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The Fed cuts once, China is happy to wait out Trump on trade, and Europe’s factories are flashing red. 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.
One and Done?
The Federal Reserve cut interest rates for the first time since 2008, a pre-emptive strike to cushion the economy from a global slowdown and continuing trade tensions, Nick Timiraos reports.
- Investors expected the quarter-point cut but still ended the day disappointed. Stock markets sold off and the dollar strengthened after Fed Chairman Jerome Powell called the move a mere “mid-cycle adjustment.”
- Mr. Powell didn’t say the Fed would stop at one. But he didn’t promise a long series of rate cuts. “You would do that if you saw real economic weakness…. That’s not what we’re seeing.”
- Two officials dissented. Both had said recently they didn’t see a strong case for cutting interest rates because U.S. economic data has been good.
- The takeaway: “The discussion around the future path of interest rates was ham-handed and probably undid a lot of the benefit of the rate cut today,” said Scott Minerd, chief investment officer at money manager Guggenheim Partners LLC.
WHAT TO WATCH TODAY
The Bank of England releases a policy statement at 7 a.m. ET, and governor Mark Carney holds a press conference at 7:30 a.m. ET.
U.S. jobless claims are expected to rise to 214,000 from 206,000 a week earlier. (8:30 a.m. ET)
IHS Markit’s U.S. manufacturing index for July is out at 9:45 a.m. ET.
The Institute for Supply Management’s manufacturing index for July is expected to hold steady at 51.7. (10 a.m. ET)
U.S. construction spending for June is expected to rise 0.1% from a month earlier. (10 a.m. ET)
The Bank of Japan releases minutes from its June 19-20 meeting at 7:50 p.m. ET.
TOP STORIES
What a Difference a Quarter Point Makes
How much will a one quarter-percentage-point drop in borrowing costs help businesses and cushion a broader slowdown driven by some factors outside the Fed’s control? U.S. business investment fell in the second quarter, posting its weakest showing since late 2015. Central bank policy may be an imperfect instrument if investment is being held back chiefly by concerns over trade policy, Nick Timiraos writes. “The real issue facing the global economy is trade uncertainty, and monetary policy is not well targeted to address that uncertainty,” said Catherine Mann, chief global economist at Citigroup.
Wait for It…
Trade tensions, meanwhile, aren’t getting worse. But they’re not really getting better. That’s in part due to a new tactic from Beijing, which increasingly thinks slow-walking negotiations may produce a more-favorable agreement, Chao Deng reports.
- U.S. and Chinese trade negotiators this week wrapped up their first face-to-face meeting in more than two months. Both sides described the talks as constructive and said the next round will be held in September.
- But Beijing thinks it can extract better terms by not hurrying into concessions. While tariffs have exacerbated a slowdown in China’s growth, many policy makers believe the economy is bottoming out. Meanwhile, the thinking goes, a protracted dispute is likely to prove a headache for President Trump, as tariffs pinch U.S. farmers and consumers in the run-up to the presidential election.
Not Good But a Little Better
There is some evidence China’s economy is recovering from a soft patch. The Caixin China manufacturing purchasing managers index rose to 49.9 in July from 49.4 in June, just below the 50 threshold that separates contraction from expansion. “China’s manufacturing economy showed signs of recovery in July. Business confidence rebounded, reflecting the strong resilience in the economy,” said CEBM Group’s Zhengsheng Zhong.
Really Bad and a Lot Worse
Europe’s factories aren’t faring as well as China’s. IHS Markit’s July manufacturing index for the eurozone fell to its lowest level since December 2012. Production and jobs were cut at the fastest rates in more than six years, prices fell at the sharpest rate in more than three years and expectations for the year ahead fell to the lowest in over 6 1/2 years. “The Eurozone PMI dashboard is a sea of red, with all lights warning on the deteriorating health of the region’s manufacturers,” said IHS Markit’s Chris Williamson.
Labor Pains
U.S. worker pay gains retreated in the second quarter of the year. The Labor Department’s employment-cost index, which measures wages and benefits, rose 2.7% in the second quarter from a year earlier, marking a slight pullback from the first quarter’s 2.8% gain. That’s in line with separate readings on compensation that showed pay gains cooling as the overall economy started to slow, Sarah Chaney reports.
One possible reason wages aren’t heating up: More and more people are coming off the sidelines and into the labor force. While the share of men who move from outside the labor force to employment has leveled off, the share of women is by one measure the highest of the expansion. Deutsche Bank economist Torsten Sløk notes that about 125,000 people are coming off the sidelines each month, a figure that has increased gradually throughout the expansion: “A low unemployment rate draws workers back from outside the labor market and into employment, which again dampens wage growth.”
WHAT ELSE WE’RE READING
A society’s values and beliefs matter for its economy. “On reflection, it seems obvious that cultural change can unlock the economic potential of people and ideas, with history-altering results. Such shifts matter for reasons other than their effect on GDP. Evolving norms that allow women, ethnic minorities, immigrants, and gay and transgender people to play full roles in society not only boost growth but reduce human suffering. But because these shifts matter economically, the dismal science needs a better understanding of when and how cultures change—especially now,” the Economist writes.
Reducing inequality and raising productivity can go hand in hand. “The argument is simple: we are able to maximize the total production of things we value—whether that’s food, cars, movies, or scientific breakthroughs—when all people are doing the things they are best at. That’s far from the case in the U.S. today, where substantial barriers prevent whole groups of people—including women and minorities—from realizing their productive potential. This is not just extremely inequitable. It’s also economically damaging,” Harvard’s Anna Stansbury writes at Bloomberg Opinion.
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