The Go! Go! Curry restaurant has a sign in the window reading “We Are Hiring” in Cambridge, Massachusetts, July 8, 2022.
Brian Snyder | Reuters

September’s jobs report provided both assurance that the jobs market remains strong and that the Federal Reserve will have to do more to slow it down.

The 263,000 gain in nonfarm payrolls was just below analyst expectations and the slowest monthly gain in nearly a year and a half.

But a surprising drop in the unemployment late and another boost in worker wages sent a clear message to markets that more giant interest rate hikes are on the way.

“Low unemployment used to feel so good. Everybody who seems to want a job is getting a job,” said Ron Hetrick, senior economist at labor force data provider Lightcast. “But we’ve been getting into a situation where our low unemployment rate has absolutely been a significant driver of our inflation.”

Indeed, average hourly earnings rose 5% on a year-over-year basis in September, down slightly from the 5.2% pace in August but still indicative of an economy where the cost of living is surging. Hourly earnings rose 0.3% on a monthly basis, the same as in August.

No ‘green light’ for a Fed change

Fed officials have pointed to a historically tight labor market as a byproduct of economic conditions that have pushed inflation readings to near the highest point since the early 1980s. A series of central bank rate increases has been aimed at reducing demand and thus loosening up a labor market where there are still 1.7 open jobs for every available worker.

Friday’s nonfarm payrolls report only reinforced that the conditions behind inflation are persisting.

To financial markets, that meant the near certainty that the Fed will approve a fourth consecutive 0.75 percentage point interest rate hike when it meets again in early November. This will be the last jobs report policymakers will see before the Nov. 1-2 Federal Open Market Committee meeting.

“Anyone looking for a reprieve that might give the Fed the green light to start to telegraph a pivot didn’t get it from this report,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Maybe the light got a little greener that they can step back from” two more 0.75 percentage point increases and only one more, Sonders said.

In a speech Thursday, Fed Governor Christopher Waller sent up a preemptive flare that Friday’s report would do little to dissuade his view on inflation.

“In my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand,” Waller said.

Markets do, however, expect that November probably will be the last three-quarter point rate hike.

Futures pricing Friday pointed to an 82% chance of a 0.75-point move in November, then a 0.5-point increase in December followed by another 0.25-point move in February that would take the fed funds rate to a range of 4.5%4.75%, according to CME Group data.

What concerns investors more than anything now is whether the Fed can do all that without dragging the economy into a deep, prolonged recession.

Pessimism on the Street

September’s payroll gains brought some hope that the labor market could be strong enough to withstand monetary tightening matched only when former Fed Chairman Paul Volcker slew inflation in the early 1980s with a fund rate that topped out just above 19% in early 1981.

“It could add to the story of that soft landing that for a while seemed fairly elusive,” said Jeffrey Roach, chief economist at LPL Financial. “That soft landing could still be in the cards if the Fed doesn’t break anything.”

Investors, though, were concerned enough over the prospects of a “break” that they sent the Dow Jones Industrial Average down more than 500 points by noon Friday.

Commentary around Wall Street centered on the uncertainty of the road ahead:

  • From KPMG senior economist Ken Kim: “Typically, in most other economic cycles, we’d be very happy with such a solid report, especially coming from the labor market side. But this just speaks volumes about the upside-down world that we’re in, because the strength of the unemployment report keeps the pressure on the Fed to continue with their rate increases going forward.”
  • Rick Rieder, BlackRock’s chief investment officer of global fixed income, joked about the Fed banning resume software in an effort to cool job hunters: “The Fed should throw another 75-bps rate hike into this mix at its next meeting … consequently pressing financial conditions tighter along the way … We wonder whether it will actually take banning resume software as a last-ditch effort to hit the target, but while that won’t happen, we wonder whether, and when, significant unemployment increases will happen as well.”
  • David Donabedian, CIO at CIBC Private Wealth: “We expect the pressure on the Fed to remain high, with continued monetary tightening well into 2023. The Fed is not done tightening the screws on the economy, creating persistent headwinds for the equity market.”
  • Ron Temple, head of U.S. equity at Lazard Asset Management: “While job growth is slowing, the US economy remains far too hot for the Fed to achieve its inflation target. The path to a soft landing keeps getting more challenging. If there are any doves left on the FOMC, today’s report might have further thinned their ranks.”

The employment data left the third-quarter economic picture looking stronger.

The Atlanta Fed’s GDPNow tracker put growth for the quarter at 2.9%, a reprieve after the economy saw consecutive negative readings in the first two quarters of the year, meeting the technical definition of recession.

However, the Atlanta Fed’s wage tracker shows worker pay growing at a 6.9% annual pace through August, even faster than the Bureau of Labor Statistics numbers. The Fed tracker uses Census rather than BLS data to inform its calculations and is generally more closely followed by central bank policymakers.

It all makes the inflation fight look ongoing, even with a slowdown in payroll growth.

“There is an interpretation of today’s data as supporting a soft landing – job openings are falling and the unemployment rate is staying low,” wrote Citigroup economist Andrew Hollenhorst, “but we continue to see the most likely outcome as persistently strong wage and price inflation that the Fed will drive the economy into at least a mild recession to bring down inflation.”

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The U.S. labor market showed strength in September, with private companies adding more jobs than expected, payroll services firm ADP reported Wednesday.

Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August.

Those gains came even as goods-producing industries reported a loss of 29,000 positions, with manufacturing down 13,000 and natural resources and mining losing 16,000.

However, a big jump in trade, transportation and utilities helped offset those losses, as the sector saw a jobs gain of 147,000.

Professional and business services added 57,000, while education and health services picked up 38,000 and leisure and hospitality grew by 31,000. There also were losers within the services sector, as information declined by 19,000 and financial activities saw a loss of 16,000 positions.

By size, companies employing 50-499 workers led with a 90,000 gain, while large firms added 60,000 and small businesses contributed 58,000.

The tight job market saw another month of sizeable pay hikes, with annual pay trending up 7.8% from a year ago, according to ADP, which compiles the report in tandem with the Stanford Digital Economy Lab. Those changing jobs saw a median change in annual pay of 15.7%, down from 16.2% in August for the biggest monthly drop in the three years ADP has been tracking the data.

ADP’s report comes two days before the closely watched nonfarm payrolls report issued by the Bureau of Labor Statistics.

The estimate for the Friday report is growth of 275,000 jobs. Though ADP revised its methodology over the summer, the August total, which was revised up sharply from the originally reported 132,000, was still well shy of the BLS count of 315,000 added jobs.

Federal Reserve officials are watching the jobs numbers closely as the central bank looks to stem high inflation.

In other economic news Wednesday, the U.S. trade deficit fell again, declining to $67.4 billion in August, its lowest level since May 2021.

Also, the ISM services index edged lower to 56.7% but still represented expansion in the sector. The reading was better than the 56% estimate.

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Jerome Powell, chairman of the US Federal Reserve, speaks during a Fed Listens event in Washington, D.C., US, on Friday, Sept. 23, 2022. Federal Reserve officials this week gave their clearest signal yet that they’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation.
Al Drago | Bloomberg | Getty Images

Think of Federal Reserve Chairman Jerome Powell as a gymnast sprinting across the mat, spiraling, turning, churning, then twisting through the air and trying to make sure he still lands perfectly on his feet.

That’s monetary policy in this era of rapid inflation, swooning economic growth and heightened fears over what could go wrong. Powell is that gymnast, standing on the economic version of an Olympic mat, and having to make sure everything goes right.

Because if things go wrong, they could go very wrong.

“They have to stick the landing,” said Joseph Brusuelas, U.S. chief economist at RSM.. “It’s the lower end of the economic ladder that is going to bear the burden if the Fed doesn’t stick the landing correctly. They lose jobs and their spending goes down and they have to draw on savings and 401(k)s to make ends meet.”

Consumers pressured by consistently rising prices already are dipping into savings to cover costs.

The personal saving rate was just 3.5% in August, according to the Bureau of Economic Analysis. That was just above a 3% rate in June that was the lowest in 14 years, dating back to the early days of the financial crisis.

Prices for everyday items have been surging at an extraordinary clip. Eggs were up 40% from a year ago in August, butter and margarine soared nearly 30% and gasoline, even with a 10.6% decline in the month, was still more than 25% higher than the same point in 2021.

The consequences for not bringing that under control could be severe, just as they could be if the Fed goes too far in its quest to regain price stability for the U.S. economy.

Brusuelas said a worst-case scenario would look something like a 5.5% unemployment rate and 3.5 million jobs lost as companies have to lay off workers to deal with the economic deceleration and surging costs that would come should inflation run rampant.

The risk of failure

As it stands, the economy is quite likely headed for a recession anyway. The question is how much worse it can end up.

“It’s not a matter of are we going into recession or not, it’s when we’re going to have it and the degree of intensity of the recession,” Brusuelas said. “My sense is we’re in a recession by the second quarter of 2023.”

The Fed cannot just keep raising rates as the economy weakens. It must hike until it reaches an equilibrium where it slows down the economy enough to correct the multifaceted supply/demand mismatches but not so much that it causes deeper, unnecessary pain. According to the Fed’s most recent outlook, policymakers expect to keep going into 2023, with benchmark rates about 1.5 percentage points from the current level.

“If the Fed overdoes it, you’ll have a much deeper recession with higher unemployment,” Brusuelas said.

That the Fed goes too far and stifles the economy too much is the principal fear of the central bank’s critics.

They say there are tangible signs that the 3 percentage points of rate hikes so far in 2022 have accomplished their goal, and the Fed now can pause to let inflation recede and the economy recover, albeit slowly.

“The Fed could quit today and inflation’s going to be back to acceptable levels next spring,” said James Paulsen, chief investment strategist at The Leuthold Group. “I really think the war on inflation has been won. We just don’t know it.”

Paulsen looks at things such as falling prices for commodities, used cars and imported goods. He also said prices on technology-related items are declining, while retail inventories are rising.

On the jobs market, he said the balance of payroll growth this year has come from the supply side of the economy that the Fed wants to stimulate, rather than the demand side that fueled the inflation explosion.

“If they want to, they can cause a needless recession,” Paulsen said. “I just don’t know why they want to do that.”

Paulsen is not alone in his criticism. There are spreading calls around Wall Street for the central bank to dial down its policy tightening and watch how the economy progresses from here.

Wells Fargo head of equity strategy Christopher Harvey said the Fed’s messaging, particularly from Chairman Jerome Powell, that it is willing to inflict “some pain” on the economy is being interpreted as the central bank willing to keep going “until something breaks.”

“What is troubling is the apparent downplaying of capital market signals as the Fed trudges toward its 2% inflation target,” Harvey said in a client note. “Therefore, those signals will need to get louder (i.e. even lower equities and wider spreads) before the Fed reacts. This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate.”

Human costs

No less an authority than the United Nations issued an agency report Monday in which the UN Conference on Trade and Development warned of the ramifications that the rate hikes could have globally.

“The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course,” UNCTAD Secretary-General Rebeca Grynspan told a news conference in Geneva, according to a Reuters account.

Yet the data suggest the Fed still has work to do.

The upcoming consumer price index report is expected to show that the cost of living continued to climb in September. The Cleveland Fed’s Nowcast tracker of the items in the broad-based basket of goods and services the Bureau of Labor Statistics uses to compute the CPI is showing another 0.5% gain excluding food and energy, good for a 6.6% year over year pace. Including food and energy, headline CPI is projecting to rise 0.3% and 8.2% respectively.

While critics argue that those kinds of data points are backward-looking, the Fed faces an added optics issue after it downplayed inflation when it first started rising significantly more than a year ago, and was late to act.

That puts the burden back on policymakers to keep tightening to avoid a scenario like the 1970s and early ’80s, when then-Chairman Paul Volcker had to drag the economy into a tough recession to stop inflation once and for all.

“This is not the ’70s by any stretch of the imagination, for a whole lot of reasons,” said Steve Blitz, chief economist at TS Lombard. “But I would argue that they’re still being overly optimistic at which the inflation rate is going to decelerate on its own.”

For their part, Fed officials have stuck to the company line that they are willing to do whatever it takes to halt price surges.

San Francisco Fed President Mary Daly spoke emphatically about the human consequences of inflation, telling an audience Tuesday that she has been hearing about it from her constituents.

“Right now, the pain that I hear, the suffering that people are telling me what they’re going through, is on the inflation side,” she said during a talk at the Council on Foreign Relations. “They’re worried about their day-to-day living.”

Specifically addressing the wage issue, Daly said she one person told her, “I’m running fast and falling behind every single day. I’m working as hard as I can and I’m falling further behind.”

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Gautam Adani has had a very good year.

The Indian billionaire briefly surpassed Amazon founder Jeff Bezos to become the second-richest person in the world in September, according to Bloomberg. He’s now ranked as the world’s fourth wealthiest person.

Outside Southeast Asia, Adani is hardly a household name. That might be changing now that he’s richer than Microsoft founder Bill Gates and iconic investor Warren Buffett.

“The kind of rise that you have seen is truly phenomenal and probably unprecedented in the world that in such a short time a single individual has been able to acquire assets across industrial sectors and has emerged as one of the largest billionaires in the world,” said Hemindra Hazari, an independent research analyst based in Mumbai, India.

Coming from a middle-class family background, Adani began his entrepreneurial journey in the country’s financial capital, Mumbai, as a diamond sorter in the late 1970s. Adani is now chair of the Adani Group, one of the three largest industrial conglomerates in India.

Adani’s company representatives did not respond to several requests for comment from CNBC.

Why is Adani’s wealth on the rise? Watch the video above to learn more about how Adani’s political connections may have boosted the success of his many companies. 

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Inflation in August was stronger than expected despite the Federal Reserve’s efforts to bring down prices, according to data Friday that the central bank follows closely.

The personal consumption expenditures price index excluding food and energy rose 0.6% for the month after being flat in July. That was faster than the 0.5% Dow Jones estimate and another indication that inflation is broadening.

On a year-over-year basis, core PCE increased 4.9%, more than the 4.7% estimate and up from 4.7% the previous month.

Including gas and energy, headline PCE increased 0.3% in August, compared with a decline of 0.1% in July. It rose even with a sharp decline in gas prices that took the cost at the pump well below the nominal record above $5 a gallon earlier in the summer.

The Fed generally favors core PCE as the broadest indicator of where prices are heading as it adjusts for consumer behavior. In the case of either core or headline, the data Friday from the Commerce Department shows inflation running well above the central bank’s 2% long-run target.

Outside the inflation data, the numbers showed that income and spending continues to grow.

Personal income rose 0.3% in August, the same as July and in line with the estimate. Spending rose 0.4% after declining 0.2% the month before, beating the 0.3% expectation. After-tax income increased just 0.1% after rising 0.5% the previous month, while inflation adjusted spending rose 0.1%.

The inflation data reflected the shift in spending from goods back to services, which saw respective gains of 0.3% and 0.6% on the month. Food prices rose 0.8% while energy prices slid 5.5%. Housing and utilities prices were up 1% while health care rose 0.6%.

Markets showed little reaction to the news, with stock futures pointing to a slightly higher open on Wall Street.

The market, however, has been highly volatile as investors deal with the highest inflation since the early 1980s. To combat inflation, the Federal Reserve has enacted a series of interest rate increases this year totaling 3 percentage points, taking rates to their highest levels since early 2008.

However, with data showing that the rate hikes have yet to work their way through to bringing down prices, Fed officials have remained vigilant about the need to keep tightening policy.

Fed Chair Lael Brainard in a speech Friday morning cautioned against pulling back “prematurely,” saying rates will remain higher “for some time” until inflation is brought under control.

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Turkish President Tayyip Erdogan addresses members of his ruling AK Party (AKP) during a meeting at the parliament in Ankara, Turkey May 18, 2022. Murat Cetinmuhurdar/Presidential Press Office/Handout via REUTERS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. NO RESALES. NO ARCHIVES. MANDATORY CREDIT
Murat Cetinmuhurdar | Reuters

Turkey will keep cutting interest rates, its President Recep Tayyip Erdogan said, despite soaring inflation at over 80%.

The central bank of Turkey will not be raising rates, he told CNN Turk on Wednesday night, adding that he expects the country’s key rate, currently 12%, to hit single digits by the end of this year.

Faced with deepening economic problems, Erdogan also took the time to throw some barbs at the U.K., saying that the British pound has “blown up.”

The U.K. currency recently hit a historic low against the U.S. dollar at close to $1.03, as the new Conservative government led by Prime Minister Liz Truss put forward an economic plan — based heavily on borrowing and tax cuts despite mounting inflation — that sent markets reeling.

It’s prompted alarmed reactions from U.S. economists, policymakers and the International Monetary Fund, with some saying the U.K. is behaving like an emerging market.

Turkey’s lira, meanwhile, hit a record low of 18.549 against the dollar on Thursday. The currency has lost roughly 28% of its value against the dollar this year and 80% in the last 5 years as markets shunned Erdogan’s unorthodox monetary policy of cutting interest rates despite high inflation.

“Oh the irony, Erdogan giving Truss advice on the economy,” Timothy Ash, an emerging markets strategist at BlueBay Asset Management, said in an email note. 

“Turkey has 80% inflation and I guess the worst performing currency over the past decade. Lol. How low the U.K. has sunk.”

People browse gold jewelry in the window of a gold shop in Istanbul’s Grand Bazaar on May 05, 2022 in Istanbul, Turkey. Gold prices ticked higher on Monday as the dollar hovered near recent lows, with investors’ focus being on a key U.S. inflation reading as it could influence the size of the Federal Reserve’s next interest-rate hike.
Burak Kara | Getty Images News | Getty Images

Erdogan doubled down on his controversial monetary plan on Thursday, saying that he told central bank decision-makers to continue lowering rates at its next meeting in October.

“My biggest battle is against interest. My biggest enemy is interest. We lowered the interest rate to 12%. Is that enough? It is not enough. This needs to come down further,” Erdogan said during an event, according to a Reuters translation.

“We have discussed, are discussing this with our central bank. I suggested the need for this to come down further in upcoming monetary policy committee meetings,” he added. Turkey’s central bank shocked markets with two consecutive 100 basis point cuts in the last two months, as many other major economies seek to tighten policy.

The lira meanwhile is set to fall further as Turkey prioritizes growth over tackling inflation, which is at its highest in 24 years. In addition to the skyrocketing living costs this has brought on Turkey’s population of 84 million, the country is burning through its foreign exchange reserves and has a widening current account deficit.

As the U.S. Federal Reserve raises its interest rate and the dollar grows stronger, Turkey’s many dollar-denominated debts, and the energy it imports in dollars, will only become more painful to pay for.

“With external financing conditions tightening, the risks remain firmly skewed to sharp and disorderly falls in the lira,” Liam Peach, a senior emerging markets economist, wrote in a note after Turkey’s last rate cut on Sept. 22.

“The macro backdrop in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening and short-term external debts remain large,” he wrote. “It may not take a significant tightening of global financial conditions for investor risk sentiment towards Turkey to sour and add more downward pressure on the lira.”

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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 with 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 estimate. That was the second straight quarter of negative GDP, meeting a commonly accepted definition of a recession.

Correction: The final estimate for Q2 GDP was a decline of 0.6%, unchanged from the previous estimate. An earlier version misstated its status.

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Ray Dalio, founder of Bridgewater Associates LP, speaks during a panel session on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, May 25, 2022.
Bloomberg | Bloomberg | Getty Images

The financial market turmoil resulting from the U.K. government’s spending plan “suggests incompetence,” according to billionaire investor Ray Dalio. 

“I can’t imagine that this is intended – and if it’s not intended then it’s an understanding question,” Dalio said on BBC Radio 4′s “Today” program Wednesday.

His comments referred to the market turbulence that followed Finance Minister Kwasi Kwarteng’s fiscal announcements late last week. The measures included large swathes of unfunded tax cuts that have drawn global criticism, including from the International Monetary Fund.

The Bank of England on Wednesday stepped in to try to calm markets, saying it would purchase government bonds on a temporary basis to help “restore orderly market conditions.”

Dalio has joined a growing list of economists criticizing the measures proposed by Liz Truss’ administration.

The founder of Bridgewater, one of the world’s largest hedge funds, said it isn’t possible to make wealth by running large deficits because a country needs lenders willing to own that debt.

“It doesn’t stimulate the economy, productivity is what stimulates the economy over the long run,” Dalio said.

“I would think there would be an understanding of the mechanics of that by the government and that’s why it’s concerning,” Dalio said. 

Speaking via Twitter, Dalio said the panic selling driving the plunge in U.K. bonds, sterling and financial assets was “due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand.”

“That makes people want to get out of the debt and currency. I can’t understand how those who were behind this move didn’t understand that. It suggests incompetence,” he added.

A Downing Street spokesperson was not immediately available to comment when contacted by CNBC.

The U.K. Treasury said Monday that the government would set out its medium-term fiscal plan on Nov. 23.

Jonathan Portes, professor of economics and public policy at King’s College London, told CNBC on Wednesday that the U.K. government’s spending plans put the country’s debt and deficit “on an unsustainable path.”

“It has rightly, I think, been regarded by economists across the political spectrum as unnecessary and damaging,” Portes told CNBC’s “Squawk Box Europe.”

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Larry Summers
Cameron Costa | CNBC

LONDON — Former U.S. Treasury Secretary Larry Summers on Tuesday warned that the U.K. has lost sovereign credibility after the new government’s fiscal policy sent markets into a tailspin.

The British pound hit an all-time low against the dollar in the early hours of Monday morning, before recovering slightly on Tuesday, while the U.K. 10-year gilt yield rose to its highest level since 2008 as markets recoiled at Finance Minister Kwasi Kwarteng’s so-called “mini-budget” on Friday.

In a series of tweets Tuesday morning, Harvard professor Summers said that although he was “very pessimistic” about the potential fallout from the “utterly irresponsible” policy announcements, he did not expect markets to capitulate so quickly.

“A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost,” Summers said.

“This happens most frequently in developing countries but happened with early (Former French President) Mitterrand before a U turn, in the late Carter Administration before Volcker and with Lafontaine in Germany.”

The policy announcement from Prime Minister Liz Truss’s administration last week included a volume of tax cuts not seen in Britain since 1972, funded by borrowing, and an unabashed return to the “trickle-down economics” promoted by the likes of Ronald Reagan and Margaret Thatcher. Truss and Kwarteng maintain that the policies are focused on driving economic growth.

The sudden sell-off in the pound and U.K. bond markets led economists to anticipate more aggressive interest rate hikes from the Bank of England. The central bank said Monday night that it would not hesitate to act in order to return inflation toward its 2% target over the medium term, but would appraise the impact of the new economic policy at its November meeting.

Summers noted that British credit default swaps — contracts in which one party acquires insurance against the default of a borrower from another party — still suggest “negligible default probabilities,” but have risen sharply.

“I cannot remember a G10 country with so much debt sustainability risk in its own currency. The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts,” Summers said on Twitter.

“I cannot see how the BOE, knowing the government’s plans, decided to move so timidly. The suggestions that seem to have emanated from the Bank of England that there is something anti- inflationary about unbounded energy subsidies are bizarre. Subsidies affect whether energy is paid for directly or through taxes now and in the future, not its ultimate cost.”

‘Global consequences’

Summers, who served as U.S. Treasury Secretary from 1999 to 2001 under President Bill Clinton and as director of the National Economic Council from 2009 to 2010 under the Obama administration, added that the scale of Britain’s trade deficit emphasized the challenges the economy faces. The U.K. current account deficit sat at more than 8% of GDP, as of the first quarter of 2022 — well before the government’s announcement.

Summers predicted that the pound will fall below parity with both the dollar and the euro.

“I would not be amazed if British short rates more than triple in the next two years and reach levels above 7 percent. I say this because U.S. rates are now projected to approach 5 percent and Britain has much more serious inflation, is pursuing more aggressive fiscal expansion and has larger financing challenges,” he said.

U.K. inflation unexpectedly fell to 9.9% in August, and analysts recalibrated their eye-watering expectations after the government stepped in to cap annual household energy bills. However, many see the new fiscal policies driving higher inflation over the medium term.

“Financial crisis in Britain will affect London’s viability as a global financial center so there is the risk of a vicious cycle where volatility hurts the fundamentals, which in turn raises volatility,” Summers added.

“A currency crisis in a reserve currency could well have global consequences. I am surprised that we have heard nothing from the IMF.”

His warnings of global contagion echo those of U.S. Federal Reserve official Raphael Bostic, president of the Atlanta Fed, who told The Washington Post on Monday that Kwarteng’s £45 billion in tax cuts had increased economic uncertainty and raised the probability of a global recession.

Chicago Fed President Charles Evans told CNBC on Tuesday that the situation was “very challenging,” given an aging population and slowing growth, adding that the global economy would need to increase growth of labor input and technological infrastructure in order to secure long-term stability.

‘Emerging market currency crisis’

Sterling has fallen by roughly 7-8% on a trade-weighted basis in less than two months, and strategists at Dutch bank ING noted Tuesday that traded volatility levels for the pound are “those you would expect during an emerging market currency crisis.”

ING Developed Markets Economist James Smith suggested that mounting pressure, potentially coupled with comments from ratings agencies in the coming weeks, may lead investors to look for signs of a policy U-turn from the government.

“Ministers may emphasize that tax measures will be coupled with spending cuts, and there are hints at that in today’s papers,” Smith noted.

“We also wouldn’t rule out the government looking more closely at a wider windfall tax on energy producers, something which the prime minister has signaled she is against. Such a policy would materially reduce the amount of gilt issuance required over the coming year.”

The likening of the U.K. to an emerging market economy has become more prevalent among market commentators in recent days.

Timothy Ash, senior sovereign strategist at BlueBay Asset Management, said in a Politico editorial on Tuesday that rising inflation, falling living standards and a potential wage price spiral, combated by tax cuts that will exacerbate “already bloated” budget and current account deficits and increase public debt, mean the U.K. is now resembling an emerging market.

“Predictably, the market has been unconvinced by the new government’s dash-for-growth economic policy. Borrowing costs for the government have risen, making its macro forecasts now appear unsustainable. Everything is unraveling, and talk of crisis is in the air,” Ash said.

“All of the above sounds like a classic emerging market (EM) crisis country. And as an EM economist for 35 years, if you presented me with the above fundamentals, the last thing I would now recommend is a program of unfunded tax cuts.”

However, not all strategists are sold on the emerging market narrative. Julian Howard, investment director at GAM Investments, told CNBC on Tuesday that the bond sell-off was a global phenomenon and that lower taxes and deregulation could be “very helpful” over the medium term, but that the market had “chosen to completely ignore it.”

“I think really what’s happened is that sterling and gilts have been swept up in a wider global phenomenon … In the meantime, I think the U.K. might quietly get some growth going over the next six to nine months, and that has been studiously ignored,” he said.

“There is a more general inflation panic going on around the world, and I think if that eases off then we may see some more stabilization in the U.K.”

Howard said talk of an “emerging market” economy was premature and “too harsh,” and suggested the Bank of England should hold off on raising rates any further.

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Berkshire Hathaway Chairman Warren Buffett seen at the annual Berkshire shareholder shopping day in Omaha, Nebraska, U.S., May 3, 2019.
Scott Morgan | Reuters

Researchers applied the Inflation Reduction Act’s new 15% corporate minimum tax onto 2021 company earnings and found that the burden would only be felt by about 78 companies, with Berkshire Hathaway and Amazon paying up the most.

The study from the University of North Carolina Tax Center used past securities filings to map the tax, which goes into effect in January, onto companies’ 2021 earnings.

The researchers found that the 15% minimum would have taken a total of $31.8 billion from 78 firms in 2021. Berkshire led the estimated payout with $8.33 billion, and Amazon follows behind with $2.77 billion owed based on its 2021 earnings.

The study notes the limitations of looking solely at public company data within a single year. The researchers recognized that these estimates may be subject to change, especially as company operations change under the tax in 2023.

President Joe Biden signed the minimum book tax into law, along with the rest of the Inflation Reduction Act, in August. The tax is specifically meant to target companies earning more than $1 billion per year.

The Joint Committee on Taxation had previously estimated that it would affect around 150 firms, with the costs falling specifically on the manufacturing industry. The bipartisan JCT also predicted $34 billion in revenue in the first year of the tax, slightly more than the theoretical 2021 revenue estimated at UNC.

According to the study, the next-highest taxes would be paid by Ford, AT&T, eBay and Moderna, all of which would owe more than $1.2 billion in payments based on their 2021 financials.

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