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The European Central Bank is making it harder for the Fed not to cut interest rates, the U.S. budget deficit topped $1 trillion, and core inflation posted its largest 12-month gain since 2008. Happy Friday the 13th. Here is today’s top economic news.
A Big Dose of Monetary Medicine
The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases. It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years, Tom Fairless reports.
- The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions. But it triggered opposition from a handful of ECB officials and an immediate response from President Trump.
- “They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” Mr. Trump tweeted.
- Mr. Draghi also called on Germany to ramp up government spending in support of the ailing eurozone economy, a plea that drew criticism from German media and financial-sector executives and silence from Berlin.
- The Fed is expected to cut its key interest rate by a quarter percentage point next week, following a similar cut in July. One reason the Fed won’t be as aggressive as the ECB: The U.S. economy is stronger than the eurozone’s, which means there is less reason to boost growth.
WHAT TO WATCH
U.S. retail sales for August are expected to rise 0.2% from a month earlier. (8:30 a.m. ET)
U.S. import prices for August are expected to fall 0.4% from a month earlier. (8:30 a.m. ET)
The University of Michigan consumer sentiment index for September is expected to rise to 91.0 from 89.8 at the end of August. (10 a.m. ET)
The Baker Hughes rig count is out at 1 p.m. ET.
TOP STORIES
You’re Going to Have to Pay Me…One Trillion Dollars
The U.S. budget gap widened to more than $1 trillion in the first 11 months of the fiscal year, the first time year-to-date deficits have topped that amount in seven years. Higher spending on the military, rising interest expenses on government debt and weak revenues early in the fiscal year combined to push the deficit up, Kate Davidson reports.
- The last time the U.S. recorded a budget gap of that magnitude in the first 11 months of the fiscal year was in August 2012, when the U.S. was still climbing out of a deep recession. Deficits began to decline after Republicans and Democrats agreed to cut spending and let certain tax cuts expire. No such agreement is on the horizon now, and forecasters project trillion-dollar annual deficits for decades to come.
- Treasury Secretary Steven Mnuchin said the government is “very seriously considering” issuing a 50-year Treasury bond next year. For the U.S. government, issuing bonds with ultralong maturities holds obvious appeal: Debt-servicing costs are one of the fastest-growing drivers of federal spending and interest rates are near historic lows. Wall Street, however, has in the past showed little interest in the idea.
- U.S. state and local governments, along with universities, are joining companies in a dash to issue debt and lock in low rates, sometimes for up to 100 years. Rutgers University funded various capital projects by selling roughly $300 million in debt this week that doesn’t mature for a century.
3% GDP Growth Looking Out of Reach
The Trump administration’s goal of achieving economic growth of 3% or better is looking increasingly remote this year. Private-sector economists surveyed by the WSJ expect U.S. gross domestic product to expand an inflation-adjusted 2.2% this year on average, measured from the fourth quarter a year earlier. Forecasters expect economic growth will slow to 1.7% in 2020 and will be 1.9% in 2021. By contrast, the White House said in July it expected the economy would grow 3.2% this year, 3.1% in 2020, and 3% in each of the following four years, Harriet Torry reports.
Core Inflation Perks Up
Falling energy costs held down consumer prices last month. But details in the latest report suggest underlying inflation is firming. The consumer-price index rose 0.1% in August from a month earlier and 1.7% from a year earlier. But strip out volatile food and energy prices, and the CPI posted its largest 12-month gain since 2008, Likhitha Butchireddygari and Sarah Chaney report. Still, the latest reading is unlikely to be anywhere near strong enough to dissuade the Federal Reserve from cutting its benchmark interest rate a quarter point next week. Chairman Jerome Powell in July cited weaker inflation along with trade uncertainty and slow global growth when justifying that month’s quarter-point cut.
BOJ to ECB: Hold My Beer
The Bank of Japan is growing more open to the idea of cutting short-term interest rates deeper into negative territory, responding to global risks that are forcing other central banks to cut rates. But any changes may not happen right away. The BOJ’s policy board is leaning toward keeping policy steady at its own meeting next Wednesday and Thursday because the domestic economy looks relatively solid and the markets are stable, Megumi Fujikawa reports.
WHAT ELSE WE’RE READING
Germany will wait until it is too late before providing a measurable fiscal stimulus. “The continent faces a yawning investment gap. Communications networks need replacing (check your WiFi speed or cellular telephone connection in Germany). The decarbonisation required to meet climate targets demands the re-engineering of the continent’s economy. Europe is way behind the US and China in advanced computing and machine learning. German leaders know this as well as anyone. Still, they fear saying anything that might alarm the good burghers of Munich, Hamburg and Frankfurt,” Philip Stephens writes in the Financial Times.
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