Real Time Economics: Trump Eases Tensions with China, Ratchets Up Pressure on Fed


This post is by Jeffrey Sparshott from Real Time Economics


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It’s Fed day! The central bank is under unusal pressure as it considers cutting rates, U.S.-China trade talks are back on track and American employers are getting stingier with bonuses. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

Trump and Xi to Meet

President Trump and Chinese President Xi Jinping agreed to meet in Japan next week, lifting financial markets and spurring hopes for a trade truce, Vivian Salama, William Mauldin and Josh Zumbrun report. Both sides are under pressure to get back to the bargaining table.

  • The Trump administration’s plan to levy new tariffs on $300 billion in Chinese goods has generated stiffer resistance than the introduction previous duties.
  • China has said it is in no haste to make a deal. Even so, its economy is weakening and economists say the trade conflict is sapping domestic demand and investor confidence.
  • Big hurdles remain before the sides can restart formal talks or clinch a possible deal. Washington wants Beijing to commit to changing laws and economic policies, and also wants to phase out punitive tariffs over time to ensure Beijing follows through on pledges.
  • Chinese officials want the tariffs lifted at the time a deal is signed and are reluctant to accede to U.S. demands that a deal spell out changes to laws and regulations.

WHAT TO WATCH TODAY

European Central Bank President Mario Draghi gives closing remarks at the ECB’s central banking forum in Sintra, Portugal, at 10:00 a.m. ET.

The Federal Reserve releases a policy statement at 2 p.m. ET and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET.

TOP STORIES

Under Pressure

Federal Reserve officials wrap up their two-day policy meeting this afternoon. They’re under unusual pressure right now. First, markets increasingly expect them to lower interest rates more than once this year. Second, President Trump has repeatedly called on the central bank to cut rates, meaning any decision could be viewed by the markets through a political lens, Nick Timiraos reports.

  • The argument for leaving rates unchanged: Even though global growth has weakened, the U.S. economy still looks relatively resilient. Trade tensions have clouded the outlook but they could resolve themselves in the weeks ahead. If the outlook worsens, the Fed could cut rates when it next meets in July.
  • The argument for cutting interest rates now: Why wait? If officials think the outlook is making a July rate cut more likely, they may see a bigger boost to the economy from moving now, when markets aren’t expecting it.

Trump Rebukes…

Jerome Powell: President Trump suggested he could consider demoting the Fed chairman. Bloomberg News reported that, in February, the White House Counsel’s Office weighed the legality of stripping Mr. Powell of his chairmanship but leaving him on the Fed’s board of governors—comments the president echoed on Tuesday.

Mario Draghi: President Trump wants the Fed to cut rates. But not the European Central Bank. “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA,” Mr. Trump tweeted soon after Mr. Draghi, the ECB’s president, signaled the bank could roll out fresh stimulus as soon as July.

What Does the Data Say

The U.S. isn’t in a recession and odds are there won’t be one soon. The Atlanta Fed’s closely-watched GDPNow model is tracking second-quarter growth at 2%—just last month it was an anemic 1.2%. Solid consumer spending is helping offset soft spots elsewhere in the economy.

Fed economist Claudia Sahm recently unveiled a model that since 1970 has accurately flashed a bright-red warning signal early into a downturn. It’s not even close to suggesting we’re entering a recession.

But U.S. payrolls softened in May, U.S. factory output is down over the first five months of the year, the housing market is in a rut, trade tensions are weighing on global growth and the Fed keeps falling short of its inflation target. Investors have noticed. New York Fed researchers use the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession twelve months ahead. The figure is elevated.

What to Expect When You’re Expecting a Rate Cut

“Powell needs to signal that the Fed will ease if needed, but he shouldn’t commit to it.” —Maria Cosma, Moody’s Analytics

“The overall message from the Fed will remain dovish, leaving the door open for a rate cut in the not-too-distant future.” —Kevin Cummins and Michelle Girard, NatWest

“The outcome of this week’s meeting should open the door for policy-easing as soon as July, and we now anticipate the Fed will ultimately cut three times this year.” —Justin Weidner, Deutsche Bank Securities

“While we don’t expect any Fed easing this week, we have changed our forecast to include two 25-basis-point cuts in the funds rate in the second half of this year.” —Jim O’Sullivan, High Frequency Economics

“Escalating trade tensions won’t be enough for the Fed to send a strong signal for a rate cut in July.” —Charlie Ripley, Allianz Investment Management

“While the Fed may ease policy if economic conditions worsen, we believe the market is wrong on the timing and magnitude of any rate cuts.” —Mark Haefele, UBS

Just Once

A boom in employee bonuses handed out by some companies in the wake of the 2017 Republican tax cut proved to be temporary. Private-sector companies’ spending on nonproduction bonuses fell 24% in the first quarter of 2019 from a year earlier, the largest decrease for the category of benefit costs on record back to 2005. Those payments jumped in late 2017 and early 2018 after Congress approved its package of tax cuts, Eric Morath reports.

What Else We’re Following

Japan’s exports tumbled for the sixth straight month in May, hit by a sharp drop in shipments of chip-making tools and automobile parts. Rising global economic uncertainty, and the broad slowdown in the global economy is hurting exporters of precision equipment. Exports to China, Japan’s biggest trading partner, fell almost 10% year-over-year.

President Emmanuel Macron is preparing to cut the country’s unemployment benefits. Mr. Macron is seizing on a collapse in public support for the yellow-vest protest movement, which paralyzed his administration when it began late last year.

Boeing won a landmark 737 MAX order from British Airways parent IAG. IAG said at the Paris Air Show it had signed a letter of intent for up to 200 Boeing 737 MAX planes. The deal ends a sales drought and is the biggest vote of confidence in the beleaguered plane since its grounding more than three months ago. It could also offer a small boost for the economy—aircraft sales show up in data such as durable goods orders and exports.

WHAT ELSE WE’RE READING

Maybe GDP is the wrong way to measure an economy. “Last month, [New Zealand] released its first ‘Wellbeing Budget.’ Contra most national spending plans, the goal of the coming year’s appropriations is not to boost gross domestic product but to increase the happiness of the country’s citizens. In the next fiscal year, all of New Zealand’s noncore spending must be oriented toward five well-being goals: improving mental health, reducing child poverty, supporting indigenous people, transitioning to a low-emissions economy and thriving in a digital age,” Christine Emba writes at the Washington Post.

It’s not millennials who are spending more and more time on screens. “Screen time has increased for those in their 60s, 70s, 80s and beyond, and the rise is apparent across genders and education levels. Meanwhile, the time that these older adults spend on other recreational activities, such as reading or socializing, has ticked down slightly,” Gretchen Livingston writes for the Pew Research Center.

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