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The government is borrowing more and more, Fed policy is already helping homeowners, and Farm Belt pain is spreading to suppliers, traders and food makers. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.
$1,000,000,000,000
Borrowing by the federal government is set to top $1 trillion for the second year in a row. The Treasury Department said it expects to issue $1.23 trillion in debt in 2019, more than twice as much as the $546 billion it issued just two years earlier, Kate Davidson reports.
- Higher spending is outpacing revenue growth, and concern about budget deficits has waned in Washington and on Wall Street.
- The budget gap for the fiscal year that ends Sept. 30 is on course to exceed $1 trillion, following the 2017 tax cuts that constrained federal revenue and a previous two-year budget deal that raised spending.
- A bipartisan budget agreement, set for approval by the Senate this week, would boost federal outlays and suspend the government’s borrowing limit for two years, adding further to annual deficits.
WHAT TO WATCH TODAY
Germany’s consumer-price index for July is out at 8 a.m. ET.
U.S. consumer spending for June is expected to rise 0.3% from a month earlier. (8:30 a.m. ET)
U.S. personal-consumption-expenditure prices excluding food and energy, a key measure of inflation, are expected to rise 0.2% in June from a month earlier and 1.7% from a year earlier. (8:30 a.m. ET)
The S&P/Case-Shiller home-price index for May is out at 9 a.m. ET.
The Conference Board’s consumer confidence index for July is expected to rise to 124.8 from 121.5 a month earlier. (10 a.m. ET)
U.S. pending-home sales for June are expected to rise 0.4% from a month earlier. (10 a.m. ET)
The Federal Reserve begins a two-day policy meeting.
China’s official manufacturing index for July is out at 9 p.m. ET.
TOP STORIES
Ahead of the Fed
The Federal Reserve is prepared to cut interest rates this week for the first time since 2008, but the biggest source of debt for U.S. consumers has been getting cheaper since late last year. Mortgage rates have fallen recently to the lowest levels since late 2016, tracking a broader slide in U.S. Treasury yields, Paul Kiernan reports.
- While the decline in mortgage rates hasn’t done much to lift U.S. home sales, it has important implications for homeowners, buyers and the broader U.S. economy. Mortgages accounted for two-thirds of the $13.67 trillion in U.S. household debt in the first quarter.
- Rates on auto loans have also fallen, but less than mortgages.
- Consumer rates that tend to more closely hew to Fed policy decisions—such as credit-card debt and home-equity lines of credit—rose in the weeks after its December rate increase, and have remained mostly steady since.
Big Rig
Drilling rig owners and others who lease equipment to U.S. energy producers forecast a slowdown in activity during the second half of the year as natural-gas prices plumb lows and exploration-and-production companies exhaust their budgets. The number of rigs drilling in the U.S. has declined by about 10% over the past year and big drilling contractors are telling investors to expect more to be idled in the coming months, Ryan Dezember reports.
Higher oil prices plus falling investment are bad news for the economy. Business investment, for example, was a drag on second-quarter gross domestic product, in part because of flagging mining activity. That may only get worse through the rest of the year.
How to Weaken a Currency: Brexit Edition
Prime Minister Boris Johnson ramped up his “no-deal” Brexit rhetoric, causing the pound to fall. The British prime minister said he wouldn’t engage with EU leaders unless they reopen negotiations ahead of an Oct. 31 exit deadline. The remarks—and the possibility of a chaotic split with the EU—sent the pound down nearly 0.5% Tuesday, after having fallen by more than 1% Monday to its lowest close since March 2017, Max Colchester reports.
How to Weaken a Currency: Swiss Edition
The Swiss central bank appears to have taken its most significant steps to weaken the Swiss franc in two years. The Swiss National Bank began selling francs into the market last week after looming rate cuts from U.S. and European central banks put upward pressure on its currency, Paul J. Davies reports.
Rained Out
Farmers face a lean year and hard decisions after spring floods. U.S. farmers are reeling after unrelenting rain delayed planting across the Midwest while trade battles continue to drag down exports and crop prices. Now, the farmers’ pain is spreading to the suppliers, traders and food makers that depend on them.
What Else We’re Following
Eurozone business confidence deteriorated in July. The European Commission’s Economic Sentiment Indicator fell to its lowest level since March 2016, suggesting economic growth is unlikely to rebound significantly in coming months. The outlook weakened among service providers, retailers and construction companies, but reached its lowest level among manufacturers, where sentiment dropped to its lowest since July 2013.
The Bank of Japan left its policy unchanged on Tuesday, separating itself from other major central banks that are preparing to cut interest rates in a pre-emptive step against risks to their economies.
Huawei Technologies said its first-half revenue rose 23.2% from a year earlier, as the technology giant appeared to shrug off the impact of a U.S. supplier blacklisting. The report offered the first window into Huawei’s financial health since the U.S. restricted its access to components and software used in its popular smartphones and cellular equipment.
WHAT ELSE WE’RE READING
The White House and the Fed need to learn how to talk to each other. “Disagreement over the federal funds rate is preventing the White House and the Fed from improving their relationship and communicating better. The administration could refocus on fiscal policy and try to ensure a more predictable climate for business leaders. Meanwhile, arguments over interest rates should be part of a broader inquiry into the monetary policy framework in the post-financial crisis economy,” Glenn Hubbard, dean emeritus at Columbia Business School and former Council of Economic Advisers chairman, writes in the Financial Times.
College students don’t respond well to nudges. “Students study about five to eight hours fewer each week than they plan to, though our interventions do not alter this tendency. The coaching interventions make some students realize that more effort is needed to attain good grades but, rather than working harder, they settle by adjusting grade expectations downwards,” Philip Oreopoulos and Uros Petronijevic write in a National Bureau of Economic Research working paper.
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