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In today’s issue, stock markets are on a roller coaster but the underlying economy still appears sound, Congress gets a two-year budget breakthrough, companies grapple with rising commodity prices, mortgage rates hit their highest level in more than a year, and the U.S. farm economy’s slump deepens.
WILD RIDE FOR MARKETS
Stocks in Europe and Asia were on pace for their worst week in two years after a late slump on Thursday pushed the Dow Jones Industrial Average and S&P 500 into correction territory, Lucy Craymer and Riva Gold report.
Many investors believe the past week’s selling has reflected an overdue pullback in stocks after big 2017 and early 2018 gains, exacerbated by fears of rising inflation in the U.S., which could prompt higher interest rates, and a crash in products betting on low volatility.
NOTHING TO SEE HERE…YET
Despite Wall Street turbulence, economists remain broadly optimistic about the economy and anticipate the Fed will stick with its plan of gradually raising interest rates under new Chairman Jerome Powell.
Economists surveyed in recent days by The Wall Street Journal predict U.S. gross domestic product will rise 2.8% in 2018, the strongest growth in more than a decade, David Harrison and Ben Leubsdorf report. They also project the unemployment rate will fall below 4% by midyear, from 4.1% in January.
The Fed is expected to raise its benchmark rate three or perhaps four times this year, with the next move expected at its March 20-21 meeting.
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WHAT TO WATCH TODAY
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This week ends with an economic data whimper, at least for the U.S. Wholesale trade for December is out at 10 a.m. E.T. Economists expect a 0.2% rise.
Outside the U.S., watch for Canadian employment numbers for January. Royal Bank of Canada economists expect a net gain of only 5,000 jobs as hiring slows, and the unemployment rate to hold steady at 5.8%. “We expect underlying demand for workers is strong enough that wage growth will continue to increase although January wages should also get a boost from the sizable increase in the minimum wage in Ontario.”
If you want to get in the economic data weeds a little, take a peek at the Baker-Hughes rig count, a decent proxy for investment in the U.S. oil and gas sector.
Next week, highlights include U.S. retail sales and consumer prices, both on Wednesday. The figures are key measures of consumer spending and inflation, one of which has been reassuringly strong and the other bafflingly weak.
TOP STORIES
BUDGET BREAKTHROUGH
The House passed a two-year budget deal this morning, along with a stopgap spending bill to end a brief government shutdown, sending the bill to President Donald Trump.
The budget deal’s passage will effectively end one of the most high-stakes fights in Washington, Kristina Peterson and Natalie Andrews report. It had devolved last month into a three-day partial government shutdown and a second, shorter one early today.
The Senate had earlier passed the bill and President Trump is expected to sign it. The agreement ends for now uncertainty surrounding government funding and the debt ceiling.
SIGNS OF INFLATION
U.S. manufacturers and food companies are grappling with rising material and ingredient costs on top of pressure from higher wages—a potential double whammy that could force them to raise prices or accept lower profit margins, Andrew Tangel, Harriet Torry and and Heather Haddon write.
Fears that higher wages would push central banks to raise interest rates more aggressively to tamp down inflation have fed the global market selloff. U.S. inflation has largely been muted since the 2007-2009 recession, which economists attribute in part to weak demand, soft wage growth and cheap imports due to a strong dollar.
Over the past six months, however, the world’s major economies have been enjoying a rare spell of synchronized growth, raising demand for materials like steel, aluminum and copper. Prices of steel and aluminum could also rise for U.S. companies if the Trump administration imposes the tariffs it is considering for those metals.
CHINA CONSUMER PRICES SOFTEN
Inflation isn’t bubbling up in all corners of the globe. China’s consumer inflation slowed in January to a seven-month low on continued weakness in food prices.
Food prices fell 0.5% from a year earlier, declining for a full year, after dropping 0.4% in December. Nonfood prices grew 2.0% from a year ago, compared with a 2.4% increase in December.
WHO CARES ABOUT BOND YIELDS?
When the 10-year Treasury yield rises, borrowing costs go up.
The U.S. weekly average 30-year fixed mortgage rate jumped 10 basis points to 4.32% this week, its highest levels in more than 13 months, according to mortgage-lending giant Freddie Mac. The 30-year fixed mortgage rate is up 33 basis points since the start of the year.
The 10-year Treasury yield has climbed above 2.85% twice in the past week, near its highest level since early 2014. The benchmark rate is used as a gauge to help set borrowing costs for companies, home loans, and state and local governments.
MAKE EXPORTS GREAT AGAIN
The U.S. trade deficit last year expanded to its widest mark since 2008. But there is one silver lining: U.S. exports are growing again.
U.S. goods exports flatlined in 2015 and were disappointing through much of 2016. Adjusted for inflation, they rose 4.4% in 2017, the best performance since 2011. Imports, however, are growing even faster, leading to a wider deficit. That could complicate the playing field for U.S.-based companies.
“Solid economic growth in most of America’s trading partners and further dollar depreciation should underpin U.S. export growth in 2018 and 2019,” says Jay Bryson, global economist at Wells Fargo. “But, the more confrontational approach to trade policy that the United States has adopted poses potential downside risks to U.S. export growth in coming years.”
U.S. farmers are gearing up for another tough year.
Farm incomes are expected to hit their lowest point since 2006 and borrowing costs are rising, Jesse Newman reports, as a deepening slump in the agricultural economy enters its fifth year.
A string of bumper corn and soybean harvests has added to a glut of grain world-wide, eroding prices for U.S. farmers. Foreign rivals like Russia and Brazil are also chipping away at U.S. dominance in the global grain trade, helping to fuel a multiyear downturn that is pushing some farmers out of business.
CHART OF THE DAY
Investors globally yanked a net $30.6 billion out of equity funds in the week ended Wednesday, the most on record. -Saumya Vaishampayan
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
The mortgage interest deduction has been called the sacred cow of the U.S. tax system. The latest U.S. tax overhaul capped it but otherwise left it largely intact. What if Congress had ditched it? “Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare,” the Federal Reserve’s Kamila Sommer and American University’s Paul Sullivan write in the latest issue of the American Economic Review. “Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.”
The costs of trade are often stark: a factory closed or a job lost due to international competition. The benefits can be more diffuse and harder to measure. “We show that trade increases product market competition by reducing markups, thereby triggering firm selection and productivity growth,” the University of Nottingham’s Giammario Impullitti and Omar Licandro write in the Royal Economic Society’s latest Economic Journal. That leads to substantial welfare gains—a move from full economic independence to the current level of U.S. trade yields a 50% permanent increase in consumption, half of which is due to innovation-driven productivity growth.
from Real Time Economics http://ift.tt/2C6dHVh
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