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Oil prices are up and investors are nervous, the Fed is expected to cut interest rates again, and a nationwide strike of autoworkers could ding the economy—if it drags on. Saddle up. It’s only Tuesday.
Royal Oil
Oil prices logged one of their largest rallies ever, highlighting anxiety that weekend attacks on Saudi Arabia’s oil industry could cause supply shortages and pose a new threat to the global economy. Brent crude futures, the global gauge of oil, soared 15% to $69.02 a barrel on Monday, Joe Wallace, Caitlin Ostroff and Amrith Ramkumar report.
- The strikes disrupted roughly 5% of the world’s total supply and stoked tensions between the U.S. and Iran. With the global economy already slowing, continued price increases could result in more expensive retail gasoline and higher heating bills that could pressure consumers and hurt economic growth.
- U.S. energy companies don’t appear likely to fill the void in global supplies. Producers hope to reap the benefits of the oil-price increase and use the opportunity to regain investor support after years of spending beyond their means.
- Even with the latest spike, oil prices are still below their levels from a year ago and well shy of the $100-plus range that prevailed through much of 2011 to 2014. “Higher prices will hurt consumer spending but there will be some offset by an increase in energy-related investment. The good news is that the U.S. consumer is in good shape and can absorb higher gasoline prices in the near term,” says Ryan Sweet of Moody’s Analytics.
WHAT TO WATCH
U.S. industrial production for August is expected to rise 0.2% from the prior month. (9:15 a.m. ET)
The National Association of Home Builders housing market index for September is expected to hold steady at 66. (10 a.m. ET)
The Federal Reserve begins its two-day policy meeting.
TOP STORIES
Once, Twice, Three Times Maybe?
The Federal Reserve is expected to cut interest rates by a quarter percentage point for the second time in as many months to help cushion the U.S. economy against a slowdown from the U.S.-China trade war and weak growth abroad. But Fed officials are unlikely to signal plans for a series of rate cuts amid broader uncertainty, Nick Timiraos writes.
- Trade policy has lurched between escalation and détente in recent weeks. Trade isn’t the only geopolitical wildcard: So are the risks from the U.K.’s coming departure from the European Union and an attack on a major Saudi Arabian oil processing hub.
- Meantime, U.S. hiring and consumer spending haven’t lost significant momentum, suggesting domestic growth remains solid.
- So Fed officials are making policy decisions one meeting at a time—attempting to provide enough stimulus to keep the economy expanding without promising too much.
- The big question is how many officials will pencil in another reduction this year. Markets will watch closely how Fed Chairman Jerome Powell frames the outlook at his press conference Wednesday.
The Fed’s policy meeting starts today and concludes Wednesday with a statement at 2 p.m. and press conference at 2:30 p.m. ET.
Strike One
General Motors stands to lose $50 million to $100 million a day if the nationwide strike of auto workers continues. Stalled production could slash more than a tenth of GM’s expected third-quarter operating profit by the weekend, though GM could make up some lost production once workers return, Mike Colias reports.
- The walkout involves roughly 46,000 full-time workers in more than 30 factories across 10 states.
- The strike certainly isn’t good for the economy. But J.P. Morgan’s Daniel Silver notes that auto and parts manufacturing only accounts for about 0.8% of U.S. economic output, GM accounts for less than 20% of U.S. vehicle production, and 50,000 workers works out to roughly 0.03% of the nation’s nonfarm employees. “A short-lived strike won’t have a major impact on the economy, although the magnitude of the strike’s impact should increase the longer that it lasts.”
Dollar Vs. Yuan
China’s progress in boosting international use of its currency is stalling. The yuan was the eighth most traded currency this year, on one side of just 4.3% of foreign exchange trades by turnover world-wide, according to Bank for International Settlements data. That ranking was unchanged from the previous survey three years ago, showing the value of yuan trading has only grown in line with other emerging-market currencies. The stagnation points to international skepticism about the tight control that the world’s second-largest economy maintains over its currency, James T. Areddy reports.
Around the World
China’s central bank on Tuesday injected 200 billion yuan ($28.3 billion) of liquidity into the banking system while keeping its medium-term lending facility interest rate unchanged. Beijing has kept a relatively restrained hand in boosting growth, which slipped to a more-than-two-decade low earlier this year. The central bank has been trying to use interest-rate reform to lower borrowing costs, which many economists say is inadequate in the face of a deepening economic slowdown, Grace Zhu reports.
China plans to send an aide of top trade negotiator Liu He to the U.S. to pave the way for high-level meetings, scheduled to take place in Washington in early October. Vice Finance Minister Liao Min will lead a delegation to the U.S. on Wednesday and officials will hold talks on Thursday and Friday, Liyan Qi and Lingling Wei report.
President Trump notified Congress that the U.S. and Japan were prepared to enter a limited agreement to lower some tariffs and set terms of digital trade. A deal in which Tokyo lowers its agricultural tariffs could allow U.S. farmers to better compete in Japan. Japan is expected to receive protection from the Trump administration’s threatened tariffs on automobile imports, Josh Zumbrun reports.
WSJ Video: In the Face of Headwinds, Consumers Splurge
Despite economic uncertainty, households increased spending at the strongest pace in four and a half years during the second quarter. WSJ’s Gunjan Banerji looks at why the consumer is powering forward, and whether it could be enough to prop up the economy.
WHAT ELSE WE’RE READING
Despite the longest economic expansion on record, more than half a million people go homeless every night in the U.S. One contributing factor? Overregulation of housing markets. “We estimate that if the 11 metropolitan areas with significantly supply-constrained housing markets were deregulated, overall homelessness in the United States would fall by 13%. Homelessness would fall by…54% in San Francisco, by 40% in Los Angeles, and by 23% in New York City. On average, homelessness would fall by 31% in these 11 metropolitan areas,” the White House Council of Economic Advisers writes in a new report.
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