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In today’s issue, market gyrations are a new wildcard for central banks, businesses and consumers, January’s big U.S. wage gains may be a one-off, Congress works on a two-year budget deal, China pushes back on trade, and the European Union looks to expand.
WILL MARKET VOLATILITY DENT CONFIDENCE?
Global markets had been making a calm, steady march to new heights. Now, a series of price swings suggest a stretch of volatility. That’s a wildcard for central banks weighing their next steps on monetary policy, and the executives and households that had been backing up broad confidence with solid spending.
“This stock market selloff is unlikely to harm economic performance, unless it persists sufficiently long to generate a meaningful decline in consumer and business confidence,” says Mickey Levy, chief economist at Berenberg Capital Markets.
We’ll start to get some initial readings on consumer sentiment at the end of next week. The Dow Jones Industrial Average changed direction 29 times Tuesday before closing up 2.3%. Stocks around the world regained their footing early Wednesday after Wall Street’s rebound, but a fall in U.S. futures suggests that investors remain cautious.
CLOSER LOOK AT WAGES
A report showing rising U.S. wages last week fed market fears of inflation and touched off the global market swoon. Was it just a head fake?
Average hourly earnings increased 2.9% in January from a year earlier, the best gain since June 2009, Eric Morath and Nick Timiraos write. Stronger wage gains could feed inflation and cause the Federal Reserve to lift interest rates faster than expected.
But if you dissect the wage numbers, the gains appear concentrated in a narrow and volatile group that includes supervisors and nonproduction workers, something that could easily be reversed in February. A broader look at Americans’ after-tax incomes, including wages, dividends, bonuses and Social Security checks, shows that gains have been stronger earlier in the expansion.
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WHAT TO WATCH TODAY
It’s a busy day for Federal Reserve speakers. The Dallas Fed’s Robert Kaplan is in Frankfurt, New York’s William Dudley in New York City, Chicago’s Charles Evans in Des Moines, Iowa, and San Francisco’s John Williams in Honolulu.
Remarks will be closely watched for any comments on recent market volatility and signs that officials think inflation might creep into the economy via rising wages. Messrs. Dudley and Williams have a vote on monetary policy this year. Wednesday’s speakers range from fairly dovish to centrist.
U.S. consumer credit is due out at 3 p.m. ET on Wednesday. It’s a volatile, third-tier indicator that tells us little from month to month, though over the longer haul it highlights trends for revolving (credit cards) and nonrevolving (auto and school loans) consumer debt. In November, U.S. consumer borrowing posted the largest monthly gain in 16 years.
Wage concerns aren’t universal. The Reserve Bank of Australia left interest rates unchanged at a record low 1.5% at its first policy meeting for 2018 as it awaits signs of wage growth.
India’s central bank also left its main lending rate unchanged as it waits for more data on inflation and the country’s fiscal deficit. Consumer inflation in Asia’s third-largest economy accelerated to a 17-month high of 5.2% in December, above the bank’s 4% target.
TOP STORIES
MEANWHILE, IN WASHINGTON
In a potentially positive development, Congressional leaders are on the cusp of striking a two-year budget deal, Kristina Peterson and Siobhan Hughes report. The emerging agreement is expected to increase both military and nondefense spending, and just maybe an increase in the government’s borrowing limit.
U.S. government dysfunction has quietly fed into market worries. Stop-gap spending deals, the possibility of another government shutdown and the looming debt ceiling add to volatility. The federal government’s funding is set to expire at 12:01 a.m. Friday.
‘I’D LOVE TO SEE A SHUTDOWN’
One reason U.S. lawmakers have made progress on budget talks: They separated, for now, a fight over immigration from efforts to keep the government funded.
President Donald Trump weighed in with his own thoughts on Congress’s struggles to pass a bill linking protections for young undocumented immigrants to tighter border security. “I’d love to see a shutdown if we can’t get this stuff taken care of,” Mr. Trump said.
In exchange for protections for Dreamers, Mr. Trump has insisted on $25 billion in border security and wall funding, new limits on family migration, an end to the diversity visa lottery and other changes in immigration law, Laura Meckler and Michael C. Bender report.
AMERICA FIRST
The U.S. set a new record, but not one the Trump administration was hoping to see. The trade deficit in goods with China rose 8% during the president’s first year in office to a new high of $375.2 billion, or nearly half the total global gap between U.S. imports and exports, Jacob M. Schlesinger and Harriet Torry report.
Those numbers are likely to figure prominently in a White House campaign to ramp up pressure on Beijing’s trading practices. Administration officials are weighing wide-ranging import and investment limits on Chinese companies in retaliation for allegedly unfair trade policies. Decisions are expected soon, but no timetable has been set.
TRADE SKIRMISH
China is showing a willingness to push back against mounting trade pressure from the Trump administration, filing challenges to new U.S. tariffs on solar panels and washing machines at the World Trade Organization, Jacob M. Schlesinger reports.
While the Chinese petition is a clear challenge to the Trump administration’s newly aggressive approach to trade policy, it is still many steps removed from the retaliatory trade war many businesses fear.
EU LOOKS TO THE BALKANS
Who says globalism is dead? The European Union’s is proposing to add the continent’s poorest countries to check the influence of Russia, China and Turkey in the Balkans.
Bringing the remaining countries around the former Yugoslavia into the EU would complete what some consider the bloc’s final expansion, but it could be a long and difficult path, Drew Hinshaw and Laurence Norman report. Inclusion would allow citizens of the ex-communist states to travel, trade and work freely across Europe’s wealthiest nations.
Brussels currently sees Serbia and Montenegro as best placed but the door is now also open to Albania, Bosnia, Kosovo and Macedonia.
GERMANY’S MERKEL POISED FOR 4TH TERM
German Chancellor Angela Merkel stood within reach of a fourth term after members of the country’s two largest mainstream parties struck a deal on a policy platform, Zeke Turner reports.
Under terms of the deal, Europe’s largest economy would keep its budget balanced, and create tighter job protection rules, caps on rents, and other measures designed to please voters. A cap on the number of refugees allowed to enter Germany and changes to the country’s asylum laws were also included in the agreement.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
President Barack Obama and Democrats put together an $835 billion stimulus package to thwart the Great Recession. Republicans are one-upping their political rivals, though at a time of strong economic growth, historically low unemployment and fears of inflation. The New York Times looks at the economic impact of $1.5 trillion in tax cuts, a potential $1.5 trillion infrastructure package and other spending measures. “The added stimulus is drawing some quiet cheers from liberal economists, who say a fiscal shot at a time of low unemployment could boost typical workers’ wages in ways unseen for two decades. But it is raising alarms among fiscal hawks.”
Are the places that don’t matter getting their revenge? Parts of the U.S., the U.K., Austria and elsewhere struggling with persistent poverty, economic decay and lack of opportunities have increasingly used the ballot to rebel against feelings of being left behind, the London School of Economics’s Andrés Rodríguez-Pose writes. In a twist, this political populism has strong territorial, rather than social, foundations. “It threatens to derail the economic and social stability that has helped create the prosperity of the most dynamic cities and regions.”
There is more than $1.35 trillion in outstanding U.S. student debt weighing on graduates, dropouts and their families. A new report from Bard College argues that outright student debt cancellation financed by the federal government is a viable solution. It would boost the economy, create jobs and reduce unemployment. “There is mounting evidence that the escalation of student debt in the United States is an impediment to both household financial stability and aggregate consumption and investment,” authors Stephanie Kelton, Scott Fullwiler, Catherine Ruetschlin and Marshall Steinbaum say. “This debt burden reduces household disposable income and consumption and investment opportunities, with spillover effects across the economy.” The report sees only a “moderate” increase in the deficit. The paper doesn’t talk about the impact of debt cancellation on colleges and universities, but it probably wouldn’t hurt.
UP NEXT
Thursday is a light day for data.
U.S. initial jobless claims are due out at 8:30 a.m. E.T. on Wednesday.
Federal Reserve speakers will again be out in force. Dallas’s Robert Kaplan, Philadelphia’s Patrick Harker, Minneapolis’s Neel Kashkari and Kansas City’s Esther George are all due to speak on Thursday.
Officials at other central banks around the globe also will make public appearances. Rate decisions are due from the Bank of England and Bank of Mexico.
from Real Time Economics http://ift.tt/2ErN3LK
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