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Markets are calming but there’s no sign the U.S.-China trade fight is close to a resolution. 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.
That Escalated Quickly
The U.S. Treasury labeled China a currency manipulator. The move came after the Chinese central bank let the yuan depreciate and capped a day of trade-war escalation, falling financial markets and renewed fears the clash could stall the U.S. economic expansion, William Mauldin, Nick Timiraos and Paul Kiernan report.
- China’s yuan fell to a record offshore low against the dollar. Beijing also suspended purchases of U.S. agricultural products, and the government has not ruled out putting tariffs on U.S. farm goods.
- President Trump took the devaluation as a deliberate shot at the U.S.: “China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices.”
- Monday’s action by Treasury is mostly symbolic, requiring the U.S. administration to consult with the International Monetary Fund.
- Renewed uncertainty could pressure the Federal Reserve to consider more interest-rate cuts.
The yuan stabilized on Tuesday, supported by signs that Beijing might not permit a steep depreciation, and Asian stocks pared earlier losses as investors reconsidered China’s willingness to let its currency drop sharply.
WHAT TO WATCH TODAY
The U.S. job openings and labor turnover survey for June is out at 10 a.m. ET.
The Philadelphia Fed’s Patrick Harker speaks in Philadelphia at 10:05 a.m. ET and the St. Louis Fed’s James Bullard speaks on the economic outlook at 1:15 p.m. ET.
The Reserve Bank of New Zealand releases a policy statement at 10:00 p.m. ET.
TOP STORIES
Warning Signal
Government bond yields plumbed multiyear lows around the world and an important market-based recession indicator flashed new warning signals Monday. The yield on the benchmark 10-year Treasury note, which helps set borrowing costs on everything from mortgages to corporate loans, fell to its lowest close since October 2016. In a cautionary sign to investors, the yield on three-month Treasurys exceeded the yield on the 10-year note by the widest margin since April 2007. Investors watch the dispersion between shorter- and longer-term yields closely because shorter-term yields tend to exceed longer-term ones ahead of recessions, a phenomenon known as an inverted yield curve, Daniel Kruger reports.
It’s Different This Time? Only a Little.
Some investors, policy makers and economists argue that structural changes in the economy and markets mean that the yield curve signal isn’t what it used to be.
J.P. Morgan’s Jesse Edgerton agrees, to a point: Shifts in inflation volatility and markets have flattened the yield curve. By his estimate, that’s reduced implied recession probabilities in the traditional model by 10 to 20 percentage points. “Even after this adjustment, the yield curve still implies a probability of recession within one year above 40%,” Mr. Edgerton writes in a research note. The last time the adjusted model was above 40%: 2007. So the warning signals are still plenty bright.
Feedback Loop
Federal Reserve Bank of San Francisco President Mary Daly is focused on U.S. and China trade tensions as a factor in figuring out the central bank’s next step on interest rates. “In thinking about what to do going forward, where I’m really focusing my attention is these headwinds,” Ms. Daly told the WSJ’s Nick Timiraos. The trade headwind “is amplified. Sometimes the blowing slows down and sometimes it picks up, and now we’re in a picked-up position.”
- Heard on the Street’s Justin Lahart highlights the risk an adverse feedback loop between the Fed and the White House. In it, the Fed cuts to steady the economy in times of stress. But when worries subside, the Trump administration re-escalates the trade fight, leading to renewed risks that prompt the Fed to ease up again. Such a scenario can’t go on forever—the Fed’s target range is already low, leaving limited room for more cuts.
Declaration of Independence
Former Federal Reserve leaders said the central bank needs to remain independent and free from short-term political pressures, an implicit rebuttal to President Trump’s repeated criticism of the institution. Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen cosigned an op-ed in The Wall Street Journal saying the central bank and its leader should be allowed to serve without political pressures or “the threat of removal or demotion… for political reasons.”
Service Slowdown, Wage Woes and a Pokey Internet
The U.S. service sector expanded at the slowest pace in nearly three years in July. The Institute for Supply Management’s nonmanufacturing purchasing managers index remained above the 50 mark that indicates activity is expanding. But the slowdown “suggests that the downturn already evident in manufacturing is now spilling over into the much larger services sector,” Capital Economics’s Andrew Hunter said.
More than six months after the $15 minimum wage went into effect in New York City, business leaders and owners say the increased labor costs have forced them to cut staff, eliminate work shifts and raise prices. Many business owners said these changes were unintended consequences of the new minimum wage, which took effect at the beginning of the year.
Germany is looking for new ways to power its economy as the traditional growth engines of manufacturing and exports falter. But the country’s outdated internet is acting as a bottleneck. The sorry state of the online network has become a national joke and an economic liability. The slow speeds are hampering the digitization of swaths of industry and the delivery of products and services to consumers.
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