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New York Fed's Williams Sees Recession Risk; Another Crypto Bankruptcy
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Good day. New York Fed chief John Williams said on Monday that there was a higher risk of a recession because of the Fed’s aggressive campaign to raise rates to combat high inflation. Mr. Williams, a key lieutenant to Fed Chair Jerome Powell, also said he expected rates would have to rise in 2023 to somewhat higher levels than he had penciled in during projections central bank officials submitted at their September meeting. Meanwhile, the cryptocurrency downturn has claimed another victim: Cryptocurrency lender BlockFi Inc. on Monday filed for chapter 11 bankruptcy protection, blaming this month’s failure of crypto exchange FTX and the slump in crypto prices this summer.
Now on to today’s news and analysis.
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Fed’s Williams Says Inflation Fight Could Last Into 2024
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John Williams, president of the Federal Reserve Bank of New York. He did nothing to push back against expectations for the central bank to lift rates by a half percentage point at its meeting next month. PHOTO: ANDREW HARRER/BLOOMBERG NEWS
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New York Fed President John Williams said he expects inflation pressures to recede over the next year but cautioned the Federal Reserve will continue to have its work cut out because prices may decelerate to levels still above the central bank’s 2% target.
Mr. Williams also said the risks of a recession were elevated because the central bank has had to raise rates rapidly to combat high inflation. “I hope [a recession] is not the case, but that’s clearly a risk out there given all of the uncertainty in the global economic outlook,” he told reporters during a videoconference following a speech to the Economic Club of New York.
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Yield Curve Inversion Reaches New Extremes
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Yields on longer-term U.S. Treasurys have fallen further below those on short-term bonds than at any time in decades, a sign that investors think the Federal Reserve is close to winning its inflation battle regardless of the cost to economic activity. Gene Tannuzzo, of asset management firm Columbia Threadneedle, said investors believe “the Fed does have credibility. Ultimately the Fed will win this inflation fight and in the meantime, we have to bear higher short-term interest rates.”
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Energy Companies Expect More Friends in Washington
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Oil-and-gas companies anticipate a friendlier environment in Washington next year when the House comes under Republican rule, while the clean-energy sector is bracing for the White House’s push away from fossil fuels to slow.
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Life-Insurance Payouts Hit Record in 2021
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U.S. life insurers paid a record $100 billion in 2021 in death benefits, fueled by another year of Covid-19 deaths, following a 15% year-over-year rise in 2020, when death-benefit payments totaled $90.43 billion.
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Key Developments Around the World
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Ukraine War’s Economic Ripples Sow Discord Between Allies
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Trans-Atlantic ties are starting to fray as French President Emmanuel Macron and other European leaders chafe at new U.S. policies they say compound economic woes fueled by the war in Ukraine and the resulting energy crisis.
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Chinese Protests Put Xi Jinping in a Bind
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President Xi Jinping faces a difficult choice between loosening China’s zero-tolerance Covid-19 policy or doubling down on restrictions that have locked down neighborhoods and stifled the country’s economy over the past three years.
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Financial Regulation Roundup
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BlockFi Seeks Bankruptcy Protection as Latest Crypto Casualty
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BlockFi Inc. filed for bankruptcy Monday, making it the latest major digital-assets firm in its largely unregulated industry to fail since FTX, with which the cryptocurrency lender is financially intertwined.
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Meta Fined $276 Million in Europe for Data-Scraping Leak
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A top European regulator fined Facebook owner Meta Platforms Inc. the equivalent of about $276 million for not better safeguarding more than half a billion users’ phone numbers and other information from so-called data scrapers.
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8:30 a.m.: ECB’s Schnabel speaks at Frankfurter Konjunkturgespräch organized by IG Metall in Frankfurt; Canada gross domestic product
9 a.m.: S&P CoreLogic Case-Shiller Home Price Index for September
10 a.m.: The Conference Board Consumer Confidence Survey for November; Bank of England’s Bailey speaks at House of Lords Economic Affairs Committee hearing
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Time N/A: ECB Governing Council non-monetary policy meeting in Frankfurt
5 a.m.: November flash estimate for euro area inflation
8:15 a.m.: ADP National Employment Report for November
8:50 a.m.: Fed’s Bowman speaks at ‘The Future of Minority Depository Institutions: MDI ConnectTech’ in Washington
12:35 p.m.: Fed’s Cook speaks to Detroit Economic Club
1:30 p.m.: Fed’s Powell speaks to Brookings Institution in Washington
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Latin American Economies to See Rate Cuts Before the U.S.
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Argentina, Brazil, Chile, Colombia and Mexico are expected “to enter a synchronized but mild recession next year,” Marcos Casarin of Oxford Economics says in a research report. But because those countries are further ahead on the tightening cycle than other economies, “they will be rewarded with the prize of cutting rates sooner than their peers” and are likely to start lowering rates in the second half of 2023, or ahead of the Federal Reserve by some six months, Mr. Casarin says. He adds that “investors are unlikely to tolerate episodes of fiscal slippage.”
—Paulo Trevisani
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Look for Mild U.S. Recession in 2023, Bank of America Says
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Bank of America expects a mild U.S. recession next year driven by weaker investment and consumer spending. The BofA economics team also expects inflation to fall to 3.2% by the fourth quarter of 2023, and it forecasts the Federal Reserve will lift the fed-funds target rate to 5% to 5.25% by March and then cut interest rates beginning in December. The team also sees the Fed’s balance-sheet runoff ending at the same time rate cuts start. BofA says a recession “may coincide with unusual behavior from a cyclical perspective.” It thinks trade may continue to add to growth as household spending rebalances toward services and expects auto makers to take advantage of any slowing in demand to intentionally rebuild inventories. Both are factors behind BofA’s expectation for a “relatively benign downturn by historical standards.”
—Patrick Sheridan
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Political Risk Returns to China and Looks Here to Stay
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Chinese leader Xi Jinping faces what could be the biggest test of his tenure and it could reshape how foreign multinationals operate in China and the flow of global manufacturing investment, Nathaniel Taplin writes.
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Texas manufacturing activity fell in November for the seventh consecutive month, adding to evidence of a slowdown in the factory sector, according to data from the Federal Reserve Bank of Dallas. Its index for general business activity of the Texas Manufacturing Outlook Survey rose from minus 19.4 in October to minus 14.4, still below the no-change threshold of zero. (Dow Jones Newswires)
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Canada swung to a current-account deficit in the third quarter, following surpluses the previous two quarters, largely thanks to a sharply lower goods surplus and a higher investment income deficit. The country’s current account recorded a deficit of 11.1 billion Canadian dollars, equivalent to about $8.3 billion, in the third quarter, Statistics Canada said. (DJN)
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Mexico ran up a $2.01 billion trade deficit in October, with a shortfall in petroleum trade partially offset by a surplus in the exchange of non-oil products. Exports grew 17.7% from a year earlier to $49.28 billion, led by a 19.8% rise in shipments of manufactured goods to $44.07 billion, the National Statistics Institute said. (DJN)
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China's official manufacturing PMI likely fell to 48.9 in November from 49.2 in October, due to recurrent Covid-19 lockdowns, according to the median forecast of economists polled by The Wall Street Journal. Factory production, like other economic activities, was affected by the latest Covid flare-ups in China. (DJN)
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Thailand's central bank is expected to increase the benchmark interest rate by 25 basis points to 1.25% at its final policy meeting this year, according to five out of six analysts polled by The Wall Street Journal. The rationale to continue raising interest rates remains clear, as the country's core inflation has remained steadily elevated, says Vishnu Varathan, the Asia Economics & Strategy Head at Mizuho Bank in a note. (DJN)
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South Korea's headline consumer inflation is tipped to ease to 5.1% in November from 5.7% in the previous month, according to the median forecast of seven economists polled by the Wall Street Journal. The likely easing is due to stabilizing food, gasoline and housing prices and a higher comparison base a year earlier. (DJN)
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Eurozone government bond yields extend their drop as November flash estimate Spanish inflation data came in significantly below expectations. November inflation data are closely-watched--German figures due later Tuesday and eurozone data due Wednesday--as they give key input for the size of the European Central Bank's interest rate rise in December. (DJN)
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Spain's inflation rate has eased markedly in November due to lower fuel and electricity prices. Consumer prices rose 6.6% in November compared with the same month a year earlier by European Union-harmonized standards, easing from the 7.3% increase registered in October, preliminary data from the Spanish statistics office INE showed Tuesday. This is the lowest level since January. (DJN)
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South Africa's unemployment rate eased to 32.9% in the third quarter from 33.9% in the second quarter, Statistics South Africa said Tuesday. The number of employed people increased by 204,000 to 15.8 million, and the number of unemployed people declined by 269,000 to 7.7 million in 3Q compared with 2Q. (DJN)
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This newsletter is compiled by James Christie in San Francisco.
Send us your tips, suggestions and feedback. Write to:
James Christie, Jon Hilsenrath, Michael S. Derby, Nell Henderson, Nick Timiraos, Paul Hannon, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Perry Cleveland-Peck, Michael Maloney, Paul Kiernan, James Glynn
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