Fed’s Favored Inflation Gauge Cools to Slowest Pace Since May PCE price index less food and energy advanced 0.1% in November

The so-called core personal consumption expenditures price index, which excludes food and energy items, increased 0.1% from October and 2.8% from a year earlier, according to Bureau of Economic Analysis data out Friday. The monthly advance was the slowest since May.

The data marks one of the first reports indicating renewed progress on inflation after stalling in recent months. That had prompted Fed officials to update forecasts earlier this week showing a higher path for prices and interest rates in 2025, which helped trigger a broad market selloff.

“Overall, this is just what the Fed ordered — US economic strength continues, but with muted price pressures,” Paul Ashworth, the chief North America economist at Capital Economics, said in a note.

New York Fed President John Williams, speaking on CNBC just minutes after the release of the data, called the latest numbers “encouraging,” adding that he expects the central bank to continue moving its benchmark rate down toward a neutral level. (…)

Details on prices showed a broad-based deceleration. Core services prices — a closely watched category that excludes housing and energy — rose 0.2% from a month earlier, the slowest since August. Core goods prices — which excludes food and energy — fell for the first time in three months.

The report also showed healthy increases in incomes and spending. Adjusted for inflation, spending advanced 0.3%, indicating consumer resilience during the critical holiday shopping season.

That was mostly driven by purchases of goods, which rebounded from the prior month due in part to cars. Meanwhile, real spending on services was the weakest since the start of the year.

Spending continues to be supported by solid earnings. Wages and salaries grew 0.6% in November, the most since March. However, overall disposable income rose just 0.3%, restrained by declines in dividend income and government benefits. (…)

Right after the FOMC expressed a renewed, and justifiable, inflation angst, November core PCE inflation slumped to +0.11% (+1.3% a.r.) thanks to PCE-services inflation slowing from +0.33% on average in Sep-Oct. to +0.17% (+2.0% a.r.), breaking a 5-month streak of accelerating inflation rates.

Remarkably, goods inflation was zero across both durables and nondurables and PCE-services inflation was cut in half to +0.17% after averaging +0.3% since June. Even Supercore PCED was a low 1.9% annualized.

Inflation nirvana?

Alas, no. This PCE-inflation nirvana may not survive one or two months because the CPI-inflation data suggest otherwise.

PCE and CPI-services inflation are understandably highly correlated with annual CPI-services inflation averaging 0.3% above PCE-services inflation over the last 20 years.

Curiously, the monthly volatility between the two series has greatly increased since the summer of 2023 with the PCE measure displaying unusually erratic monthly swings. Five times since July 2023, PCE-services had monthly drops unconfirmed by the CPI and every time these corrected towards the CPI data which, incidentally, came in at +0.31% MoM in November, in line with the previous 3 months.

That said, let’s not forget the latest flash PMI survey for December:

Inflationary pressures meanwhile cooled further at the headline level in December (…). Average prices charged for goods and services rose only very modestly, increasing at the slowest rate since prices began rising in June 2020.

The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially low rate of inflation again evident in the services economy, where charges rose only marginally and at the slowest rate since May 2020.

This in spite of

The headline S&P Global Flash US PMI Composite Output Index rose from 54.9 in November to 56.6 in December, signaling the fastest expansion of business activity since March 2022. Activity levels were expanded at an increased rate in December in response to strengthening demand. New orders rose at the sharpest rate since April 2022.

If pandemic months are excluded, the latest service sector expansion was the strongest recorded since March 2015 (…). New orders for services rose at a rate not witnessed since March 2022.

Employment edged higher in December, up for the first time in five months, reflecting a second successive monthly rise in manufacturing jobs and the first increase in service sector employment since July. The increase in both sectors was only modest, however.

The productivity boom is alive and well, even amid surging demand. The U.S. is in an economic slowflation boom.

KKR illustrates the post-Covid productivity gains and provides a solid analysis, suggesting non-inflationary government spending:

Technology diffusion continues to exert an important influence on the economy. Much of this stems from advancements made during the pandemic, including surging cloud and virtualization investment, which we see as ongoing tailwinds to worker productivity. Additionally, AI is now finally beginning to play a role. Beyond what we are starting to see in our portfolio companies, a recent survey by Morgan Stanley showed that around 90% of the businesses surveyed are seeing ROI on AI-related initiatives meeting or exceeding expectations, particularly in areas like call center operations and salesforce efficiency.

Fiscal policy has been a significant enabler of productivity gains. Government programs such as the IIJA, CHIP Act, and IRA have led to a private manufacturing boom (though the pace has slowed). Instead of crowding out the private sector, we believe that strategic industrial policy helped companies overcome initial hurdle rates, as the private sector became more confident that the government was there to backstop final demand.

We believe fiscal policy remains expansionary. The deficit isn’t contracting, particularly concerning CHIPS and IRA spending, which — while no longer surging — still should support net growth. For instance, companies will now need to spend on equipment to outfit the new facilities they have built.

Our job growth forecasts are slightly below consensus, but we believe the growth of GDP-per-employee is now running at a higher run-rate. Against this backdrop, we expect the U.S. to outperform from a growth perspective.

November’s Personal Income and Outlays release has more than inflation data.

• Growth in Compensation of employees accelerated further to +0.6% MoM from a +0.45% monthly average in the previous 3 months. Last 3 months annualized: +6.1%.
• Same data for Wages and Salaries.
• Disposable Income rose 0.3%, +5.7% a.r. in the last 3 months.
• Real expenditures rose 0.3%, +3.6% a.r. in the last 3 months, after +2.4% in the previous 3 months.
• Real spending on goods remains very strong at +0.7%, +7.4% a.r. in the last 3 months. Durables: +1.8% MoM, +14.3% a.r. in the last 3 months. On a YoY basis: +5.7% in November!
• Real spending on services rose only 0.07%, a sharp slowdown from the +0.22% monthly growth rate in the previous 5 months. I find this November number dubious given the strong demand seen in the PMI surveys.

Estimated holiday spending

Source: Gallup

The Daily Shot illustrates the driving force the consumer has on the economy.

Volkswagen Aims to Reduce Workforce by 35,000 in Deal With Union Auto giant strikes agreement to cut billions of dollars in costs while avoiding factory closures

Under the agreement announced Friday, VW said it would gradually reduce staffing levels “in a socially responsible way,” through early retirement and other measures. Workers will also forgo pay increases and lose certain bonuses. In exchange, the company agreed to not make any forced job cuts until 2030 and to keep all its German factories open. (…)

VW had said in September that it was considering closing factories in Germany for the first time in its history in a bid to boost its competitiveness. The weak recovery of Europe’s car market following the pandemic had left it with capacity to make very roughly 500,000 more cars than it needed—two factories’ worth, the company said at the time. (…)

At the heart of the deal is a novel cost-control tactic initially proposed by the union. Pay increases won’t go directly to workers but will instead fund measures such as early retirement to help the company cut costs without relying on layoffs.

The staffing and bonus reductions will reduce VW’s annual costs by 1.5 billion euros, equivalent to $1.7 billion. Taken together with factory-capacity adjustments and other measures, annual savings will rise to €4 billion, the company said.

While the deal avoids factory closures today, Volkswagen’s two smallest German plants face an uncertain future. Its factory in Osnabrück doesn’t have a clear purpose after 2027, when production of the VW T-Roc convertible will end, while production of the ID.3 EV in Dresden will stop in about a year’s time. VW said it is looking for alternative uses.

VW is the largest automaker in Europe, where vehicle sales are running almost a fifth below their prepandemic level. (…)

VW isn’t alone in its struggles. Stellantis, Europe’s second-largest carmaker with brands such as Peugeot, Opel and Fiat, has repeatedly paused production in its Italian factories to keep inventories under control, leading to a standoff with unions and the government in Rome.

Foreshadowing the truce at VW, Stellantis moved to ease tensions in Italy earlier this week, committing to maintaining its current factory footprint and staffing levels in the country.

While the compromises bring workers relief ahead of the Christmas holiday period, they only partially address the fundamental problem that many European car factories are underused following the protracted sales slump, with little sign of relief.

Stellantis’s factories in the region will only run at 64% of their capacity on average this year, the lowest in the peer group, according to an analysis by brokerage Jefferies. Ford and Nissan, which have both announced big layoffs, also have weak capacity utilization, the numbers show.

Volkswagen’s European factories are producing 84% of their maximum output, adjusting for the planned closure of an Audi factory in Belgium, but the numbers in its German home territory are weaker, Jefferies noted.

“We will manage so we don’t have to fire people,” said a person close to Stellantis in Italy. “But everything in terms of job levels is dependent on levels of sales.”

• Mercedes Star Maker’s Demise Shows How Auto Pain Hits Suppliers

Germany’s Gerhardi Kunststofftechnik GmbH weathered Napoleon’s invasion, the Great Depression and two world wars. But Europe’s current auto slump has brought the plastics manufacturer to its knees.

Founded in 1796, Gerhardi started out making metal products before riding Germany’s postwar automotive boom. Its mastery of injection molding and hot stamping made it a trusted supplier of grills, handles and chrome trims for Mercedes-Benz Group AG. But last month, after a protracted period of rising costs and withering demand, the company filed for bankruptcy, plunging its 1,500 employees into an uncertain future.

Gerhardi — which makes the plastic star mounted on the grill of Mercedes sedans — is one of hundreds of small manufacturers in Europe’s automotive supply chain that are struggling to stay afloat as carmakers slash production to cope with weak sales and a rocky transition to electric vehicles. With painful cuts planned at Volkswagen AG, Stellantis NV and Ford Motor Co., their situation could get worse.

France’s Forvia SE, which makes components for Stellantis and Volkswagen, is cutting thousands of jobs as the shift to EVs makes traditional products like transmissions and exhaust systems obsolete. But suppliers linked to EVs — like Swedish battery maker Northvolt AB — are also sufffering after governments pulled back subsidies and sales cratered.

This year, European parts makers have announced 53,300 job cuts, most of which in Germany, according to the CLEPA industry lobby. That’s more than during the coronavirus pandemic, when factories and showrooms shuttered for months. And with the continent’s high energy prices, red tape and the threat of worsening trade ties with the US, next year looks similarly grim, said Matthias Zink, the group’s president.

“It’s a perfect storm,” Zink said in an interview. “Companies have invested heavily in anticipation of a surge in electric vehicle sales that hasn’t happened.”

Automotive suppliers employ around 1.7 million workers across the European Union and spend some €30 billion ($31.2 billion) each year on research and development. They range from large conglomerates like Germany’s Robert Bosch GmbH to the hundreds of smaller hidden champions that are often the economic backbone of their communities.

According to consulting firm McKinsey, one in five auto suppliers expects to lose money next year after two-thirds reported margins of 5% or less in 2024. (…)

And while Northvolt’s US bankruptcy filing has been the most high-profile setback, the fallout is spreading, with 11 out of 16 planned European-led battery factories delayed or canceled, according to a Bloomberg News analysis. (…)

“Manufacturers are slowing down and stopping production lines, which is having a profound impact on the supply base.” (…)

“Numerous suppliers and the entire retail and service structure depend directly or indirectly on the company overcoming the crisis and being securely positioned for the future,” the local branch of union IG Metall said. (…)

Wall Street’s Market Forecasts Are Out for 2025 — Be Dubious A quarter-century of predictions show that forecasters usually play it safe

Wall Street’s biggest firms have issued their latest forecasts for the S&P 500 in 2025. They sound a lot like the predictions they made over the last few years. And the years before that.

If hearing the brokerages’ average 2025 forecast of a 9.1% gain is giving you a sense of déjà vu, you’re onto something. Over the past 25 years, 53% of the 376 firm forecasts surveyed by Bloomberg clustered between 0% and 10%.

This might be understandable if annual market returns were scattered in the same way. In reality, they’re far more volatile:

(…) In seven of the past eight years, the market’s returns were outside the range of all forecasts compiled, often collectively underestimating the index’s return potential.

In fact, a similar pattern holds not just over the forecasting period, but over the prior century as well. Large gains and losses were more frequent than single-digit gains, which occurred just 14 times in 97 years.

Naturally, this disparity between forecasts and the historical record must lead to some unflattering results. Strategists on average missed the mark by more than 15 percentage points, though some were better than others. Still, even the “best” firm was off by an average of 10 points.

These errors tend to fall on the side of being too pessimistic, as 57% of all forecasts analyzed were less than the actual market returns, while 43% proved to be too high.

Professional forecasters prefer the 0 to 10% range because it aligns with the historical average, says Elliott Appel, a financial planner in Madison, WI. Clients may tolerate a mid-range miss more than an extreme one. “You look silly if you forecast 30% and the market is down 20%. If you forecast 10% and the market is down 20%, you are closer, and it’s easier to make an excuse for why the market went down. You can tell a story that sounds good that preserves your reputation.”

So what should average investors do with any given stock-market forecast they come across? Nothing, according to Elliott. “They should treat it as entertainment, much like you would a sports match.”

Quote of the year?

“What’s so bad about deflation?” he (Xi Jingping) asked his advisers, according to people close to Beijing’s decision-making. “Don’t people like it when things are cheaper?”

Bond Vigilantes Butting Heads With Washington’s Profligate Crowd

(…) While stronger economic data helped boost bond yields throughout most of Q3 and Q4, there’s now more “bad” reasons for the rise in yields. As a result, bond yields have risen since the Fed started to ease in September even though the Citigroup Economic Surprise Index has been falling (chart).

GDP. Q3 real GDP was revised up from 2.8% to 3.1%, led by an increase in personal consumption expenditures from 3.5% to 3.7% (chart). Investment in equipment and intellectual property were both revised higher as well, a good sign for future productivity growth.

Real final sales to domestic purchasers, what Fed Chair Jerome Powell likes to refer to as core GDP, was revised from 3.2% to 3.4% in Q3. Real disposable personal income growth was also revised up from 0.8% to 1.1%. (…)

Jay Powell Wednesday repeated 7 times: “At 4.3 percent and change we believe policy is still meaningfully restrictive.”

Thursday:

• Real GDP growth: revised up 0.3pp to +3.1%
• Personal consumption growth: revised up 0.2pp to +3.7%
• Residential investment growth: revised up 0.7pp to -4.3%
• Government spending growth: revised up 0.1pp to +5.1%
• Business fixed investment growth: revised up by 0.2pp to +4.0
• investment growth in intellectual property: revised up 0.6pp to +3.1%
• equipment investment growth: revised up 0.2pp to +10.8%
• Contribution from net exports: revised up 0.2pp to -0.4pp
• export growth: revised up 2.1pp.
• Real domestic final sales growth: revised up 0.2pp to +3.7%.

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Ed Yardeni devised a simple way to judge whether the Fed is restrictive or not. Recessions tend to coincide with periods when the FFR exceeds nominal GDP growth. The spread is currently close to zero, suggesting that the FFR isn’t too restrictive.

Neither are the bond vigilantes, yet:

US Existing-Home Sales Rise as Buyers Accept High Mortgage Rates Contract closings rose to 4.15 million pace, most since March

(…) November’s improvement aside, the market for previously owned homes has been stagnant with annual sales hovering around 4 million homes for the past two years, a ho-hum level that’s just three-quarters the pre-pandemic trend. That’s been due in part to a historic shortage of homes for sale as owners refuse to list their properties and give up their existing 3% mortgage rates, which in turn has driven up prices. (…)

Affordability remains a major hangup. The median sale price of a previously owned home increased 4.7% from a year earlier to $406,100 last month, a record for the month of November. And while the Federal Reserve has lowered its benchmark interest rate by a full percentage point since September, mortgage rates remain twice their level from year-end 2021 and are expected to stay above 6% for at least another two years, according to the Mortgage Bankers Association.

Home financing costs for a 30-year fixed-rate contract were 6.75% in the week ended Dec. 13, per MBA data. Treasury yields — which influence mortgage rates — spiked Wednesday after the Fed’s final meeting of 2024, in which central bankers forecast fewer rate cuts next year. (…)

  

FHFA and Wells Fargo Economics

Trump Threatens Tariffs If EU Doesn’t Buy More US Oil and Gas President-elect says the bloc must make up for trade deficit

(…) “I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!,” he said on Truth Social.

The US is the world’s largest producer of crude oil and the biggest exporter of liquefied natural gas. LNG buyers — including the EU and Vietnam — have already talked about purchasing more fuel from the US, in part to deter the threat of tariffs. (…)

“We are well-prepared for the possibility that things will become different with a new US administration,” German Foreign Minister Annalena Baerbock said after a Group of Seven meeting in Italy in late November. “If the new US administration pursues an ‘America first’ policy in the sectors of climate or trade, then our response will be ‘Europe united.’” (…)

LNG “is one of the topics that we touched upon,” von der Leyen said after a phone call with Trump. “We still get a whole lot of LNG via Russia, from Russia. And why not replace it with American LNG, which is cheaper, and brings down our energy prices.”

The US is already Europe’s biggest provider of LNG, but imports from Russia remain solidly in the second spot. EU officials are looking for ways to curb Moscow’s role as the war in Ukraine continues, even while Russian pipeline gas and LNG are largely outside of the scope of sanctions. The bloc will explore potential measures when they discuss a new sanctions package next month but stringent restrictions remain difficult, according to a person familiar with the matter, who spoke on the condition of anonymity.

In the short-term, the US doesn’t have much more capacity to increase shipments. And since LNG is sold through long-term contracts, adding shipments to Europe would require original buyers of the gas to agree to divert its shipments to Europe — but that wouldn’t boost the amount being exported by the US. Over the longer term, more capacity will come on line with dozens of projects in the US currently in the works. (…)

But the EU has still prepared for the possibility that it will end up in a trade war with Washington. The EU’s new anti-coercion instrument strengthens trade defenses and enables the commission, the bloc’s executive arm, to impose tariffs or other punitive measures in response to such politically motivated restrictions.

The EU also adopted a so-called foreign subsidies regulation, which allows the commission to prevent foreign companies that receive unfair state handouts from participating in public tenders or merger-and-acquisition deals in the bloc, among other measures. (…)

One potential problem is that U.S. domestic demand for natural gas is rising rapidly to fuel the AI boom. LNG exports may soon need to be curbed.

China’s Housing Rescue Falls Short in City That Signaled the Crisis The limits of government intervention are evident in Zhengzhou, where home prices keep falling.

Zhengzhou, where Foxconn Technology Group runs the world’s biggest iPhone factory, was among the first in the nation to see its housing market crash. Since 2022, the local government has adopted an array of measures to revive the market, from loans to developers to complete unfinished projects, offers to buy their surplus units and turn them into affordable housing, and even payments to residents who replace outdated homes.

Zhengzhou has tried so many ideas that officials from other cities have been flocking there to study its model. And yet home prices in Zhengzhou and the rest of China keep falling.

A recent visit by Bloomberg Businessweek to the city revealed evidence of the state intervention—cranes whirring again along the skyline thanks to government loans for long-stalled developments and people collecting keys to move into an affordable housing project—but would-be buyers remained on the sidelines, convinced that prices had far from bottomed out.

The public housing push, Zhengzhou’s boldest effort, isn’t making a dent in the oversupply of homes, because it’s too difficult for the local government to persuade developers to sell apartment complexes at enough of a discount to make the economics work.

The biggest problem in Zhengzhou and across the nation is that families, which have in recent years relied on real estate for almost 80% of their wealth, are hoarding cash. Without stability in the property market, the country is at risk of a prolonged economic stagnation similar to Japan’s “lost decade” in the 1990s.

Even with government intervention, there may be several more years of housing pain: China’s population is shrinking, consumers are worried about unemployment, and there are just too many homes.

Real estate will be a drag on growth for the world’s second-largest economy for at least five more years, predicts George Magnus, research associate at the University of Oxford China Centre and author of Red Flags: Why Xi’s China Is in Jeopardy. “We have definitely passed peak property in China,” he says, predicting once the market settles, home prices will be permanently lower. “The government cannot do anything to prevent this and can only try to smooth the transition or make it less uncomfortable.” (…)

After a brief recovery in October, residential sales fell again in November. National used-home prices have declined for 39 straight months through October, to a level about 30% below the July 2021 peak; Zhengzhou’s market has followed a similar trend. Fitch Ratings Inc. expects a 5% decline in new-home prices in 2025. (…)

The country’s glut of unsold new homes runs into the tens of millions, and a vast number of units that were presold but never built exacerbates the problem. Landing on definitive estimates for either is impossible because of the methodology used by the official statistics bureau. Bloomberg Economics estimates that the surplus of unsold homes would take over five years to sell, while Bloomberg Intelligence says it would cost 11 trillion yuan to complete the presold units. (…)

For local state-owned companies to be incentivized to scale up their purchases of inventory, analysts at Goldman Sachs Group Inc. have estimated that a discount of 30% may be needed, while Huatai Securities Co. analysts have suggested that markdowns of more than 50% may be required.

State purchasing of unsold units for public housing projects isn’t a quick fix for China’s housing problems, says Kristy Hung, an analyst at Bloomberg Intelligence. There’s a “perfect storm” of structural issues facing the market: demographic challenges, developers’ persistent liquidity crunch, unfinished homes weighing on buyers’ confidence and families stuck in a mindset that home prices won’t rise, she says: “These, together with a grim outlook on the economy and employment, on top of limited room for further policy support, lead us to believe that China’s housing market could be in for multiyear corrections.” (…)

• China’s Struggling Rich Cities Are Threatening the Entire Economy Fiscal hardship gripping poorer provinces is spilling into wealthy regions long considered slowdown-proof.

(…) The fiscal austerity that’s gripped poorer parts of China since the pandemic is now spilling into provinces that long seemed slowdown-proof, threatening the Communist Party’s ability to propel its $18 trillion economy. Preserving that earning power was given fresh urgency by the election victory of Donald Trump, who has pledged to choke off critical Chinese exports. (…)

In a worrying sign, the southern powerhouse of Guangdong in the first nine months of the year clocked its weakest expansion since the pandemic. The housing crash that’s made developers reluctant to purchase land choked off a key source of income, just as local governments collected less tax from struggling companies. A debt pile-up also made interest payments a growing burden. (…)

Foreign trade in Suzhou accounts for 6% of China’s total and nearly half of Jiangsu’s overall volumes. About 18,000 foreign companies operate there, with a combined investment of over $160 billion — the third largest in China. “Many families in Suzhou will be affected because very often both the husband and wife are employed by foreign companies,” Jiang said. “Their pullout from the city means job cuts here.”

What makes it an especially precarious moment for even well-off cities like Suzhou is that the local government is running a tight fiscal ship.

Authorities have scaled back salary and benefit payments for employees and reduced investment. Two years after reopening from Covid lockdowns, the Suzhou city government’s budget for meetings, service outsourcing, government car operations and maintenance is still at least 10% below its pre-pandemic levels.

Falling land sales are driving down Suzhou’s investment. Spending under a main budget for infrastructure is expected to decline 17% this year, after a 10% drop in 2023, according to Bloomberg calculations based on its budget numbers. (…)

While dwindling funding is hampering new investment, it’s by no means the only issue holding officials back from pursuing growth. The government’s anti-corruption campaign, for one, is making some local authorities inclined to do less to avoid making mistakes.

Audits and endless investigations into suspected graft are eroding officials’ desire to innovate at the local level, according to a senior partner at a law firm in Beijing who specializes in infrastructure financing and represents builders seeking delayed government payments.

Even though the 10-trillion-yuan debt swap plan sparked hope of unblocking some stalled payouts, the lawyer warns it so far remains wishful thinking, expressing doubt local officials who are “lying flat” can maximize the benefits of the program. (…)

• China Shorter Yields Sink to Two-Decade Low as Bond Fever Builds One-year yield slides to 0.85%, a level unseen since 2003

Bank of Russia Holds Key Rate at 21% Even as Inflation Rises

(…) Russia’s annual inflation accelerated again in November to 8.9% from 8.5% in the previous month, even after the central bank increased the key rate in October. Inflation expectations, a closely watched metric for monetary policymakers, reached 13.9% in December, the highest level in a year.

The central bank began the year signaling it would consider monetary easing in the second half. Instead, it has sharply raised the benchmark from 16% since July as its bet on a slowdown in price growth failed to materialize. The central bank sees inflation returning to its target in 2026.

Massive budget spending on the war in Ukraine and social programs have kept the economy overheated, while acute labor shortages have led to stiff competition for workers that’s driving up wages. Production, meanwhile, hasn’t been able to expand quickly enough to keep pace with rapidly increasing demand.

The central bank’s plan to cool demand by making credit prohibitively expensive has so far acted as a brake on economic growth, but not on rising prices.

Annual price growth as of Dec. 16 reached 9.52% while food inflation accelerated to 10.93%, weekly data published by the Economy Ministry showed. Vegetables were 24% more expensive than in the previous year.

The central bank said a “cooling of credit activity has already encompassed all segments of the credit market,” and warned that would continue into next year amid the tight monetary conditions. Nonetheless, the bank said that the balance of inflation risks in the medium-term “is still tilted to the upside.” (…)

As the War Boom Ends, the Kremlin Faces Growing Economic Risks

(…) Russia’s total military spending will be somewhere between 7 per cent and 8 per cent of gross domestic product (GDP), simi­lar to the 2024 level, which was a record in Russian post-Soviet history. In 2021, the year before Russia’s full-scale invasion of Ukraine, military spending was just 3.6 per cent of GDP. How much of Russian budg­etary expenditures do, in fact, go towards the war is very difficult to assess. Spending not directly related to the military, such as healthcare and construction in the illegally annexed Ukrainian territories, inflates the overall bill. (…)

Since 2023, energy revenues have declined amid falling prices on global commodity markets and with sanctions cutting into Russian export revenues. As a result, Russia has recently been running budget deficits, but at around 2 per cent of GDP, they do not threaten economic stability. Fiscal short­falls of this magnitude can be covered by the National Welfare Fund and domestic borrowing for several years.

Starting in 2025, some taxes will be hiked so that the budget can return to structural balance, despite increased military spend­ing: high-income earners will face higher income taxes and corporations higher profit taxes. Revenues will also be raised through much higher fees on imports of cars and lorries. At the same time, social expenditures are declining, not because of cuts in welfare but because the number of pension­ers is falling – the official retirement age is gradually being raised and Russia suf­fered a very high Covid death toll, especially among the elderly. However, it is doubt­ful whether Russia’s budget deficit will, in fact, shrink according to plan: since 2022, spending has been significantly higher than planned each year. (…)

Throughout 2024, Russian weapons production has increased more slowly than during the previous two years. The main reason is probably the lack of specialized personnel. Also, the construction of new factories takes time and that process has been at least slowed down by Western sanc­tions, as specialized machinery can no longer be imported so readily.

Despite the increase in arms production, Russia continues to struggle to make up for the material losses it suffers at the front. Moscow has to rely on imports from coun­tries such as Iran or North Korea. In the case of some weapons systems, the industry is able to deliver in large quantities only because it is tapping into the stocks of vehicles that were built up during the Soviet era. Only about 20 per cent of new armoured vehicles are built from scratch. This means that much of the cost of Russia’s current war against Ukraine today has, in fact, been met by the state expenditures of the Soviet Union.

Meanwhile, the recruitment of soldiers has slowed somewhat, too, according to official figures, and has become much more expensive. According to the Russian Defence Ministry, 540,000 recruits were added in 2023, while Dmitry Medvedev, the deputy chairman of Russia’s Security Council, announced that another 190,000 signed up during the period January-July 2024. It is very difficult to verify these figures, but they are generally supported by indicators such as Russian budget spending on recruit­ment. (…)

So far, the Krem­lin has been able to find enough recruits to replace – at least quantitatively – those lost at the front. (…)

The enormous war expenditures have led to a sharp increase in aggregate demand. Russian Finance Minister Anton Siluanov estimates that the fiscal impulse for the period 2022–24 totalled 10 per cent of Russia’s annual GDP. The result has been high GDP growth rates: in 2023, the Russian economy grew 3.6 per cent, largely owing to the creation of 2 million new jobs, most of which were in the defence industry and the army.

However, this growth model has reached its limits. Unemployment is at a historical low of 2.3 per cent and there is an acute labour shortage. The Russian Central Bank still expects the economy to grow around 3.5–4 per cent this year; but most of that growth will be due to the statistical base effect (meaning that last year’s dynamics are reflected, not the current situation). In fact, the Russian economy has barely grown since early 2024. And in September of this year, leading indicators such as the S&P Purchasing Managers’ Index were already signalling a contraction in Russian manu­facturing – for the first time since 2022.

Russia’s labour shortage is exacerbated by demographic trends. Each year, the population in the 20-65 age group shrinks by about 1 million people. The impact of this development on the labour markets can be only partly offset by the gradual increase of the retirement age. In addition, labour migration to Russia has fallen to its lowest level in 10 years owing to an increas­ingly hostile environment, harassment and even occupational bans for migrants in Russia, among other reasons. (…)

In 2024 alone, the average wage grew by 19 per cent over the previous year. In the Russian military-industrial complex, the pay hikes have been even bigger. For example, Russia’s largest tank manufacturer, Uralvagonzavod, increased wages by 12 per cent in May 2024 and then again by 28 per cent in August.

The higher wages have led to optimism about the economy among the Russian population. Consumer spending is on the rise. But prices are rising, too: in October 2024, seasonally adjusted core inflation was 9.7 per cent annualized. Western sanctions are partly responsible for inflation, as they make imports more expensive by complicating international logistics and payments for Russian businesses. At the same time, Russian export revenues from oil, coal and other commodities have decreased under the sanctions; as a result, the ruble has weakened, which means higher import prices. (…)

Short-term interest rates are at their highest level in 25 years. This creates stronger head­winds for the Russian economy because companies’ interest costs rise and demand fall. The construction sector has been par­ticularly hard hit: mortgage rates have risen to more than 30 per cent. At the same time, government subsidies for mortgages were cut in the summer. (…)

While the economic difficulties are likely to dampen optimism among the population and force the government to make political trade-offs, Russia’s ability to fight the war in Ukraine will not be directly affected. More important in this respect is the success of recruitment campaigns and the capacity of the Russian military-industrial complex. The future of Russian arms production hinges on the remaining stocks of Soviet-era armoured vehicles. Depending on the weapons system, these stocks have shrunk considerably; and in some cases, maintaining production volumes could become more difficult as soon as in 2025. To con­tinue fighting Ukraine at the same level of intensity, Russia would have to significantly increase the capacity of its arms industry.

The extent to which the economic slowdown becomes a problem for Russia also depends on the price of oil next year. A sus­tained decline in export revenues would lead to a rapid deterioration in the economic outlook. The Central Bank would be unable to intervene effectively because most of its reserves are frozen under Western sanc­tions. The devaluation of the ruble, high inflation and recession would all be inevi­table. (…)

More Men Are Addicted to the ‘Crack Cocaine’ of the Stock Market Gamblers Anonymous meetings are filling up with people hooked on trading and betting. Apps make it as easy as ordering takeout.

At Gamblers Anonymous in the Murray Hill neighborhood of Manhattan, one man called options “the crack cocaine” of the stock market. Another said he faced hundreds of thousands of dollars in trading losses after borrowing from a loan shark to double down on stocks.  And one young man brought his mom and girlfriend to celebrate one year since his last bet.

They were among a group of about 60 people, almost all men, who sat in rows of metal folding chairs in a crowded church basement that evening. Some shared their struggle with addiction—not on sports apps or at Las Vegas casinos—but using brokerage apps like Robinhood. (…)

In an age where sports betting has become an accepted pastime—accessible by the flick of the thumb on an iPhone app—they found the same rush betting on dogecoin, Tesla or Nvidia as wagering on Patrick Mahomes to carry the Kansas City Chiefs to the Super Bowl. 

Doctors and counselors say they are seeing more cases of compulsive gambling in financial markets, or an uncontrollable urge to bet. They expect the problem to worsen. (…)

Wall Street keeps introducing newer and riskier ways to play the market through stock options or complex exchange-traded products that use borrowed money and compound the risk for investors. (…)

Activity in options is on track to smash another record this year.  Trading in contracts expiring the same day, which are the riskiest, has soared to make up more than half of all trades in the market for S&P 500 index options this year, according to figures from SpotGamma. These trades are more electric than traditional stocks, with the potential to rocket higher or plunge to zero within minutes. (…)

Unfortunately, there is only one proven large scale remedy: a bear market.