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Fed and Investors Split on Policy Outlook for 2023; Bank of Mexico Extends Run of Rate Increases
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Good day. Even if the U.S. has seen peak inflation, the Federal Reserve isn’t going to lower interest rates next year as some investors would like, James Mackintosh of The Wall Street Journal writes, noting that inflation remains both broad-based and far above the central bank’s target. Meanwhile, the five-member board of governors of the Bank of Mexico voted unanimously to increase the overnight interest-rate target by three quarters of a percentage point, in line with expectations. The bank cited large and varied inflation shocks, as well as “the increasing challenges for monetary policy stemming from the ongoing tightening of global financial conditions.”
Now on to today’s news and analysis.
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The Market’s Peak Inflation Story Fights the Fed
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Investors have mostly ignored the potential for a hit to earnings, with profits expected to rise this year and next. PHOTO: RICHARD B. LEVINE/ZUMA PRESS
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The peak inflation story that propelled investors back into risky assets this summer got a big boost from Wednesday’s figures showing prices fell slightly last month.
Unfortunately, there’s no sign the Federal Reserve will change its mind and agree with investors that rates should come down again next year. Even if it does, mixed economic signals might well move the market’s focus away from inflation and interest rates and on to the shaky support for earnings.
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Bank of Mexico Raises Interest Rates for 10th Straight Time
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The Bank of Mexico raised the overnight interest-rate target by three quarters of a percentage point to 8.5%, the second straight three-quarter point rise, matching the previous two interest-rate moves by the Federal Reserve.
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Home Prices Jumped to Record High in Second Quarter
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Home prices continued to climb across nearly all the U.S. in the second quarter, when buyer demand started to fade due to higher mortgage rates but still exceeded the housing market’s unusually low supply.
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Supplier Inflation Logs Slowest Pace Since Last Fall
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The producer-price index, which generally reflects supply conditions in the economy, increased by 9.8% annually in July, the smallest annual rise since October 2021’s 8.9% increase, the Labor Department said Thursday.
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Jobless Claims Rise Slightly to New 2022 High
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Initial jobless claims, a proxy for layoffs, increased to a seasonally adjusted 262,000 last week from a revised 248,000 the previous week. The weekly number has been on an upward trend since reaching a 50-year low in March.
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Bill to Speed Energy Infrastructure Faces Resistance
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Legislation to speed the approval process for energy infrastructure projects is facing political headwinds, including from Republicans who don’t like how it was tied to the tax-and-climate bill passed by Senate Democrats.
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Key Developments Around the World
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Businesses Should Prepare for Risk of Unrest From Food Scarcity
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Rising global food prices and shortages of grain and fertilizer stemming from the war in Ukraine could trigger unrest in some countries and test the resiliency of Western companies with overseas operations in the coming months.
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Bursting Housing Bubble Compounds China’s Economic Woes
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Damage from China’s deflating property bubble is spreading across industries from building materials to real-estate services and causing loan losses to pile up at banks, which will be difficult to repair quickly, economists say.
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Global Population Set to Hit 8 Billion; Some Argue It Is Near Its Peak
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Later this year, the global population is projected to cross eight billion people. The United Nations recently pegged the date as Nov. 15, but we don’t know with any exact precision. But as we cross eight billion people, it is worth considering that the world might never make it to 10 billion, or even nine billion, and that the world’s major demographic problems won’t stem from the growing masses but from shrinking countries, aging populations and dwindling workforces.
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Oil-Storage Disaster Intensifies Cuban Energy Crisis
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Cuba brought under control a fire that raged for five days at its principal oil-storage facility, consuming four of the eight tanks and seriously hampering the country’s ability to import and store fuel for its struggling electricity system.
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With Western Funds Slow to Arrive, Ukraine Scrapes to Pay Soldiers
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Ukraine’s defense against Russia’s invasion is gradually strengthening as its army grows and more Western weapons arrive. Ukrainian Finance Minister Sergii Marchenko’s problem is how to pay for it all.
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Financial Regulation Roundup
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SEC Investigating Melvin Capital Management
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The U.S. Securities and Exchange Commission is looking into Melvin Capital Management risk controls and investor disclosure after the hedge fund was crippled by the meme-stock rally last year, said people familiar with the matter.
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Tornado Cash Crackdown Shows Limits of Regulating Crypto Services
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The U.S. sanctioning of a cryptocurrency platform has exposed technical gaps in the government’s ability to prevent criminals, national adversaries and extremist groups from using such services to launder money.
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Crypto’s Collapse Deals New Challenge for Regulators in Singapore
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After the implosions of several digital currencies and players rooted in Singapore, the city-state’s regulators are trying to distance themselves from the blowups while they grapple with how to rein in the industry.
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8:30 a.m.: U.S. import and export price indexes for July
10 a.m.: University of Michigan consumer survey for August (preliminary)
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8:30 a.m.: U.S. housing starts for July
9:15 a.m.: U.S. industrial production and capacity utilization for July
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‘Healthy Deceleration’ Expected for U.S. Instead of Recession
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The U.S. economy “is experiencing a healthy deceleration, not a recession,” Goldman Sachs economists wrote in a report after looking into historical patterns of revisions of data used to guide monetary policy. “We find that the initial estimates of payrolls, household employment, and consumption growth at the start of recessions tend to be revised down,” the report said. “Even if current employment and consumption figures were revised down by the average amount at the start of recessions, most indicators that are used to determine whether the economy is in a recession would still suggest that economic activity is expanding.”
—Paulo Trevisani
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Biden’s Agenda Doesn’t Give Priority to Inflation, Despite Rhetoric
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The fact that President Biden has enthusiastically signed into law a collection of bills that on net add to deficits shows how little he really gives priority to inflation in his legislative agenda, Greg Ip writes.
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One Good Inflation Report Isn’t Enough
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The Federal Reserve is still so far from its inflation target that it can’t afford to continue to let financial conditions ease, so better to be more aggressive now than to have a bigger problem to deal with later, Jason Furman writes.
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Mr. Furman, a professor of the practice of economic policy at Harvard University, was chairman of the White House Council of Economic Advisers, 2013-17.
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Global oil supplies are slowly catching up with flagging demand for crude, leaving the oil market close to balanced, the Organization of the Petroleum Exporting Countries said, suggesting the cartel sees little need in the short term to increase its output further.
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The average U.S. 30-year fixed-rate mortgage came with an interest rate of 5.22% this week, up from 4.99% a week earlier and sub-3% levels a year ago, according to Freddie Mac. (Dow Jones Newswires)
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Mexico’s industrial production rose 0.1% in June from May with gains in construction and mining activity, marking a fourth consecutive monthly increase, the National Statistics Institute said. (DJN)
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Argentina’s consumer price index surged 7.4% in July, bringing the annual inflation rate to 71%, according to state statistics agency Indec. (DJN)
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China's new yuan loans fell more than expected in July, as the central bank vowed not to flood the economy with excessive liquidity. New yuan loans stood at 679 billion yuan ($100.7 billion) for July, less than a quarter of the amount of CNY2.81 trillion in June, the People's Bank of China said. (DJN)
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Hong Kong cut its 2022 gross domestic product forecast after taking into account a worse-than-expected economic performance in the first half and a sharp deterioration of global economic prospects. (DJN)
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Malaysia's gross domestic product grew 8.9% compared with the same period a year earlier and 5.0% compared with the quarter before. A Dow Jones Newswires poll of economists had tipped second-quarter GDP growth of 6.3% on year. (DJN)
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Eurozone industrial production increased in June, even as factories across the region continued to struggle with supply bottlenecks and high costs. (DJN)
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Germany’s industrial production was curtailed by 1% in July and by 0.4% so far in August because of low water levels on the Rhine river, a key transport corridor for industrial materials, according Liberum analyst Susana Cruz. (DJN)
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The U.K. economy The U.K. economy contracted in the second quarter, as inflation and uncertainty from Russia's invasion of Ukraine took their toll. GDP fell 0.1% from April to June compared with the preceding quarter, the Office for National Statistics said. (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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