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The U.S.-China trade spat is heating up, the Fed is having a hard time communicating and Japan is launching a big fiscal experiment. 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.
Magnificent Seven
China’s currency Monday fell past the psychologically important level of 7 yuan to the dollar to a record low in offshore trading. The depreciation is likely to exacerbate the U.S.-China trade dispute just days after President Trump threatened to broaden U.S. tariffs to cover essentially all Chinese imports, Joanne Chiu and Steven Russolillo report.
- China’s central bank suggested the depreciation was in response to more tariffs: The yuan’s weakening was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.”
- Mr. Trump and other U.S. officials have long accused China of weakening the yuan to make its exports cheaper and gain an unfair advantage in trade.
Heard on the Street’s Mike Bird says, yes, a weaker yuan would help make China’s goods more attractively priced abroad and widen the U.S. trade deficit with Beijing. But it carries serious risks too: the possibility of capital flight and higher costs for Chinese firms with debt denominated in foreign currencies.
- A short, sharp depreciation could be beneficial to the Chinese negotiating position, but if the fall takes on a momentum of its own, the shift will undoubtedly be far more painful in Beijing than Washington.
WHAT TO WATCH TODAY
IHS Markit’s U.S. services index for July is out at 9:45 a.m. ET.
The Institute for Supply Management’s nonmanufactruing index is expected to rise to 55.7 from 55.1 a month earlier. (10 a.m. ET)
Federal Reserve governor Lael Brainard speaks at a town hall on payment systems at 1:30 p.m. ET.
TOP STORIES
Tariff Time
President Trump defied his advisers on new China tariffs. In a heated exchange, Mr. Trump insisted levies were the best way to make Beijing comply with U.S. demands. The U.S. is set to impose 10% tariffs on roughly $300 billion in Chinese imports that aren’t currently taxed starting Sept. 1, Vivian Salama and Josh Zumbrun report.
Even before the new round of tariffs take effect, pressure from the Trump administration cost China its position as the U.S.’s top trading partner. During the first half of the year, imports from China dropped by 12%, and U.S. exports to China fell 19%. The new No. 1? Mexico, Paul Kiernan and Anthony DeBarros report.
Communication Breakdown
Following the worst week for stocks of 2019, investors are adding to betsthat the Federal Reserve will continue lowering interest rates to stabilize the economy. Federal-funds futures, used by traders to wager on the direction of monetary policy, show a 100% chance of another rate cut in September, Amrith Ramkumar reports.
Investors, however, haven’t had an easy time interpreting Fed Chairman Jerome Powell. The Fed leader jarred markets last week when he described a rate cut as a technical “mid-cycle adjustment,” leaving them to wonder if he was ruling out more reductions. That wasn’t the first head fake. Mr. Powell’s off-the cuff comments in December and May initially worried investors before the Fed walked them back, Nick Timiraos and Daniel Kruger report.
- The latest episode highlights the difficulty giving markets what they crave—more clues about the Fed’s policy path—during a time of heightened uncertainty from trade tensions and a global manufacturing slowdown.
Bad Hours, Worse Pay
So, how tight is the labor market? FedEx and United Parcel Service drivers are set to start Sunday deliveries. One big difference for the Sunday service: Drivers working that day will be paid at a much lower rate than those who drive during the week, Paul Ziobro reports.
Taxes, Loans and Phones
Japan’s national sales tax will rise to 10% from 8% on Oct. 1. Prime Minister Shinzo Abe’s government is trying to make the fiscal medicine go down easier with sweetners such as one-time bargains and tax breaks that partially cancel out the increase. The experiment is worthy of the world’s attention because many other countries, including the U.S., are also grappling with large budget deficits.
Russians have come to depend on easy loans. As real disposable income falls—it declined each year between 2013 and 2018—personal consumer lending has exploded. Most of Russians’ debt is due to a surge in unsecured cash loans, often with high interest rates. Why are they borrowing? To purchase goods, maintain a certain living standard or simply to survive.
Huawei’s smartphone sales are surging in China as a patriotic buying spree helps to blunt the impact of widening U.S. restrictions. Huawei’s share of smartphone sales in China soared by almost a third to a record 38% during the second quarter. All of Huawei’s major rivals, including Apple and Xiaomi, lost ground in the period.
Service With a Smile
Europe’s service industries are propping up the region’s economy. IHS Markit’s services index inched down to 53.2 in July from 53.6 a month earlier but remained well above the 50 mark that separates expansion from contraction. That helped mask a sharp downturn in manufacturing—but may not be enough to revive economic growth. “There are signs that the scale of the manufacturing downturn is starting to overwhelm,” IHS Markit’s Chris Williamson said.
China’s service sector activity, meanwhile, slowed to a five-month low. The Caixin China services purchasing managers index slipped to 51.6 in July from 52.0 in June.
The latest U.S. service-sector data is out this morning.
WHAT ELSE WE’RE READING
Enough fiddling around with interest rates. Central banks should just give people money when the next downturn hits. “They can cut the interest rate on which they lend to banks, subject to these loans being extended to the private sector, and they can raise the interest rate paid on deposits. The evidence from economic history, and simple logic, suggests that if you boost household income in this way economies will recover,” M&G Prudential’s Eric Lonergan writes in the Financial Times.
Big data has been more promise than practice when it comes to real-time tracking the economy. Economists at the Fed are working to change that. “Using anonymized transactions data from a large electronic payments technology company, we create daily estimates of retail spending at detailed geographies. Our daily estimates are available only a few days after the transactions occur, and the historical time series are available from 2010 to the present,” Aditya Aladangady, Shifrah Aron-Dine, Wendy Dunn, Laura Feiveson, Paul Lengermann and Claudia Sahm write in a staff working paper.
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