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Central Bankers and Governments on Collision Course; BoE's Bailey in the Inflation Hot Seat; U.K. U-Turn
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Good day. Who will come out on top in the tussle between central banks and governments? Central banks have generally vowed to restore low inflation at any cost, and if they continue to raise interest rates they will raise the cost of servicing government debt and could put millions of people out of work. At the same time, many governments are spending heavily to absorb the blow of higher energy costs and to meet new commitments. As some economists see it, there are signs central banks are deferring more to governments’ needs. At the Bank of England, for example, Gov. Andrew Bailey is in the hottest of hot seats as he grapples with one of the highest inflation rates in Europe, a prime minister who has been openly critical of the central bank, and a government whose fiscal plan is seen as stepping on the inflationary gas. However, there may be some relief
for him today after the U.K. government said this morning that it won’t proceed with the removal of a 45% top rate of income tax, scrapping a key element of a plan announced late last month that triggered turmoil in the country’s financial markets and an intervention by the central bank.
Now on to today’s news and analysis.
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Higher Rates, Bond Sales Clash With Government Needs
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Bank of England officials said debt purchases were aimed at countering bond-market dysfunction that threatened financial stability, not to help the government borrow.
PHOTO: TOLGA AKMEN/SHUTTERSTOCK
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Central banks and governments are on a collision course.
For 15 years, central bankers around the world worked hand in glove with elected leaders to bolster economic growth and inflation. Now, with inflation at multidecade highs, technocratic central bankers are driving up the cost of servicing mortgages and other debt, just as many governments spend heavily to absorb the blow of higher energy costs stemming from the war in Ukraine, and to meet new commitments, including defense.
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Fed’s Lael Brainard Warns on Inflation, Financial Stability Risks
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Fed Vice Chairwoman Lael Brainard said the central bank was watching for financial tremors that could result from interest-rate increases across the globe but that it wouldn’t pull back prematurely on efforts to beat high inflation.
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Fed's Barkin Expects Inflation Easing a Bit in Coming Months
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All signs point to lower U.S. inflation in coming months, Federal Reserve Bank of Richmond President Thomas Barkin said Friday. “Inflation should come down a bit. I don’t expect it to be immediate. I don’t expect it to be predictable,” Mr. Barkin said in a speech to the Prince William Chamber of Commerce. (MarketWatch)
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Underlying Inflation Gained Steam in August
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Overall inflation slowed in August, measured by the Federal Reserve’s preferred gauge, but underlying price pressures strengthened last month, signaling that high inflation is increasingly entrenched in the U.S. economy.
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Inflation Keeps U.S. From Stepping In to Slow Dollar’s Rapid Rise
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U.S. policy makers aren’t likely to take action to slow the dollar’s rapid rise despite rising risks of global financial turmoil, according to analysts, largely because a strong greenback helps fight domestic inflation.
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U.S. Consumer Spending Rose 0.4% in August Despite High Inflation
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U.S. consumers are digging deeper into their wallets to cover rising costs of essentials such as rent and utilities as inflation spreads, a Commerce Department report for August showed on Friday.
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Hurricane Ian Will Cause Short-Term Economic Hit, Economists Say
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Hurricane Ian will likely weigh on U.S. economic growth through the end of 2022, economists say, but beyond that the rebuilding and recovery will nudge up economic output over the coming years.
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Key Developments Around the World
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Former President Lula da Silva Wins First Round in Brazil Election
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Former President Luiz Inácio Lula da Silva took the most votes in the first round of Brazil's elections but President Jair Bolsonaro’s better-than-expected performance means the two will face each other again in a runoff vote.
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Ukraine War Creates Worst Global Food Crisis Since 2008, IMF Says
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Sharp rises in food and fertilizer prices caused by the war in Ukraine are creating the worst global food crisis since at least 2008, putting the lives and livelihood of 345 million people in immediate danger, the IMF said.
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China Is Rerouting U.S. Liquefied Natural Gas to Europe at a Big Profit
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OPEC+ to Weigh Production Cut to Bolster Oil Prices
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OPEC+ will consider on Wednesday its most drastic reduction of production since the pandemic in order to help prop up falling oil prices, a move that could put pressure on global economic growth.
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Financial Regulation Roundup
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Credit Suisse Seeks to Calm Market Jitters
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Credit Suisse Group AG tried to assuage fears about its health in a memo to employees and in a round of phone calls to investors and clients over the weekend, according to people familiar with the matter.
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Lawmakers Step Up Efforts to Advance Bill Taking on Visa, Mastercard
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Lawmakers backing a bill taking aim at Visa Inc. and Mastercard Inc. are pushing to have proposed credit-card routing rules included in a sweeping defense-spending bill. The Senate will start considering the defense bill on Oct. 11.
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Chinese Regulator Tells Banks to Avoid Political Talk
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China’s securities regulator has told investment banks operating in the country to avoid publishing politically sensitive research ahead of a twice-in-a-decade meeting of the Communist Party this month.
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Consumer Complaints About Crypto on the Rise Amid Crypto Slump
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Consumer complaints about cryptocurrency have surged during an increase in its market volatility over the past two years, hitting not only crypto-trading platforms but also traditional financial institutions.
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Fed, FDIC to Target Regional Banks' 'Living Wills' in New Guidance
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Large U.S. regional banks will face new regulatory guidance in the coming months aimed at boosting their “living wills,” or road maps to help with the banks’ liquidation in a severe crisis. The Federal Reserve and Federal Deposit Insurance Corporation on Friday said the guidance would help “further develop” the living wills regional banks with at least $250 billion in assets must file in 2024. The Biden administration and its top regulators are seeking to address concerns that the steady growth of the nation’s largest regional banks has introduced new risks to the financial system. (Dow Jones Newswires)
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Time N/A: ECB’s Lagarde and Panetta at Eurogroup meeting in Luxembourg
9:05 a.m.: Atlanta Fed’s Bostic speaks at 2022 Technology-Enabled Disruption conference
10 a.m.: ISM Report on Business Manufacturing PMI for September; U.S. construction spending for August
3:10 p.m.: New York Fed’s Williams speaks at 2022 U.S. Hispanic Chamber of Commerce National Conference
11:30 p.m.: Reserve Bank of Australia interest rate decision and statement
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Time N/A: ECB’s de Guindos at ECOFIN meeting in Luxembourg
5 a.m.: European Union producer price index for August
8 a.m.: ECB’s Enria speaks at FMA Supervisory Conference 2022
9 a.m.: New York Fed’s Williams speaks at New York Fed Web Series on Culture: Culture and the New Workplace; Dallas Fed's Logan speaks at Technology-Enabled Disruption conference
10 a.m.: U.S. durable goods and factory orders for August; U.S. Job Openings and Labor Turnover Survey for August
11 a.m.: ECB’s Lagarde speaks with students at Central Bank of Cyprus event
1 p.m.: San Francisco Fed’s Daly in fireside chat at the Council on Foreign Relations in New York
9 p.m.: Reserve Bank of New Zealand interest rate decision and statement
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PCE Data Confirms Slowdown, Supports Hawkish Fed
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August personal-consumption expenditures price indicators reinforce the notion that the U.S. economy is slowing even as resilient prices point to monetary tightening. A 0.1% rise in real consumption in August “leaves consumption on track for growth of only 0.7% annualized in the third quarter, down from 2.0% in the second,” Michael Pearce of Capital Economics wrote in a report. “We expect consumption growth to remain weak over the coming quarters.” Meanwhile, the Federal Reserve’s preferred inflation gauge, the core PCE, showed prices rising by 4.9% in August. “That will only serve to underline the Fed’s hawkishness over the coming months,” Mr. Pearce wrote.
—Paulo Trevisani
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Higher Rates Will Put the Kibosh on Consumption Growth
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It looks as if U.S consumer spending is on course for an eighth-straight quarter of gains, but given the interest-rate backdrop and the Fed’s plans to keep pushing rates higher a ninth could be a stretch, Justin Lahart writes.
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More Trouble for China’s Export Juggernaut
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An export boom sustained China through some tough times over the past two years, but it also increased the country’s dependence on the rest of the world, which may not be welcome now in Beijing, Nathaniel Taplin writes.
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U.S. consumer sentiment edged up in September to its highest level in five months as the decline in energy prices led to easing inflation expectations. The final estimate of the consumer sentiment index published Friday by the University of Michigan increased to 58.6 in September from 58.2 in August. However, the index fell compared with the mid-month preliminary reading of 59.5. Economists polled by The Wall Street Journal expected consumer sentiment to be unchanged from the preliminary estimate. (Dow Jones Newswires)
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The Chicago Business Barometer, aka the Chicago PMI, dropped from 52.2 in August to 45.7 in September, its lowest level in more than two years. Economists polled by The Wall Street Journal expected the index to come in at 51.8. The indicator signals activity contracted as it came in below the 50 threshold which indicates growth. (DJN)
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Japan’s spending on currency intervention came to 2.8382 trillion yen ($19.65 billion) in the latest month to Sept. 28, Ministry of Finance data showed Friday. The Japanese government intervened in the currency market on Sept. 22 by buying yen and selling U.S. dollars for the first time in 24 years. (DJN)
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Sentiment among Japan's large manufacturers deteriorated in the three months to September, the third straight quarter it has worsened, amid lingering concerns over supply shortages. (DJN)
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Brazil’s unemployment rate declined for the sixth consecutive three-month period amid strong new job creation in the services sector. The jobless rate reached 8.9% in the three months through August, from 9.1% in the three months through July and 13.1% in the year-earlier period, the Brazilian Institute of Geography and Statistics said. (DJN)
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Turkey's annual rate of inflation continued to soar in September, according to data released Monday by the national statistics office Turkstat, and shows no signs of retreating anytime soon as the government prioritizes stimulating growth over reining in price increases ahead of elections next year. (DJN)
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Ocean carriers are canceling dozens of sailings on the world’s busiest routes during what is normally their peak season, the latest sign of the economic whiplash hitting companies as inflation weighs on global trade and consumer spending.
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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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