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The U.S. economy looks great. But markets tumbled Tuesday, wiping out yearly gains for the S&P 500 and Dow Jones Industrial Average. Just some jitters or do investors know something we don’t?
Good morning. Jeff Sparshott here to take you through the day’s top economic news. We have Greg Ip’s exclusive interview with investor Stan Druckenmiller, look at pressure on the Fed to stop raising rates, and check in on economic growth. There’s also the latest White House accusations against China and some good news for multimillionaires.
THAT SINKING FEELING
The U.S. economy is firing on all cylinders—job growth is strong, wages are climbing, factories are humming and inflation is on target. Yet stocks are sinking, yields on corporate bonds are rising and commodity prices are tumbling, all typical precursors of a slowdown or recession. The causes: Growth outside the U.S. is deteriorating and the Federal Reserve is steadily withdrawing the unprecedented monetary stimulus that buoyed the economy and almost every asset class over the last decade.
The question is whether markets, in adjusting to these new realities, will overreact to the point that they endanger the expansion, on track to become the longest ever next summer. The answer for now appears to be no, but the trends are troubling, Greg Ip writes.
HEDGE FUND LEGEND IS WORRIED
Stan Druckenmiller is a legend among hedge fund managers, as lieutenant to George Soros and head of his own firm. The market has him worried. “The defensive stocks have been going straight up since May. All the economically sensitive stocks have been going down since May. They’re predicting we’re in a very, very late cycle,” he said Tuesday. The signs are the “same stuff I screamed about in 2007.” He’s not saying the Fed shouldn’t tighten, ever; but it should wait, and “see what happens.” The time to tighten was a few years ago; now, it’s more dangerous: “The leveraged loan market is two times what it was in 2007.” He pins the blame on the Fed’s quantitative easing which “encouraged more malinvestment…than at any time I can ever remember. We’re in the most economically disruptive period since the 1880s and there’s been no bankruptcies. As quantitative easing turns to quantitative tightening, all these zombies are going to be exposed.”—Greg Ip
WHAT TO WATCH TODAY
U.S. durable goods orders for October, out at 8:30 a.m. ET, are expected to fall 2.6% from the prior month.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to inch down to 214,000.
U.S. existing-home sales for October, out at 10 a.m. ET, are expected to rise to an annual pace of 5.19 million.
The University of Michigan consumer sentiment index for November, out at 10 a.m. ET, is expected to register at 98.2, little changed from its preliminary reading.
The Conference Board’s leading economic index for October, out at 10 a.m. ET, is expected to be unchanged.
Japan’s consumer-price index for October is out at 6:30 p.m. ET.
TOP STORIES
STEADY AS SHE GOES, MR. POWELL
President Trump and some investors are calling on the Fed to halt its campaign of interest rate increases, but the selloff in stocks and corporate bonds is unlikely to stop the central bank from raising rates when it meets again next month. Fed officials have signaled in recent days they plan to proceed with another quarter percentage point increase in their benchmark short-term interest rate when they meet Dec. 19, marking their fourth rate increase this year. The market pullback does underscore the uncertain outlook for what the Fed will do after that, Nick Timiraos and Gregory Zuckerman report.
Under pressure: “I’d like to see the Fed with a lower interest rate. I think the rate is too high. I think we have much more of a Fed problem than we have a problem with anyone else,” Mr. Trump said Tuesday.
SHADOW OF A DOUBT
The Federal Reserve has flagged that it plans to raise short-term interest rates three times next year. Bond traders are increasingly skeptical that it will. A market-based measure of interest-rate expectations for 2019 fell to its lowest level in months. Federal-funds futures showed the market pricing in a 10% chance of the Fed raising rates at least three times next year. That’s down from 21% a week ago and 28% a month ago, Akane Otani reports.
IT’S THE ECONOMY, SMARTY PANTS
One reason markets may worry that growth is fading: Growth is fading. The Atlanta Fed’s GDPNow model is tracking a 2.5% annualized rate of growth in the fourth quarter, respectable but well short of 3.5% in the third quarter and 4.2% in the second. J.P. Morgan is forecasting 1.9% for all of 2019, an all-too-familiar pace for the current expansion. The triple whammy: “Monetary, fiscal and trade policies all are turning somewhat less friendly for growth next year,” J.P. Morgan economists write. In other words, interest rates are rising, the boost from tax cuts is fading and tariffs are acting like a tax increase.
CENTRAL PLANNING
Central banks are out of ammo. So it’s up to governments to prepare spending plans they can roll out quickly and in concert should the global economy slow sharply, the Organization for Economic Cooperation and Development said. The OECD still expects the global economy to experience a soft landing over the coming years, but warned Wednesday of a growing risk that higher barriers to trade, capital outflows from developing economies, and higher oil prices could push it off track, Paul Hannon reports.
Central banks did most of the heavy lifting during the last recession. But interest rates are already negative across much of Europe and Japan while central banks’ balance sheets have been swollen by purchases of government bonds and other securities. Fiscal policy would likely have to come to the rescue.
UNFAIR AND UNREASONABLE
Less than two weeks ahead of a China-U.S. summit, the U.S. Trade Representative accused Beijing of failing to change economic policies that threaten U.S. industry. “China has not fundamentally altered its unfair, unreasonable and market-distorting practices,” U.S. Trade Representative Robert Lighthizer said.
The trade representative’s office Tuesday released a 50-page report on Chinese trade practices, an update on a March study that alleged Beijing used various techniques to coerce U.S. firms to hand over leading-edge technology. The Trump administration has used the March report as the basis for levying tariffs on $250 billion of Chinese goods, about half of what Beijing sends to the U.S. annually, Bob Davis reports. President Trump and Chinese President Xi Jinping are scheduled to meet in Buenos Aires around Dec. 1.
SKIP THIS ONE UNLESS YOU’RE RICH
Multimillionaires would get more flexibility to make tax-free gifts to their heirs under a Trump administration proposal released late Tuesday. Under the regulation, people would have an easier time taking advantage of the temporary increase in the gift- and estate-tax exclusion that Congress passed last year. Before Tuesday’s proposal, some tax lawyers worried that making significant tax-free gifts now could cause an estate-tax bill for some people dying after the changes expire at the end of 2025. Once the regulation becomes final, it is likely to spur a wave of wealth transfers from people worth more than $5 million to their children, Richard Rubin and Laura Saunders report.
QUOTES OF THE DAY
“I mean, I’m reading some of the weirdest stuff, how a recession is around the corner. Nonsense. My personal view, our administration’s view, recession is so far in the distance I can’t see it.”—White House Economic Adviser Lawrence Kudlow on Tuesday
“You can call it Goldilocks 2.0. But you can’t call it a recession.”—Mr. Kudlow in December 2007
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING: BLACK FRIDAY EDITION
Gift-giving can be a bit of an economic drag. “In many developing countries, gift expenses escalate with income growth and account for a substantial share of household expenditure. We develop a theoretical model to demonstrate how (unequal) income growth may trigger ‘gift competition’ and drive up the financial burden associated with gift exchange,” Erwin Bultea, Ruixin Wang and Xiaobo Zhang write in the Journal of Economic Behavior and Organization. The results include potential adverse welfare effects and crowding out of spending on other items.
For charities, Christmas can’t come too soon. “First, the month of December is associated with a 14% increase in the probability to make a donation, thereby providing strong support to the notion of seasonal altruism. Second, exploiting a reform that changed the price of giving, I find that this December effect is equivalent to a 32% discount on charitable giving. Finally, half of the December increase in generosity persists into January before returning to the baseline in February,” Mathias Ekström writes in the Journal of Economic Behavior and Organization.
from Real Time Economics https://ift.tt/2OXQCKG
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