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Strong Dollar's Role in Fighting Inflation; Mester Signals Support for Two More 50 Basis-Point Rate Rises
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Good day. U.S. interest rates are substantially higher than elsewhere, so investors searching for higher returns have an incentive to put money here. A stronger dollar is the natural offshoot, that along with less burdensome import prices should help restrain inflation running at a four-decade high, taking some pressure off the Federal Reserve to move even more aggressively with rates than planned. As things stand, Cleveland Fed President Loretta Mester said on Friday it would be appropriate for the Fed to raise the policy rate another 50 basis points at each of its next two meetings. After those increases, the federal-funds target rate, now at between 0.75% and 1%, will be within the range of a stance that neither stimulates growth nor restricts it, she added.
Now on to today’s news and analysis.
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Dollar Winning in Messy Global Economy Matters in Inflation Fight
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A strong dollar makes imported goods less costly in the U.S., which should help hold down inflation.
PHOTO: GETTY IMAGES
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Despite signals of economic trouble in the U.S., such as soaring inflation, falling stock prices and wavering consumer confidence, one important indicator is flashing American strength: the dollar.
Even as the Dow tumbles, The Wall Street Journal’s dollar index has risen 8% this year. Against China’s yuan, the dollar is up 7%, with much of it in just the past month. Against Japan’s yen it’s up 12% and against Switzerland’s franc it’s up 10%.
The currency move has important economic implications. A strong national currency makes imported goods less costly, which should help to hold down inflation. That, in turn, makes the Federal Reserve’s job a little bit easier, potentially diminishing its impulse to raise interest rates aggressively to restrain demand and stop the upward move of consumer prices.
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Loretta Mester Says Fed Is On Track for Aggressive Rate Rises
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Cleveland Fed President Loretta Mester said the U.S. central bank needs to press forward with aggressive rate rises, and that by early fall it may be able to take stock of whether it can slow down or speed removing support from the economy.
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Powell at the Future of Everything Festival
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The WSJ Future of Everything Festival is returning to New York in person this week after a two-year break, with discussions on the future of business, science, sports and culture. At 2 p.m. EDT Wednesday, Fed Chairman Jerome Powell will discuss central bank plans for taming inflation. View the program here and register here for a free pass.
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Nations Aim to Secure Supply Chains by ‘Friend-Shoring’
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As war and the pandemic expose the fragility of supply chains, the U.S. and its allies are pursuing a new kind of global trade, one that confines commerce to a circle of trusted nations. Fans call the shift “friend-shoring.”
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Borrowing Costs Balloon as Home Construction Gets Delayed
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People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be nearly double what they anticipated when they paid their deposits.
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The List of Companies Cutting Staff, Freezing Hiring or Slashing Costs
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Companies which saw substantial growth during the pandemic are starting to take a more cautious approach toward hiring and spending. Here’s a look at ones laying people off, changing hiring practices or cutting spending.
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Key Developments Around the World
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Bank of Japan Will Stick to Easy Monetary Policy, Gov. Kuroda Says
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Bank of Japan Gov. Haruhiko Kuroda reiterated Friday that the central bank would continue its monetary easing program as the nation’s economy is still recovering from the impact of the pandemic.
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China PBOC Keeps Key Policy Rates Unchanged
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China's central bank kept its key policy interest rates unchanged Monday, suggesting it may maintain benchmark loan rates at the same level as last month. The People's Bank of China kept the interest rate of the one-year medium-term lending facility unchanged at 2.85%, while injecting 100 billion yuan ($14.7 billion)of liquidity into the banking system via the MLF. (Dow Jones Newswires)
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EU Lowers Growth Outlook, Raises Inflation Forecasts Due to War
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The European Union’s economy would likely contract during the remainder of this year if supplies of natural gas from Russia were to be halted soon, with the deepest recessions felt by countries that rely on that source, the bloc said.
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Slowdown in Canada’s Housing Sector Shows Risk of Higher Rates
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Canada’s 12-year real-estate boom appears to be coming to an end following the Bank of Canada’s recent rate increases, which have triggered a sharp decline in residential sales and a slowdown in home-price gains.
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El Salvador’s President Went All In on Bitcoin. Then It Tanked.
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The plunging value of bitcoin has hurt cryptocurrency investors everywhere, but the stakes are especially high in El Salvador, whose president has spent hundreds of millions of dollars rolling it out as a national currency.
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Rising Food Prices Roil Developing World
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Soaring food prices are triggering shortages and protests across the developing world as disruption from the Ukraine war adds to existing strains on global supplies of grains, meat and other foodstuffs. India on Saturday invoked a rare ban on wheat exports to help tame domestic prices, a move likely to exacerbate global strains.
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Record Diesel Prices Pressure European Drivers, U.S. Deliveries
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A global shortfall of the fuel—the workhorse for much of the world economy—is straining industries from trucking to farming. Europe, dependent on imports of Russian diesel, is particularly vulnerable.
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Financial Regulation Roundup
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Yellen Seeks European Support for Tax Deal Congress Hasn’t Backed
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U.S. Treasury Secretary Janet Yellen wants to clinch the European Union’s approval for a global minimum tax on the profits of large corporations, hoping to smooth out Poland’s objections to approving the plan.
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Treasury Outlines Strategy for Tackling Illicit-Finance Threats
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The U.S. Treasury Department in a national strategy outlined actions it will take to address illicit-finance risks posed by anonymous shell companies, ransomware and rising domestic extremism.
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How More Than $1 Trillion of Crypto Vanished in Just Six Months
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Wild swings are fairly common with cryptocurrencies, but even seasoned investors were left reeling as bitcoin dropped 29% over a seven-day losing streak that just ended as a stablecoin unexpectedly crashed.
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8:55 a.m.: New York Fed’s Williams speaks at MBA’s Secondary and Capital Markets Conference and Expo
9:30 p.m.: Reserve Bank of Australia minutes of monetary policy meeting
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2:30 a.m.: ECB’s Enria speaks at Institut Montaigne in Paris
8 a.m.: St. Louis Fed’s Bullard speaks at Energy Infrastructure Council Investor Conference
8:30 a.m.: U.S. retail sales for April
9:15 a.m.: U.S. industrial production for April; Philadelphia Fed’s Harker speaks to Stern Future Healthcare Workforce Summit
10 a.m.: NAHB/Wells Fargo Housing Market Index for May
1 p.m.: ECB’s Lagarde speaks at event organized by Soroptimist International - Club Darmstadt in Darmstadt, Germany
2 p.m.: Federal Reserve’s Powell speaks at Wall Street Journal Future of Everything Festival
2:30 p.m.: Cleveland Fed’s Mester speaks at Cleveland Fed Conversations on Central Banking
6:45 p.m.: Chicago Fed’s Evans speaks to Money Marketeers
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May Consumer Sentiment Data Shows Stable Inflation Expectations
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Good news of a sort for the Federal Reserve appeared in the latest University of Michigan consumer sentiment survey. It showed inflation expectations for one year and five years out held steady at 5.4% and 3%, respectively. While overall sentiment levels fell, the Fed will likely welcome findings showing expectations haven’t worsened under the onslaught of terrible price pressure data. The University of Michigan survey report noted “long term inflation expectations remain well-anchored.” For the Fed that suggests the public retains confidence that inflation will at some point ease from its current high levels. J.P. Morgan economist Daniel Silver in a note to clients wrote that “gauges of inflation expectations have increased noticeably relative to where they were before the pandemic began but there has not been much change in the data in recent
months.”
—Michael S. Derby
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Europe’s Gas Market Is Still Counting on Russian Supplies
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Pipeline diplomacy has kept Russian gas flowing into Western Europe for decades, but the reasons to think this time is different just keep coming and a disruption this year is all too easy to imagine, Rochelle Toplensky writes.
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What to Know if You Want to Buy the Stock Market Dip
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The Fed isn’t going to bandage investors’ mistakes anymore, Jason Zweig writes, noting that with inflation above 8%, cutting interest rates anytime soon would be like testing a flamethrower in a dynamite factory.
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The University of Michigan’s U.S. consumer sentiment gauge fell to 59.1 in May from a final April reading of 65.2, its lowest level in more than 10 years. Declines were broad-based and visible across income, age, education, geography and political affiliation, continuing the general downward trend in sentiment over the past year, said Joanne Hsu, the survey’s director. (Dow Jones Newswires)
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U.S. import prices cooled in April after a sharp gain in the prior three months, the Labor Department said. Prices from overseas goods were unchanged after increasing 2.9% in March. Economists polled by the Wall Street Journal had forecast a 0.6% gain in import prices in April. Over the past year, the price index for imports has risen 12%, compared with a 13% rate in March. (DJN)
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Bank of Canada Governor Tiff Macklem's decisions to date can't be blamed for three-decade high inflation, BMO chief economist Doug Porter said. Last week, the presumptive frontrunner for Canada's Conservative Party, Pierre Poilievre, said he would fire Macklem should he form government for letting inflation surge to nearly 7% at an annual rate. However, Porter said long-term trends, from 10 to 30 years, indicate inflation is holding steady near 2%. (DJN)
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Peru's central bank will likely continue to raise its reference interest rate until it reaches 6%, said Alexander Mueller, an economist at Bank of America. The central bank increased rates by 50 basis points to 5% yesterday amid rising inflation. Mueller says he expects two more similar hikes before reaching 6%. (DJN)
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China's central bank cut the lower limit on mortgage rates for first-home buyers, a move that could revive the property market and support the cooling economy. The People's Bank of China said Sunday that it would allow commercial banks to reduce their mortgage rates by up to 20 basis points from the current floors, while keeping the minimum mortgage rates for second-home buyers unchanged. (DJN)
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China’s broadest measurement of money supply came in much higher than expected in April as the central bank provided more liquidity to further support the slowing economy. M2 rose 10.5% from a year earlier, compared with March’s 9.7% growth and market expectation of 9.9%, according to data released by the People’s Bank of China on Friday. (DJN)
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Turkey posted a slightly wider current-account deficit for March compared with the previous month, data released by the Turkish central bank on Monday showed. The current account recorded a $5.55 billion deficit in March, bringing the 12-month rolling deficit to $24.22 billion, according to the data. (DJN)
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Tanzania’s headline inflation eased to 3.8% in the first quarter from 4.1% the prior quarter, the country’s central bank said. Headline inflation is projected to stay within the target of 3% to 5% this year, supported by the stability of the exchange rate and prudent fiscal and monetary policies, the central bank 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
Follow us on Twitter:
@WSJCentralBanks, @NHendersonWSJ, @michaelsderby, @NickTimiraos, @PaulHannon29, @kimmackrael, @TomFairless, @megumifujikawa, @pkwsj, @JamesGlynnWSJ, @cleveland_peck
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