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The Israel-Hamas war could have a significant impact on economic growth and inflation in the euro zone unless energy price pressures remain contained, according to Goldman Sachs.

The ongoing hostilities could affect European economies via lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence, Europe Economics Analyst Katya Vashkinskaya highlighted in a research note Wednesday.

Concerns are growing among economists that the conflict could spill over and engulf the Middle East, with Israel and Lebanon exchanging missiles as Israel continues to bombard Gaza, resulting in massive civilian casualties and a deepening humanitarian crisis.

Although the tensions could affect European economic activity via lower trade with the Middle East, Vashkinskaya highlighted that the continent’s exposure is limited, given that the euro area exports around 0.4% of the GDP to Israel and its neighbors, while the British trade exposure is less than 0.2% of the GDP.

She noted that tighter financial conditions could weigh on growth and exacerbate the existing drag on economic activity from higher interest rates in both the euro area and the U.K. However, Goldman does not see a clear pattern between financial conditions and previous episodes of tension in the Middle East

The most important and potentially impactful way in which tensions could spill over into the European economy is through oil and gas markets, Vashkinskaya said.

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“Since the current conflict broke out, commodities markets have seen increased volatility, with Brent crude oil and European natural gas prices up by around 9% and 34% at the peak respectively,” she said.

Goldman’s commodities team assessed a set of downside scenarios in which oil prices could rise by between 5% and 20% above the baseline, depending on the severity of the oil supply shock.

“A persistent 10% oil price increase usually reduces Euro area real GDP by about 0.2% after one year and boosts consumer prices by almost 0.3pp over this time, with similar effects observed in the U.K.,” Vashkinskaya said.

“However, for the drag to appear, oil prices must remain consistently elevated, which is already in question, with the Brent crude oil price almost back at pre-conflict levels at the end of October.”

Gas price developments present a more acute challenge, she suggested, with the price increase driven by a reduction in global LNG (liquefied natural gas) exports from Israeli gas fields and the current gas market less able to respond to adverse supply shocks.

“While our commodities team’s estimates point to a sizeable increase in European natural gas prices in case of a supply downside scenario in the range of 102-200 EUR/MWh, we believe that the policy response to continue existing or re-start previous energy cost support policies would buffer the disposable income hit and support firms, if such risks were to materialize,” Vashkinskaya said.

The labor market showed greater deterioration for Hispanic workers, whose unemployment rate rose more than that of the U.S.’, according to data released Friday by the Department of Labor.

The overall unemployment rate rose 0.1% to 3.9% last month, the highest level since January 2022, against expectations that it would hold steady at 3.8%. Among Hispanic Americans, the jobless rate rose 0.2% to 4.8%.

Black Americans, the group with the highest jobless percentage in America, saw their unemployment rate tick up 0.1% to 5.8% last month. The record low for Black unemployment is 5.4% in October 2019.

“When averages tick downwards, there’s often larger movement at the bottom end of the wage distribution,” Julia Pollak, ZipRecruiter’s chief economist, told CNBC. “Low-wage workers, less-educated workers and those facing barriers to employment suffer the brunt of any slowdown in the labor market.”

Black and Hispanic Americans were hit particularly hard by the business shutdowns in the depths of the Covid-19 pandemic, with the unemployment rate for Black workers peaking at 16.8% in 2020 and the Hispanic jobless rate surging as high as 18.8%. The overall unemployment rate hit a high of 14.7% in April 2020.

Asian Americans, while having the lowest jobless rate among different demographic groups, saw the biggest percentage increase in unemployment. The rate rose 0.3% to 3.1% in October.

The Federal Reserve, which has a dual mandate that includes full employment, has deliberately tried to slow the economy to tackle inflation. Fed Chair Jerome Powell said earlier this week that slower growth and a softer labor market are still “likely” needed to tame price pressures.

The participation rate for Hispanic workers declined to 66.9% last month from 67.3% in September. Overall, the labor force participation rate declined slightly to 62.7%, while the labor force contracted by 201,000.

Friday’s market reaction to the jobs report comes down to a simple premise: bad news is good news, as long as it isn’t too bad.

Stocks rallied sharply after the Labor Department said nonfarm payrolls rose by 150,000 in October — 20,000 fewer than expected but a difference attributable pretty much completely to the auto strikes, which appear to be over.

For the Federal Reserve, the relatively muted job creation coupled with wage gains nearly in line with expectations adds up to a scenario in which the central bank doesn’t really have to do anything. It can just continue to let the data flow in, without having to move on interest rates as it evaluates the impact of its previous 11 hikes.

“The Fed finally got what it’s been looking for — a meaningful slowdown in the labor market,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office.

“We’ve seen one or two head fakes in this direction before, but the fact that this report followed other weaker-than-expected economic data points this week may encourage investors who have been waiting for a less-hawkish Fed,” he added.

Markets reacted in more ways than one to the report. Traders in fed funds futures reduced the probability for a December rate hike to less than 10% and now see the first cut coming as soon as May, according to CME Group tracking.

However, that cut could be the really bad news, as it likely would signal the Fed’s concern that the economy is slowing so much that it needs a boost from monetary policy. Slow, controlled growth is something the markets and the Fed are seeking in the current climate, negative growth is not.

“Investors who are eager for the Fed to be cutting rates should be careful what they wish for,” Michael Arone, chief investment strategist at State Street Global Advisors, said in an interview earlier this week.

Despite market pricing, it seems like cuts aren’t around the corner if recent statements from Fed officials are any indication. Fed Chairman Jerome Powell said Wednesday that cuts have not been a part of the conversation among policymakers.

“It seems like that’s still a ways off in my mind,” Richmond Fed President Thomas Barkin said during an interview Friday on CNBC’s “Squawk on the Street.” “You could imagine scenarios where demand comes off and you have to do something. You could imagine a scenario where inflation is starting to settle and you want to lower real rates. Both of those imaginary things still feel pretty far out the distance.”

The October jobs report showed a cooling labor market in the U.S., with many sectors showing minimal or negative growth as the economy added a relatively meager 150,000 jobs overall.

A bright spot came in health care and social assistance, which added more than 77,000 jobs. Within that, ambulatory health care gained 32,000 jobs.

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If private education was included in that category, as some economists choose to do, there would have been 89,000 jobs added in that group.

Government employment grew by 51,000, making it the second-strongest category in October. That sector has now returned to its pre-pandemic level, the U.S. Bureau of Labor Statistics said in the report.

“It’s usually a bad thing when job growth is led by the public service, but in this case, it is long overdue. The private sector jobs recovery was much stronger and much faster than that of the public sector,” said Julia Pollak, chief economist at ZipRecruiter.

Other areas showed meager job growth and saw employment shrink. Mining and logging, utilities and retail trade combined to add just 2,500 jobs. Information shed 9,000 jobs, while transportation and warehousing lost more than 12,000 jobs.

“Many workers in trucking, for example, are finding very, very soft economic conditions. You lose one job and it is not easy to find another. The same is true in tech,” Pollak said.

Manufacturing was the weakest sector in October, dropping 35,000 jobs. The decline was due largely to strike activity, the BLS report said. That should improve in November now that the United Auto Workers union has now reached tentative agreements with the three major Detroit automakers.

The world’s major central banks paused their interest rate hiking cycles in recent weeks and with data suggesting economies are softening, markets are turning their attention to the first round of cuts.

The U.S. Federal Reserve, European Central Bank and the Bank of England dramatically hiked rates over the last 18 months in a bid to tame runaway inflation.

The Fed on Wednesday held benchmark interest rates steady at a target range of 5.25%-5.5% for the second consecutive meeting after ending a string of 11 hikes in September.

Though Chairman Jerome Powell has been keen to reiterate that the Fed’s work on inflation is not yet done, the annual rise in the consumer price index came in at 3.7% in September, down from a pandemic-era peak of 9.1% in June 2022.

Yet despite Powell’s refusal to close the door on further increases in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rallied on the back of the decision.

The market is now narrowly pricing a first 25 basis point cut from the Fed on May 1, 2024, according to CME Group’s FedWatch tool, with 100 basis points of cuts now expected by the end of next year.

Since last week’s decision, U.S. nonfarm payrolls came in softer than expected for October, with job creation below trend, unemployment rising slightly and a further deceleration in wages. Although headline inflation remained unchanged at 3.7% annually from August to September, the core figure came down to 4.1%, having roughly halved over the last 12 months.

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“Core PCE, which is the Fed’s preferred inflation metric, is even lower at 2.5% (3-month, annualized),” noted analysts at DBRS Morningstar.

“The lagged effects of a cooler housing market should reinforce the disinflationary trend over the next few months.”

But despite the dovish data points, short-term U.S. Treasurys reversed course to sell off on Monday, which Deutsche Bank’s Jim Reid chalked up to investors beginning to “wonder if last week’s narrative about rate cuts was overdone.”

“The U.S. economy is also proving more resilient than the U.K. and euro zone,” he said.

“For instance, market pricing for the Fed now implies a 16% chance of another rate hike, up from 11% on Friday,” Reid said in an email Tuesday.

“Moreover, the rate priced in by the December 2024 meeting was up +12.4bps to 4.47%. So there was a clear, albeit partial unwinding of last week’s moves.”

Reid also highlighted that this is the seventh time this cycle that markets have notably reacted on dovish speculation.

“Clearly rates aren’t going to keep going up forever, but on the previous 6 occasions we saw hopes for near-term rate cuts dashed every time. Note that we’ve still got above-target inflation in every G7 country,” he added.

Chicago Federal Reserve President Austan Goolsbee said Tuesday a soft landing is still on the table as the central bank seeks to combat inflation without hurting the economy significantly.

“Because of some of the strangeness of this moment, there is the possibility of the golden path … that we got inflation down without a recession,” Goolsbee said on CNBC’s “Squawk Box.” “If that happened … it would just be a continuation of what we’ve already seen this year, which is unemployment up very modestly, while inflation has come down a lot. … That’s our goal.”

The Fed kept interest rates steady last week, the second consecutive meeting that the Federal Open Market Committee chose to hold, following a string of 11 rate hikes.

Core inflation, per the personal consumption expenditures price index, is currently running at 3.7% on an annual basis, still well above the Fed’s 2% annual target. Goolsbee emphasized that the decline in price pressures so far has already been a great achievement.

“The fastest drop in the inflation rate in any year was 1982,” Goolsbee said. “We’ll see what happens over the next couple of months. We might equal the fastest dropping inflation in the last century. So we’re making progress on the inflation rate.”

The economy has held up well so far amid the tightening measures over the past year and a half. Gross domestic product expanded at a 4.9% annualized rate in the third quarter, stronger than even elevated expectations.

Goolsbee stressed that accomplishing such a “golden path” against a historic surge in inflation won’t be an easy task.

“Unusually for a soft landing of this magnitude, there has never been an inflation rate drop, to get inflation down as much as we’re getting it down without a big recession. That’s basically never happened,” he said. “Let’s shoot to try to manage that.”

The Fed president said the central bank will be data dependent going forward, echoing Chair Jerome Powell’s comments last week.

Powell previously said the central bank hasn’t made any decisions yet for its December meeting, saying that “The committee will always do what it thinks is appropriate at the time.”

The consumer took a spending break ahead of the holiday season, with October retail sales, excluding autos and gas, falling by 0.08%, and core retail, which also removes restaurants, declining by 0.03%, according to the new CNBC/NRF Retail Monitor.

The new Retail Monitor, debuting Monday, is a joint product of CNBC and the National Retail Federation based on data from Affinity Solutions, a leading consumer purchase insights company. The data is sourced from more than 9 billion annual credit and debit card transactions collected and anonymized by Affinity and accounting for more than $500 billion in sales. The cards are issued by more than 1,400 financial institutions.

The data differs from the Census Bureau’s retail sales report as it is the result of actual consumer purchases, while the Census relies on survey data. The government data is frequently revised as additional survey data becomes available. The CNBC/NRF Retail Monitor is not revised as it’s calculated from actual transactions during the month. It is, however, seasonally adjusted, using the same program employed by Census.

“The CNBC/NRF Retail Monitor will modernize how retail sales are tracked and measured, and Affinity Solutions’ vast dataset of how, what and where the consumer is spending will identify how key demographics and channels are performing for the industry generally and for specific retail sectors,″ said NRF President and CEO Matthew Shay.

“Our audience, investors and executives alike, will now be armed with dynamic insights that go beyond headline numbers to show emerging trends and critical detail,” CNBC Senior Vice President of Business News Dan Colarusso said.

Weakness in electronics and furniture

The October data shows a cooling of consumer spending, in line with the consensus of Wall Street forecasts. Year over year, overall retail and core retail sales are both up 2.6%.

The October data showed weakness in gas station sales, electronics and appliances, and furniture and home stores. There was strength in sporting goods and hobby stores and nonstore retails, or internet sales, along with health and personal care.

Starting modestly before the Covid pandemic, and accelerating amid the outbreak, economists turned to real and high-frequency private sector data to gauge the economy. In some cases, it was due to the absence of government data, with some agencies unable to gather information and others finding response rates limited. In other cases, economists looked to data that was not readily available from government sources, like subway ridership data or how much consumer spending occurred “with card not present” to gauge whether Americans continued to shun shopping in person.

While the pandemic passed, the move toward actual, high-frequency and private sector data has continued to expand.

“The Retail Monitor heralds a new era of retail intelligence, where data isn’t just a resource – it’s a roadmap to understanding and engaging with the modern consumer,” Affinity Solutions founder and CEO Jonathan Silver said. Affinity is also a leading provider of data to Wall Street.

In coming months, the Retail Monitor will provide demographic breakdowns of spending by age, income and geography.

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.

In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.

The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.

“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”

The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.

“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the U.S. economy and giving a potential green light to the Federal Reserve to stop raising interest rates.

The consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday. Economists surveyed by Dow Jones had been looking for respective readings of 0.1% and 3.3%.

The headline CPI had increased 0.4% in September.

Excluding volatile food and energy prices, the core CPI increased 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual level was the lowest in two years, down from 4.1% in September, though still well above the Federal Reserve’s 2% target. However, Fed officials have stressed that they want to see a series of declines in core readings, which has been the case since April.

Markets spiked following the news. The Dow Jones Industrial Average roared higher by nearly 500 points as Treasury yields fell sharply. Traders also took any potential Fed rate hikes almost completely off the table, according to CME Group data.

“The Fed looks smart for effectively ending its tightening cycle as inflation continues to slow. Yields are down significantly as the last of investors not convinced the Fed is done are likely throwing in the towel,” said Bryce Doty, portfolio manager at Sit Fixed Income Advisors.

The flat reading on the headline CPI came as energy prices declined 2.5% for the month, offsetting a 0.3% increase in the food index. It was the slowest monthly pace since July 2022.

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Shelter costs, a key component in the index, rose 0.3% in October, half the gain in September as the year-over-year increase eased to 6.7%. Within the category, owners equivalent rent, which gauges what property owners could command for rent, increased 0.4%. A subcategory that includes hotel and motel pricing dropped 2.9%.

“This is a game changer,” Paul McCulley, former chief economist at Pimco and now an adjunct professor at Georgetown University, said on CNBC’s “Squawk on the Street.” “We’re having a day of rational exuberance, because the data clearly show what we’ve been waiting for for a long time, which is a crack in the shelter component.”

Chicago Fed President Austan Goolsbee called the report “slow but clear progress” on getting inflation back to healthy levels.

Vehicle costs, which had been a key inflation component during the spike in 2021-22, fell on the month. New vehicle prices declined 0.1%, while used vehicle prices were off 0.8% and were down 7.1% from a year ago.

Airfares, another closely watched component, declined 0.9% and are off 13.2% annually. Motor vehicle insurance, however, saw a 1.9% increase and was up 19.2% from a year ago.

The report comes as markets are closely watching the Fed for its next steps in a battle against persistent inflation that began in March 2022. The central bank ultimately increased its key borrowing rate 11 times for a total of 5.25 percentage points.

While markets overwhelmingly believe the Fed is done tightening monetary policy, the data of late has sent conflicting signals.

Nonfarm payrolls in October increased by just 150,000, indicating the labor market finally is showing signs that it is reacting to Fed efforts to correct a supply-demand imbalance that has been a contributing inflation factor.

Labor costs have been increasing at a much slower pace over the past year and a half as productivity has been on the rise this year.

Real average hourly earnings — adjusted for inflation — increased 0.2% on a monthly basis in October but were up just 0.8% from a year ago, according to a separate Labor Department release.

More broadly speaking, gross domestic product surged in the third quarter, rising at a 4.9% annualized pace, though most economists expect the growth rate to slow considerably.

However, other indicators show that consumer inflation expectations are still rising, the likely product of a spike in gasoline prices and uncertainty caused by the wars in Ukraine and Gaza.

Fed Chair Jerome Powell last week added to market anxiety when he said he and his fellow policymakers remain unconvinced that they’ve done enough to get inflation back down to a 2% annual rate and won’t hesitate to raise rates if more progress isn’t made.

“Despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to the long-run 2% target,” said Jeffrey Roach, chief economist at LPL Financial.

Even if the Fed is done hiking, there’s more uncertainty over how long it will keep benchmark rates at their highest level in some 22 years.

Wholesale prices in October posted their biggest decline in 3½ years, providing another indication that the worst of the inflation surge may have passed.

The producer price index, which measures final-demand costs for businesses, declined 0.5% for the month, against expectations for a 0.1% increase from the Dow Jones consensus, the Labor Department reported Wednesday. The department said that was the biggest monthly decline since April 2020.

On a yearly basis, headline PPI posted a 1.3% increase, down from 2.2% in September.

Excluding food and energy, core PPI was unchanged, also below the forecast for a 0.3% increase. Excluding food, energy and trade services, the index increased 0.1%.

The report comes a day after the Labor Department said the consumer price index, which measures prices for goods and services at the consumer level, was unchanged in October from the previous month. That set off an aggressive rally on Wall Street, where sentiment is rising that the Federal Reserve is done raising interest rates and could in fact start cutting in the first half of 2024.

However, consumers in October displayed some sensitivity to prices.

The Commerce Department’s advance retail sales report for the month showed a decline of 0.1%, according to a number that is adjusted for seasonal factors but not inflation. Wall Street had been looking for a drop of 0.2%. Excluding autos, sales rose 0.1%, compared with expectations for an unchanged number.

Price declines came primarily from the goods side, as the index slid 1.4%, according to the PPI report. Final demand services prices were unchanged. A spike in goods prices caused by outsized demand for big-ticket items in the early days of the Covid pandemic helped fuel the inflation surge.

Some 80% of the drop in goods prices came from a 15.3% tumble in gasoline prices, the Labor Department said.

On the services side, transportation and warehousing costs increased 1.5%, while trade services declined 0.7%. Airline passenger services prices increased 3.1%.

From the consumer standpoint, sales also were held back by the decrease in gasoline prices, with sales at service stations down 0.3%, the Commerce Department reported. Motor vehicles and parts dealers saw a decline of 1% while furniture and home furnishing stores reported a 2% drop. Both food and beverage and electronics and appliance stores showed increases of 0.6%.

The control group of retail sales that the Commerce Department uses to compute gross domestic product showed a 0.2% gain. Sales overall increased 2.5% from a year ago.

Stocks were positive following the report while Treasury yields also were higher.

In other economic news, the Empire State Manufacturing Survey, which gauges conditions in the New York area, posted an unexpected increase of 14 points to 9.1, better than the estimate for a -3 reading. The number represents the percentage of companies seeing expansion against contraction, so any positive number indicates growth.

The report, from the New York Federal Reserve, showed gains in inventories and shipments, while the indexes for employment, prices and unfilled orders fell.