Good Morning! In today’s issue, we look ahead to Jackson Hole as the Fed seems poised to raise interest rates again next month, China’s economic struggles ahead of key trade talks with the U.S., and some good news on trade.
COLLISION COURSE
September could be a rough month for relations between President Trump and the Federal Reserve. Fed officials at their last meeting signaled they were likely to raise interest rates next month and discussed in greater detail their concerns over how prolonged trade disputes could disrupt economic growth. If the economy performs in line with current expectations, “it would likely soon be appropriate to take another step in” raising rates, said the minutes of the Fed’s July 31-Aug. 1 meeting. That wouldn’t be good news at the White House. President Trump signaled his unhappiness with Fed rate increases more than a week before officials met, and he repeated those concerns in comments to donors and reporters in recent days, writes Nick Timiraos. The minutes didn’t indicate any discussion of those comments.
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WHAT TO WATCH TODAY
The eurozone Markit composite purchasing managers index for August rose 0.1 point to to 55.4, broadly in line with expectations and signaling solid economic growth.
The minutes of the European Central Bank’s July 25-26 meeting are due at 7:30 a.m. ET.
New U.S. home sales for July are due at 10 a.m. ET. Economists expect a 648,000 annual sales rate, compared to 631,000 in June.
Additional U.S. tariff of 25% on $16 billion Chinese imports take effect. Chinese retaliatory measures take effect too.
TOP STORIES
U.S. SPENDING HITS ITS TARGET
Despite all the recent talk of trade wars, the U.S. is still a consumption-driven economy whose fortunes rise and fall on the backs of U.S. consumers. That makes recent results from big retailers particularly good news for the economy. Target said it had its best quarterly results in more than a decade, buoyed by the retailer’s efforts to improve its stores and e-commerce capabilities as well as by a booming economy that has helped lift sales across the retail industry. The numbers from the Minneapolis-based chain continue a strong quarter of results from the country’s largest retailers, which have benefited from increasing consumer confidence and rising online sales despite the challenge of Amazon, writes Khadeeja Safdar.
ADVANTAGE, U.S.?
The U.S. and China kicked off two days of talks in Washington aimed at settling an escalating trade battle, with the U.S. claiming the advantage because Beijing is struggling to keep its economic growth from faltering. Beijing has tried a number of approaches to strengthening its economy in the short term, including relaxing credit controls and encouraging more lending and spending, especially on highways, rail lines and other big-ticket government projects, write Lingling Wei and Bob Davis. But the actions threaten to weaken the economy over the longer term, many economists warn. That is because China’s debt load has soared since 2009, when Beijing was fighting a global recession, and the trade fight may prompt Beijing to put off debt restructuring.
ALL EYES ON JACKSON HOLE
An uptick in the Federal Reserve’s benchmark interest rate is putting more pressure on the central bank to clarify plans for its $4 trillion bond portfolio, and analysts hope to get some insight at this week’s Jackson Hole symposium, writes Sam Goldfarb.The effective federal-funds rate, the rate on overnight loans between banks that is the Fed’s primary means of influencing the U.S. economy, inched back up to 1.92% last week, after spending nearly two months at 1.91%.That put the rate just 0.08 percentage point from the top of the Fed’s targeted range of 1.75% to 2%. If the rate knocks up against the top of the range, investors and traders may take it as a sign that the central bank is losing control of the rate.
AND SOME GOOD NEWS ON NAFTA
Here’s some rare good news on trade. U.S. and Mexican officials are close to resolving some of the sticking points that have stalled negotiations to overhaul the North American Free Trade Agreement, Mexico’s chief trade negotiator said on Wednesday. “We hope that we’ll have a solution“ within a couple of days, said Ildefonso Guajardo, Mexico’s economy minister before entering the offices of U.S. Trade Representative Robert Lighthizer in a last-minute dash to reach an agreement before the end of this month. He offered no details. A person familiar with the talks said both sides are now very close on those auto rules of origin, write Santiago Perez and Joshua Zumbrun, raising manufacturing content that must originate within Mexico, the U.S. and Canada to 75% from the current 62.5%. Talks are set to resume on Thursday.
TRI-STATE TRAUMA
The effects of last year’s tax reform are still reverberating in parts of the U.S., an indication that the long-term economic effects of the reform remain uncertain. The Trump administration is finishing what’s expected to be a crackdown on state laws circumventing the new $10,000 federal cap on individual deductions for state and local taxes. The rules are likely to halt a strategy embraced in New York, New Jersey and Connecticut, high-tax states where high-income residents are getting pinched by the cap, writes Richard Rubin. Tax experts are watching the rules for how Treasury handles similar credits that predate last year’s GOP tax law, including programs in Alabama, Arizona, Georgia and South Carolina.
German central bank president Jens Weidmann speaking Thursday at an event in Berlin
https://ift.tt/2EhCPd3
ROB FORD
@ROBFORDMANCS
In the year since German election brought another Grand Coalition, support for Greens (+5 points to record high) is up by more than double the increase for radical right AfD (up 2 points). Yet media attention is all on AfD. Because "populism/Trump/Brexit/crisis" is the narrative
— Rob Ford (@robfordmancs) August 20, 2018
In the year since German election brought another Grand Coalition, support for Greens (+5 points to record high) is up by more than double the increase for radical right AfD (up 2 points). Yet media attention is all on AfD. Because “populism/Trump/Brexit/crisis” is the narrative
WHAT ELSE WE ARE READING
The most profitable American firms don’t seem to be separating too much from the rest of the economy despite having more pricing power, according to a paper published by the World Bank. While “star firms tend to be larger, younger, and have higher markups,” this advantage disappears once intangible capital (which is poorly captured by conventional financial statement) is included, the authors write. Nor do star firms with unusually wide profit margins invest less than those with narrower margins.
UP NEXT
Fed Chairman Jerome Powell speaks on “Monetary policy in a changing economy”Friday in Jackson Hole, Wyo.
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