Toys, in particular, drove significant demand, with deals as high as 33% off.

For retailers, these numbers may be a promising indicator about the weeks ahead. Early holiday forecasts have been muted. Target, Macy’s, Nordstrom and other companies reported a lull in sales in late October and early November. Consumer sentiment has weakened in the past month as inflation hovers near four-decade highs.

That has ratcheted up the pressure for retailers on Black Friday weekend — a time that’s often associated with the biggest deals of the holiday shopping season.

Adobe expects Cyber Week, the five days from Thanksgiving Day through Cyber Monday, will generate around $34.8 billion in online spending, up nearly 3% compared to 2021. Cyber Monday is expected to be the biggest online shopping day, with sales slated to top $11.2 billion, the company forecast.

— CNBC’s Melissa Repko contributed to this report.

Ukraine reacts as initial findings suggest it fired the missile that hit Poland

Ukrainian President Volodymyr Zelensky makes a surprise visit to Kherson on November 14, 2022 in Kherson, Ukraine.

Paula Bronstein | Getty Images News | Getty Images

Ukraine’s Defense Ministry responded cautiously to mounting evidence suggesting its own armed forces fired a missile that hit Poland, killing two people — saying the issue was “very sensitive” and that it wanted its own officials to be able access the site where the incident took place.

Early Wednesday morning, The Associated Press reported, citing three unnamed U.S. officials, that preliminary assessments indicated “the missile that struck Poland had been fired by Ukrainian forces at an incoming Russian missile.”

Other media agencies, including NBC News, cited similar details on Wednesday; Reuters reported a NATO source as saying President Joe Biden had told the G-7 and NATO partners that the strike was caused by “a Ukrainian air defense missile,” while The Wall Street Journal cited two senior Western officials briefed on the preliminary U.S. assessments as saying the missile was from a Ukrainian air defense system.

Those initial findings were then confirmed by NATO on Wednesday morning with Secretary-General Jens Stoltenberg telling reporters that while investigations continue, the strike was likely caused by a Ukrainian air defense missile but that, ultimately, Russia was “responsible for the war that has caused this situation.”

Earlier Wednesday, Ukraine’s Defense Ministry was cautious about the initial assessments of the incident. Yuriy Sak, an advisor to Ukraine’s defense minister, Oleksiy Reznikov, told CNBC that Kyiv welcomed a thorough investigation of the incident and said the issue was “very sensitive.”

“It is too early to give any definitive answers and it’s very dangerous to jump to any conclusions,” Sak said Wednesday morning.

“I would like to just stress once again that right now, the president of Poland has said that there are no conclusive evidence of what exactly has happened. Joe Biden, when he was making his comment, he was also cautious because everybody understands that this is a very sensitive issue,” he said.

“Before any conclusions are made, an investigation must be done. So, that is where we stand,” he said.

After NATO’s comments, Oleksiy Danilov, head of Ukraine’s National Security and Defense Council, tweeted that Kyiv favored a “joint study” into the incident. Danilov said on Twitter that Ukraine was “ready to hand over the evidence of the Russian trail that we have” but Kyiv was still awaiting “information from our partners, on the basis of which a conclusion was made that it is a Ukrainian air defense missile.”

He added that Ukraine had requested that Defense Ministry and border guard officials be granted immediate access to the site of the explosion.

Police run a check point outside the scene in Przewodow, Poland, where authorities in Warsaw say a Russian-made missile struck its territory, killing two civilians.

Omar Marques | Getty Images News | Getty Images

Missile hit context

Ukrainian defense official Sak told CNBC that Ukraine’s international allies should have responded to Kyiv’s repeated requests for them to impose a no-fly zone over Ukraine.

NATO refused to do that early in the war, fearing it would be dragged into a direct conflict with nuclear power Russia.

“What we want to stress is that if there was no invasion of Ukraine, yesterday would not have happened. If the Ukrainian sky would have been closed at our request by our allies, this would not have happened,” Sak said, echoing comments by British Prime Minister Rishi Sunak who said Wednesday morning that “none of this would be happening if it wasn’t for the Russian invasion of Ukraine.”

Sak said it was crucial that the missile incident didn’t distract from Ukraine’s defense needs.

“It is very important that we don’t shift the focus now and that we continue to discuss the options for further closing the Ukrainian sky, providing Ukraine with efficient air defense systems, because what needs to happen is that we need to all collectively make sure that such tragic incidents as yesterday do not happen again,” he said.

World leaders hold an emergency meeting in Bali to discuss the explosion on Polish territory. Shown are U.S. President Joe Biden (C), U.K. Prime Minister Rishi Sunak, Canada’s Prime Minister Justin Trudeau, German Chancellor Olaf Scholz, French President Emmanuel Macron, Italian Prime Minister Giorgia Meloni, Japan Prime Minister Kishida Fumio, European Commission President Ursula von der Leyen, European Council President Charles Michel, Spain’s Prime Minister Pedro Sanchez, Netherlands’ Prime Minister Mark Rutte and U.S. Secretary of State Antony Blinken

Ludovic Marin | AFP | Getty Images

As a flurry of urgent and high-level diplomatic talks are taking place among NATO members on Wednesday, defense analysts agreed that, whether Russia fired the missile or not, it bears a lot responsibility for the attack.

“Russia is to some degree culpable regardless, because it’s firing missiles on civilian infrastructure targets, and firing them dangerously close to NATO territory and the Ukrainian-Polish border, and Ukraine needs to defend itself,” Samuel Ramani, a geopolitical analyst and associate fellow at the Royal United Services Institute defense think tank, told CNBC on Wednesday.

“But it may not be that Russia intentionally targeted Poland, and it could be Ukraine doing it. So right now, I think we need an investigation to figure out what’s really happening.”

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Biden says it’s ‘unlikely’ the missile that hit Poland was fired from Russia

President Joe Biden of the United States arrives at the formal welcome ceremony to mark the beginning of the G20 Summit on November 15, 2022 in Nusa Dua, Indonesia.

Leon Neal | Pool | via Reuters

U.S. President Joe Biden said it is unlikely that the missile that hit Poland and killed two people was fired from Russia, but the United States and allies unanimously agreed to support the country’s investigation.

“I’m going to make sure we figure out exactly what happened,” Biden said.

Early Wednesday morning, Polish officials said a “Russian-made missile” landed on its soil, killing two people. It would mark the first time since Russia’s war in Ukraine began in February of this year that a Russian projectile hit NATO territory.

“There is preliminary information that contests that,” Biden said when asked if the missile was fired from Russia. “I don’t want to say until we completely investigate. It is unlikely in the lines of the trajectory that it was fired from Russia, but we’ll see.”

Biden didn’t address whether the missile could have been fired by Russia from Ukraine or elsewhere.

Biden was speaking in Bali, Indonesia where he is attending the Group of 20 summit, a meeting of the world’s largest economies.

Biden has repeatedly said any attack on NATO soil will be considered an attack on all of the alliance members. He spoke with Polish President Andrzej Duda after the explosion offering his full support, according to the White House. He spokes with NATO Secretary General Jens Stoltenberg in a separate call, the White House said.

Before speaking to reporters, Biden convened a meeting of “like-minded leaders” on the situation. Participants included G-7 members and allies: European Commission President Ursula von der Leyen, Italian Prime Minister Giorgia Meloni, German Chancellor Olaf Scholz, French President Emmanuel Macron, Canadian Prime Minister Justin Trudeau, UK Prime Minister Rishi Sunak, Spainish Prime Minister Pedro Sanchez, Dutch Prime Minister Mark Rutte, Japanese Prime Minister Kishida Fumio and European Council President Charles Michel.

“We’re going to collectively determine our next step as we investigate and proceed,” Biden said. “There was total unanimity among folks at the table.”

Biden said the group also discussed Russia’s recent missile attacks in Ukraine, saying the country’s aggression has been “unconscionable.”

“The moment when the world came together at the G-20 to urge de-escalation, Russia continues to escalate in Ukraine,” Biden said. “While we were meeting there were scores and scores of missile attacks in western Ukraine. We support Ukraine fully in this moment; we have since the start of the conflict.”

Adidas warns of big earnings hit after ending Ye partnership

Kanye West at an event announcing a partnership with Adidas on June 28, 2016 in Hollywood, California.

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Adidas on Wednesday cut its full-year guidance on the back of the German sportswear giant’s termination of its partnership with Kanye West’s Yeezy brand.

The company ended its relationship with Ye, formerly known as Kanye West, on Oct. 25 after the musician launched a series of offensive and antisemitic tirades on social media and in interviews.

Adidas now projects a net income from continuing operations of around 250 million euros ($251.56 million), down from a target of around 500 million euros laid out on Oct. 20. The company now expects currency-neutral revenues for low single-digit growth in 2022, with gross margin now expected to come in at around 47% for the year.

Adidas reported a 4% year-on-year increase in currency-neutral sales in the third quarter, with double-digit growth in e-commerce in the EMEA, North America and Latin America. Gross margin fell by one percentage point to 49.1% on the back of “higher supply chain costs, higher discounting, and an unfavorable market mix,” the company said.

Operating profit came in at 564 million euros, while net income from continuing operations of 66 million euros, down from 479 million euros a year ago, was “negatively impacted by several one-off costs totalling almost 300 million as well as extraordinary tax effects in Q3,” Adidas said.

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“This amount differs from the preliminary figure published on October 20, 2022, due to negative tax implications in the third quarter related to the company’s decision to terminate the adidas Yeezy partnership. This negative tax effect will be fully compensated by a positive tax effect of similar size in Q4,” Adidas said.

The company also revealed that it had already reduced its full-year guidance on Oct. 20 as a result of “further deterioration of traffic trends in Greater China, higher clearance activity to reduce elevated inventory levels as well as total one-off costs of around 500 million euros.”

“The market environment shifted at the beginning of September as consumer demand in Western markets slowed and traffic trends in Greater China further deteriorated,” Adidas CFO Harm Ohlmeyer said in a statement.

“As a result, we saw a significant inventory buildup across the industry, leading to higher promotional activity during the remainder of the year which will increasingly weigh on our earnings.”

Ohlmeyer said the company was “encouraged” by “noticeable” enthusiasm in the buildup to the FIFA World Cup in Qatar later this month.

Paul Pelosi attacker David DePape hit with federal criminal charges

Speaker of the United States House of Representatives Nancy Pelosi and her husband Paul Pelosi arrive on the red carpet for the Time 100 Gala at the Lincoln Center in New York on April 23, 2019.

Angela Weiss | AFP | Getty Images

The Justice Department filed two federal criminal charges Monday against David DePape, who is accused of viciously attacking Paul Pelosi, the husband of House Speaker Nancy Pelosi, in the couple’s San Francisco home.

The new federal criminal complaint says evidence shows DePape “was prepared to detain and injure Speaker Pelosi when he entered the Pelosi residence in the early morning” Friday, when DePape was toting zip ties, tape, rope, and at least one hammer.

And when Paul Pelosi told DePape that Nancy Pelosi “would not be home for several days,” DePape “reiterated that he would wait,” the complaint alleges.

“DePap also later explained that by breaking Nancy’s kneecaps, she would then have to be wheeled into Congress, which would show other Members of Congress there were consequences to actions,” according to the complaint.

DePape, 42, was charged with assaulting an immediate family member of a United States official with the intent to retaliate against the official on account of the performance of official duties. He also was charged with attempted kidnapping.

The Richmond, California, resident was arrested by San Francisco Police on Friday after he was found at the home struggling with the 82-year-old Paul Pelosi over a hammer.

When officers ordered the men to drop the hammer, DePape gained control of it, and hit Pelosi in the head, knocking him out, authorities said.

Police found a roll of tape, white rope, a second hammer, a pair of rubber and cloth gloves, and zip ties from the crime scene, the Justice Department noted in a press release Monday.

DePape faces a maximum possible prison term of 30 years if convicted of the federal assault charge, and a maximum of 20 years in prison if convicted of attempted kidnapping.

Pelosi remained in the intensive care unit at a San Francisco hospital, surrounded by family members, on Monday morning, sources told NBC.

David Depape is shown in Berkeley, Calif.,on Friday, Dec. 13, 2013. An intruder attacked and severely beat House Speaker Nancy Pelosi’s husband with a hammer in the couple’s San Francisco home early Friday, Oct. 28, 2022, while searching for the Democratic leader. Police were called to the home to check on Paul Pelosi when they discovered the 82-year-old and the suspect, Depape, both grabbing onto the hammer, said Police Chief William Scott.

Michael Short | San Francisco Chronicle | AP

Law enforcement officials including FBI agents on Sunday obtained Pelosi’s account of the home invasion, a source with knowledge of the investigation told NBC.

Pelosi told police he had been asleep when DePape, whom he did not know, entered his bedroom looking for Nancy Pelosi, authorities said.

Pelosi had all of his cognitive functions and seemed to recall everything about the incident, the source said. 

Nancy Pelosi, a California Democrat who as House speaker is second in the line of presidential succession, was in Washington, D.C., at the time of the attack.

This is breaking news. Please check back for updates.

Clean energy investment may hit $2 trillion a year by 2030: IEA

Wind turbines photographed off the coast of Wales. Clean energy investment could be on course to exceed $2 trillion per year by 2030, according to the International Energy Agency.

Ben Birchall | PA Images | Getty Images

Clean energy investment could be on course to exceed $2 trillion per year by 2030, an increase of over 50% compared to today, according to analysis from the International Energy Agency.

The projection is found within the Paris-based organization’s World Energy Outlook 2022, which was published on Thursday morning.

It’s based on the IEA’s Stated Policies Scenario, which factors in what it calls “the latest policy settings worldwide.”

Despite this increase, the IEA repeated its assertion that clean energy investment would still need to hit over $4 trillion by 2030 in its Net Zero Emissions by 2050 Scenario.

This, the IEA’s report said, highlighted “the need to attract new investors to the energy sector.”

The shadow of 2015’s Paris Agreement looms large over the IEA’s report.

The landmark accord aims to “limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.”

Cutting human-made carbon dioxide emissions to net-zero by 2050 is seen as crucial when it comes to meeting the 1.5 degrees Celsius target.

The newest edition of the World Energy Outlook comes at a time of significant uncertainty and volatility in global energy markets.

Read more about energy from CNBC Pro

According to Fatih Birol, the IEA’s executive director, the changes taking place appear to be seismic ones.

“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” he said. “Even with today’s policy settings, the energy world is shifting dramatically before our eyes.”

Birol added, “Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.”

Peak demand for coal, gas and oil?

In a statement accompanying the report’s release, the IEA said its Stated Policies Scenario had “global demand for every fossil fuel exhibiting a peak or plateau.”

Under this outlook, “coal use falls back within the next few years, natural gas demand reaches a plateau by the end of the decade, and rising sales of electric vehicles … mean that oil demand levels off in the mid-2030s before ebbing slightly to mid-century.”

The IEA’s statement also noted, however, that there was a huge amount of work to be done in order to keep global warming to 1.5 degrees Celsius.

Under its Stated Policies Scenario, fossil fuels’ share in the planet’s energy mix would be a little over 60% by the middle of this century.

“Global CO2 emissions fall back slowly from a high point of 37 billion tonnes per year to 32 billion tonnes by 2050,” it added.

“This would be associated with a rise of around 2.5 °C in global average temperatures by 2100, far from enough to avoid severe climate change impacts.”

The above echoes a separate report published by U.N. Climate Change this week.

In an announcement Wednesday, the U.N. said that “the combined climate pledges of 193 Parties under the Paris Agreement could put the world on track for around 2.5 degrees Celsius of warming by the end of the century.” 

U.N. Climate Change said its new report also showed that countries’ pledges, as they stand now, would see emissions jump by 10.6% by the year 2030, compared to levels in 2010.

The U.N.’s analysis comes ahead of next month’s COP27 climate change summit in Sharm el-Sheikh, Egypt.

Brits are being hit by a wave of bad news

Pensioners protest over rising fuel prices at a demonstration outside Downing street called by The National Pensioners Convention and Fuel Poverty Action on February 7, 2022 in London, England.

Guy Smallman | Getty Images

LONDON — “The brains of humans and other animals contain a mechanism designed to give priority to bad news,” former Nobel Prize-winning economist Daniel Kahneman once said.

For Brits, this mechanism has been taking a beating in recent months.

The Bank of England this week has added to its emergency rescue package for British pension funds, while the government brought forward its medium-term fiscal policy plan, having plunged the markets into chaos with its widely-criticized announcements last month.

A number of pension funds were hours from collapse when the central bank intervened on Sep. 28, and policymakers continue to battle against market volatility with further expansions of the bond-buying scheme on Monday and Tuesday. 

The spike in interest rate expectations following new Finance Minister Kwasi Kwarteng’s so-called “mini-budget” also caused mayhem in the mortgage market, leading banks to withdraw products and rates to surge for prospective homeowners.

Meanwhile the British pound fell to an all-time low against the dollar in the aftermath of Kwarteng’s policy announcements, only regaining some ground when the government U-turned on some of its most radical policies, such as the abolition of the top rate of tax for the country’s highest earners.

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Kwarteng on Monday announced that his scheduled expansion on last month’s controversial fiscal plans — and an independent assessment of their impact from the Office for Budget Responsibility — would be brought forward by three weeks to Oct. 31, as the Treasury and the Bank of England look to temper market concerns and restore credibility.

The same day, the central bank is expected to begin selling gilts (U.K. sovereign bonds), part of its delayed quantitative tightening efforts as it unwinds pandemic-era monetary stimulus in the hope of tackling runaway inflation.

Economists expect further volatility in the bond market, and peril for pension funds, in the coming weeks ahead of the full budget statement, while the Bank of England continues to walk a tightrope between ensuring fiscal stability and reining in inflation.

‘The recession has begun’

The U.K. is the only G-7 economy not to have re-attained its pre-pandemic GDP level by the second quarter of 2022, Citibank Chief U.K. Economist Benjamin Nabarro pointed out in an Institute for Fiscal Studies event on Tuesday.

The U.K. economy shrank by 0.3% in August, the Office for National Statistics estimated Wednesday, potentially beginning what economists expect will be a lengthy recession through the winter.

The ONS said GDP was only just returning to its pre-pandemic level, highlighting the challenge facing Prime Minister Liz Truss’ “growth, growth, growth” agenda. The prime minister has committed to a radical overhaul of the country’s economic policy, vowing to address anemic growth over the past decade or more, despite her party having been in power since 2010.

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The government’s growth plan must also overcome the impact of Brexit, which most economists project will reduce real per capita GDP. The government’s independent Office for Budget Responsibility (OBR) calculated that Brexit would reduce the U.K.’s potential productivity by 4% over the long term, while the OECD projects that the U.K. will have the lowest growth in the G-20 in 2023, apart from heavily sanctioned Russia.

“Real GDP is likely to retreat again in September in line with double-digit inflation eroding household purchasing power and the resulting output loss from additional bank holiday to coincide with Queen Elizabeth’s funeral on Monday 19 September,” said Raj Badiani, economics director at S&P Global Market Intelligence.

Queen Elizabeth II, the world’s longest-reigning monarch, died on Sep. 8 after 70 years on the throne, ushering in 10 days of national morning and a public holiday on the day of her funeral.

“We now believe the recession in the U.K. has begun in the third quarter of 2022 and will likely last for three quarters. Our near-term GDP outlook anticipates a recession spilling into 2023 because of a tight and prolonged squeeze on household budget fueling a consumer-led recession,” Badiani added.

We'll continue to see a hawkish Bank of England, chief economist says

S&P also expects the economy to contract over the full year of 2023, despite substantial fiscal stimulus such as the government’s energy price guarantee and income tax cuts, due to rising household borrowing costs, softer demand in critical export markets and persistent volatility in financial markets.

The latest labor market statistics showed U.K. unemployment falling to 3.5%, its lowest rate since 1974, fueled by a rise in the inactivity rate, which now stands at 21.7%.

From June to August, annual growth in average total pay (including bonuses) for employees was 6% while growth in regular pay (excluding bonuses) was 5.4%, representing a real terms decline of 2.4% and 2.9%, respectively.

U.K. inflation slipped slightly to 9.9% in August, with soaring food and energy prices having driven annual consumer price inflation to a 40-year high of 10.1% the previous month, but economists expect it to rise through the remainder of the year.

A worst-case scenario laid out by national electricity system operator the National Grid warned that households and businesses may face three-hour power outages over winter to prevent a collapse of the grid. However, senior cabinet minister Nadhim Zahawi told the BBC this week that this scenario is “extremely unlikely.” 

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Prime Minister Liz Truss is also coming under pressure from lawmakers in her own party to guarantee an increase to welfare benefits in line with inflation, with reports suggesting she could opt for raising them in line with earnings instead, heaping further pain on the country’s lowest-income households.

New research by British investment house Charles Stanley found that 22% of U.K. adults said they were having sleepless nights over market volatility, soaring inflation and the rising cost of living, while one in 10 said they had experienced panic attacks.

“Even under ‘precedented’ circumstances, financial pressures can get the better of us, but we’re living in unprecedented times, and the term ‘financial stress’ has taken on a whole new meaning,” said Lisa Caplan, director of OneStep Financial Planning at Charles Stanley. 

“The cost of living crisis is having a detrimental effect on individuals, not only financially, but physically and mentally too.”

Widespread strikes

Postal workers, rail workers, journalists and public barristers have all carried out strikes in recent months in protest over pay and conditions, as wages fail to keep up with inflation running at around 10%.

Rail strikes carried out by members of the RMT union, in protest over pay and conditions have brought the country to a standstill on multiple days throughout the summer and into fall.

Members of the CWU (Communication Workers Union) also continue to strike, including 115,000 postal employees of former state monopoly Royal Mail. CNBC reported Friday that CWU representatives had entered into talks with Royal Mail executives, but 19 days of further postal strikes are still set to go ahead in the runup to the festive period unless substantial progress is made in the coming days.

Meanwhile, the Royal College of Nursing (RCN) is currently holding its first industrial action ballot in its 106-year history for 300,000 members, demanding a pay rise in line with inflation. The RCN cited new analysis from London Economics, which found that nurses’ real earnings have fallen at twice the rate of the private sector over the last decade.

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The government imposed a minimum pay rise to most NHS staff of 4.5% in July, representing a real terms pay cut of more than £1,000 per year when adjusted for inflation.

Waiting times for access to the country’s National Health Service are at an all-time high, with public hospitals beset by staff shortages and a lack of beds. 

The GMB union is also holding ballots for ambulance staff in various regions of the country, with paramedics’ real pay down £1,500 per year. Junior doctors will ballot for industrial action in early January, after the government refused to meet the British Medical Association’s demand to restore pay increases to 2008/9 levels by the end of September. 

Junior doctors were excluded from the 4.5% NHS uplift, with the government instead imposing an increase of just 2%, which the BMA said is “derisory” in the face of the ongoing cost of living crisis and in the aftermath of the Covid-19 pandemic.

Jobless claims hit five-month low despite Fed’s efforts to slow labor market

A person arranges groceries in El Progreso Market in the Mount Pleasant neighborhood of Washington, D.C., August 19, 2022.

Sarah Silbiger | Reuters

Initial filings for unemployment claims fell last week to their lowest level in five months, a sign that the labor market is strengthening even as the Federal Reserve is trying to slow things down.

Jobless claims for the week ended Sept. 24 totaled 193,000, a decrease of 16,000 from the previous week’s downwardly revised total and below the 215,000 Dow Jones estimate, according to a Labor Department report Thursday.

The drop in claims was the lowest level since April 23 and the first time claims fell below 200,000 since early May.

Continuing claims, which run a week behind, fell 29,000 to 1.347 million.

The strong labor numbers come amid Fed efforts to cool the economy and bring down inflation, which is running near its highest levels since the early 1980s. Central bank officials specifically have pointed to the tight labor market and its upward pressure on salaries as a target of the policy tightening.

Stocks plunged following the report while Treasury yields were higher.

“The recent decline in layoffs flies in the face of the Fed’s efforts to soften up labor market conditions and knock inflation back down toward its 2% target,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “The capital markets have heard the Fed, and investors are feeling the pain. But the jobs market? For now at least, it’s not listening.”

There was more bad news Thursday for the Fed on the inflation front.

The personal consumption expenditures price index, a favorite inflation gauge for the Fed, showed a 7.3% year-over-year price gain in the second quarter, the Commerce Department reported in its final GDP estimate for the period. That was above the 7.1% reading in the prior two Q2 estimates and just off the 7.5% gain in the first quarter.

Excluding food and energy, core PCE inflation was 4.7%, 0.3 percentage point higher than the previous two estimates but below the 5.6% jump in Q1.

The Fed has raised interest rates five times in 2022 for a total of 3 percentage points, and officials have stressed the importance of continuing to hike until inflation comes down closer to the central bank’s 2% target.

“We have to do what we must do to get back to price stability, because we can’t have a healthy economy, we can’t have good labor markets over time, unless we get back to price stability,” Cleveland Fed President Loretta Mester told CNBC’s “Squawk Box” in an interview Thursday morning.

However, the Cleveland Fed’s own Inflation Nowcasting gauge shows little improvement on the inflation front in September even with a sharp decline in gas prices. The gauge is indicating an 8.2% increase in the headline consumer price index and a 6.6% increase in core prices, compared to respective readings of 8.3% and 6.3% in August.

The BEA’s final estimate for Q2 GDP was a decline of 0.6%, unchanged from the previous two estimates. That was the second straight quarter of negative GDP, meeting a commonly accepted definition of a recession.