Newsletter: Fed Jumps Into Markets, Saudis Restore Some Production, the Army is Looking for a Few More Good Men

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The Fed has a lot of things to talk about ahead of its interest-rate decision later today. How resilient is the U.S. economy? How severe are the slowdowns in China and Europe? What’s going on with trade policy and oil prices? What’s up with repo markets?  ¯\_(ツ)_/¯

Repo Man

For the first time in more than a decade, the Federal Reserve injected cash into money markets to pull down interest rates. The move came ahead of the Fed’s interest-rate decision expected later today. 

• What happened? Borrowers in the market for repurchase, or repo, agreements paid as much as 10% in morning trading, versus recent rates of just over 2%. Banks and brokerages use repo contracts to borrow short-term cash by selling a security, like a mortgage or a Treasury bond, and promising to buy it back in the future at a slightly higher price. Asset managers get a safe place to put money and (usually) earn a slight return.

 

When the repo market is running smoothly, it barely registers beyond a small group of dedicated traders and funding specialists. But a jolt like the one seen Tuesday raises concerns among bank executives, who count on repo to keep the lights on overnight, and regulators in Washington who rely on it to grease the skids of the financial system.

• Why did it happen? Possibly a confluence of unrelated factors that in isolation would pose no huge threat but combined to roil the market: Corporations paid their quarterly taxes, and the government collected payment for Treasury bills it sold to dealers last week. Both sucked billions of dollars out of banks and money-market funds. The Fed’s intervention Tuesday—and its plan to jump in again Wednesday—make more cash available to those seeking to borrow.
• In the short run this likely affects only those who borrow in the overnight markets, but if the strains last long enough it can affect the rates other businesses and consumers pay. The federal-funds rate, a benchmark that influences borrowing costs throughout the financial system, rose to the top end of the Fed’s target range of 2% to 2.25%. 

WHAT TO WATCH 

U.S. housing starts for August are expected to rise to an annual rate of 1.25 million from 1.191 million a month earlier. (8:30 a.m. ET)

The Federal Reserve releases a policy statement at 2 p.m. ET and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET.

Australia’s August employment report is out at 9:30 p.m. ET.

TOP STORIES

Tell Me Something I Don’t Know

The Fed is likely to cut its short-term benchmark rate by one quarter percentage point at the conclusion of its two-day meeting today. The big question is what’s next, Nick Timiraos writes. Pay close attention to Chairman Jerome Powell’s press conference and quarterly interest-rate projections—the so-called dot plot. In June, seven of 17 officials penciled in two rate cuts this year. How many of them will project at least one more rate reduction for 2019?

Some things for the Fed to contemplate:

Are trade tensions easing? President Trump said China has started to buy U.S. agricultural products, and signaled optimism that his administration will be able to sign a trade deal with China before the 2020 presidential election. Other positive signs: Chinese negotiators were making plans to give U.S. companies greater access to China’s market and bolster intellectual-property protections. China also made public last week a series of exemptions to its tariffs on U.S. imports, Vivian Salama reports.

Is the worst over for U.S. manufacturers? U.S. industrial production rose in August, a welcome sign of resilience in the economy after recent weak readings. Output at U.S. factories, which accounts for about 75% of the nation’s total industrial output, climbed 0.5% last month from July, though it was down slightly from a year earlier, Harriet Torry reports. “This sector cannot be considered strong, but damage from slow growth abroad and trade tensions has not been severe so far,” Daiwa Capital’s Michael Moran said.

Will lower rates spur the housing market? The sector has been a drag on the economy for six straight quarters. But home builder sentiment this month rose to the highest level since October. “Solid household formations and attractive mortgage rates are contributing to a positive builder outlook,” National Association of Home Builders chief economist Robert Dietz said.

What’s going on with oil prices? The price of Brent crude—the global benchmark—jumped 15% to $69.02 a barrel on Monday, its largest one-day climb since 1988, following attacks on Saudi Arabia’s energy infrastructure. It then fell back 6.5% to $64.55 a barrel on Tuesday. The kingdom’s energy ministry said it had restored 50% of production lost in Saturday’s attacks and will return to normal production levels in weeks, Rory Jones, Summer Said and Benoit Faucon report.

• Higher oil prices are a mixed bag for the U.S.: bad for consumers, good for energy producers. For countries such as China, Japan and South Korea—the world’s first-, fourth- and fifth-largest crude oil-importers in 2017—the impact of higher prices and supply disruptions is likely to be magnified. Collectively, Asian countries account for about 72% of Saudi Arabia’s crude exports, or about five million barrels a day, Stephanie Yang and Benoit Faucon report.

In the Army Now

The U.S. Army is experimenting with new recruiting tactics as it struggles to connect with young people who have other job options in a strong economy. Last year the nation’s largest military branch recruited just under 70,000 troops, about 10% short of its target and the first time in a decade the Army missed its goal. For this fiscal year ending in September, they met a more-modest goal of 68,000. Experts say the military’s appeal has been waning among young people, and a tight labor market is typically the toughest time to recruit, Ben Kesling reports.

WHAT ELSE WE’RE READING

U.S. war veterans are at ground zero for the opioid epidemic. “Combat service substantially increased the risk of prescription painkiller abuse and illicit heroin use among active duty servicemen. War-related physical injuries, death-related battlefield trauma, and Post-Traumatic Stress Disorder emerge as primary mechanisms. The magnitudes of our estimates imply lower-bound combat exposure-induced health care costs of $1.04 billion per year for prescription painkiller abuse and $470 million per year for heroin use,” Resul Cesur, Joseph Sabia, and W. David Bradford write in a National Bureau of Economic Research working paper.

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