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Fed Backs Alternative Data as Way to Ease Lending; Bank of Canada Expected to Hold Rates Steady
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Good day. The Federal Reserve and other U.S. banking regulators backed the use of alternative data in assessing the creditworthiness of consumers who may struggle to obtain credit through traditional evaluations. The Fed's benchmark interest rate is well below what monetary policy rules prescribe. And the Bank of Canada is expected to keep rates steady today, but economists surveyed by The Wall Street Journal are divided on whether a rate cut will come next year.
Now on to today’s news and analysis.
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Bad Credit? Alternative Data Wins Support as a Way to Ease Lending
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From left, Comptroller of the Currency Joseph Otting; Fed Vice Chairman of Supervision Randal Quarles; FDIC Chair Jelena McWilliams; and Rodney Hood, chairman of National Credit Union Administration, testified before the Senate Banking Committee in May. PHOTO: JONATHAN ERNST/REUTERS
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Consumers with spotty or no credit histories might find it easier to get loans after federal banking regulators endorsed alternatives to traditional methods of assessing creditworthiness. The regulators backed the use of information such as borrowers’ cash flow as an alternative to the traditional credit-evaluation system, which relies on scores issued by companies such as Equifax and Experian based on applicants’ history of borrowing and repayments.
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Fed Adds $95.56 Billion in Short-Term Liquidity to Markets
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The New York Fed added $95.56 billion in temporary liquidity to financial markets Tuesday. The intervention came in two parts. One was via overnight repurchase agreements, or repos, that totaled $77.8 billion, and the other was via 14-day repos totaling $17.76 billion. The central bank took all the securities it was offered. It also bought $7.50 billion in U.S. Treasury bills as part of efforts to expand its balance sheet for technical reasons.
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Derby's Take: Rules Suggest Fed-Funds Rate Should Be Much Higher
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If the Federal Reserve was playing by the “rules,” monetary policy would look a lot different right now.
The rules, in this case, are a suite of formulas policy makers can use to decide where interest-rate policy should stand. In a report released last week, the Cleveland Fed employed seven such rules to divine where monetary policy should stand. For the final three months of this year, the median reading of these rules say the benchmark federal-funds rate should average 2.35% and then rise to 2.82% by the fourth quarter of 2020.
That’s some distance from where the Fed now stands. Read More.
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Other Developments Around the World
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Bank of Canada Expected to Hold Steady on Rates
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Market watchers expect the Bank of Canada to leave its main interest rate unchanged in its decision Wednesday but are sharply divided on whether a rate cut is coming in early 2020.
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Trump Says Trade War With China Could Drag On
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President Trump said he was willing to wait until after next year’s presidential election to strike a limited trade deal with China, sending stock prices down and casting doubt on whether the two sides will find enough common ground to head off new tariffs.
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Germans Keep on Saving Their Money—Even When It Hurts
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Germans won’t stop saving. But in a world of negative interest rates, stockpiling cash has left German households poorer than those in Greece, hindered companies from investing and restrained economic growth across Europe.
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Australia’s Economy Fails to Fire Up Despite Stimulus
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Australia’s economy failed to fire up in the third quarter, despite the Reserve Bank of Australia rolling out cuts to its official cash rate, the first in three years, and Canberra chiming in with a reduction in income tax.
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The economy grew by a seasonally-adjusted 0.4% in the third quarter from the second quarter, and by 1.7% on year, data released by the Australian Bureau of Statistics showed Wednesday. However, the pace is well below what’s needed to cut into unemployment and boost flagging wages growth.
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Central Banks Could Do to Address Climate Change, Jefferies Says
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Central banks could arguably do more directly to help address the issue of climate change, given their large quantitative easing portfolios and reserves, according to David Owen, chief European economist at Jefferies. A review of the mandates of 133 central banks found that 12 have explicit sustainability mandates, whilst 29% are mandated to support the government's policy priorities, which in many cases include sustainability goals.
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Mr. Owen noted European Central Bank President Christine Lagarde's references to climate change at the European Parliament this week. "One key question for investors is whether the ECB along with the NCBs [national central banks] that comprise the Eurosystem makes explicit use of their balance sheet...to directly try and address the issue." (Dow Jones Newswires)
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Financial Regulation Roundup
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Appeals Court Rules Against Trump on Subpoenas to Banks
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A federal appeals court ruled House Democrats can enforce subpoenas to Deutsche Bank and Capital One Financial seeking a broad range of President Trump’s financial records, as well as those of his family and their businesses.
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Banks No Longer Required to Report Hemp Growers as Suspicious
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Banks are no longer required to file suspicious activity reports on customers who cultivate hemp, industry regulators said. A group of financial regulators clarified the compliance requirements for banks whose customers produce hemp, a variety of the cannabis plant that is often used for its fiber and generally doesn’t get people high.
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Sprint Overcounted Subsidized Customers for Years
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Sprint has for years overestimated how many of the low-income Americans it provides wireless service to through a federal subsidy program actually use their phones, according to regulatory documents reviewed by WSJ.
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Need to Pay the Babysitter? Don’t Even Think About Using Cash
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The shift away from cash has generated debate in one family, with some older members worrying about the safety and privacy ramifications of transferring money via apps.
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Wednesday (all times EST)
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10 a.m.: Fed’s Quarles testifies on bank supervision and regulation before House Financial Services Committee in Washington; Bank of Canada releases interest-rate announcement
8:30 p.m.: Bank of Japan’s Harada gives speech to business leaders in Oita, Japan
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Time N/A: Reserve Bank of India releases policy statement
8 a.m.: Bank of Canada’s Lane speaks on economic progress report in Ottawa
8:30 a.m.: Commerce Department releases October trade data
10 a.m.: Fed’s Quarles testifies on bank supervision and regulation before Senate Banking Committee in Washington
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Do Negative Rates Explain Low Profitability of European Banks?
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A recent study examines the effect negative interest rates have on European banks’ profitability. Researchers Nicholas Coleman and Viktors Stebunovs consolidated data for 387 institutions across 20 European countries and published their findings in the Federal Reserve’s FEDS Notes. Prior research has shown that “low-for-long” interest rates burden bank profitability, causing many banks in Europe to become concerned about the current level of interest rates. “Overall, we find evidence consistent with bank and analyst reports that sovereign yields, and to some extent other macroeconomic factors, are important for European bank profitability,” the researchers say. However,
they find “bank-specific and banking sector-specific factors, in particular unobserved ones, appear to be much more important in explaining bank profitability.”
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Social-Media Data Can Boost Consumer-Confidence Forecasting
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Social-media data can be used to improve efforts to measure consumer confidence, a group of academics write in a paper made available by the National Bureau of Economic Research. "Our results show that including consumer sentiment measures from Twitter greatly improves forecast accuracy," they write. The paper, written by Steve Lehrer of Queen's University, Tao Zeng of Zhejiang University and Tian Xie of Shanghai University of Finance and Economics, focused on forecasting the Conference Board's monthly consumer confidence index because it is a major predictor of general confidence in the economy. While
social-media users aren't representative of the population as a whole, "a predominantly younger population may be quite relevant for forecasts." Using this data "may provide individuals and firms across numerous industries including banking and finance an advantage to enhance their forecasting capabilities."
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American shoppers increased their spending by 16% over the five-day shopping period between Thanksgiving Day and Cyber Monday, according to new data, signaling U.S. consumer confidence hasn’t wavered in the face of global political and economic uncertainty.
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Iraq and some other oil-exporting nations will support deeper production cuts from the Organization of the Petroleum Exporting Countries and its allies as the cartel tries to shore up sagging oil prices.
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When it comes to real estate, the Second City sits at the bottom of the table. The value of Chicago property has been mixed in recent years, while values in New York, Boston and San Francisco have been steadily rising thanks to strong economies and job growth.
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While Iran’s sanction-battered economy has sparked protests across the nation, U.S. officials cite new intelligence suggesting Tehran’s finances are more dire than previously thought and bringing it closer to a financial crisis.
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Bank of America Merrill Lynch sees U.S. core personal-consumption expenditure inflation at around 2% by the end of 2020. The Fed isn't expected to take further rate action for the foreseeable future, unless a material shift in outlook triggers it, Bank of America says in its 2020 Market Outlook. (Dow Jones Newswires)
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The Turkish central bank will have to reverse course by raising rates in 2020 as the lira depreciates and inflation continues to rise, Capital Economics expects. (DJN)
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Brazil's economic recovery is gaining momentum, but not enough to discourage the central bank from cutting rates again, Capital Economics says. The country's third-quarter GDP was 0.6% higher than in the previous quarter, slightly stronger than forecast. (DJN)
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