U.S. Economy Is Revving Up; 10-Year Treasury Yield Tops 5%; Fed Rate Moves Squeeze Key U.S. Ally; Europe and U.S. Diverge on Deficits

U.S. Economy Is Revving Up; 10-Year Treasury Yield Tops 5%; Fed Rate Moves Squeeze Key U.S. Ally; Europe and U.S. Diverge on Deficits By James Christie

Good day. The U.S. economy appears to be speeding up, not what Federal Reserve officials had in mind earlier this year, with analysts raising their growth forecasts. Despite this momentum, inflation has continued to ease, allowing Fed officials to indicate they would hold off on further rate increases unless they see signs of renewed price pressures. The yield on the benchmark 10-year Treasury note surged past 5% this morning, crossing a key threshold for the first time since 2007. Bond yields have risen sharply in recent weeks, which could slow the economy and effectively substitute for another Fed hike if higher borrowing costs are sustained. Meanwhile, in Asia, South Korea's alliance with the U.S. has strengthened during the Biden presidency, but the country's economy has fallen victim to the rapid rise in U.S. interest rates, showing how the Fed's decisions-and the uncertainty around them-can send ripples around the world. And in Europe, a significant divergence has emerged with the U.S. While the U.S. is all in on deficits, Europe's are on track to narrow significantly.

Now on to today's news and analysis.

Top News The Economy Was Supposed to Slow by Now. Instead It's Revving Up

Earlier this year, economists and Federal Reserve officials predicted that the U.S. economy would be sputtering by now as higher interest rates cut into spending and investment.

The opposite is happening . Recent economic data suggests the economy is accelerating despite higher borrowing costs, the resumption of student loan payments, and wars in Ukraine and the Middle East.

Benchmark Treasury Yield Tops 5%

The 10-year U.S. Treasury yield traded above 5% , extending a dramatic run-up in the benchmark rate that underpins borrowing costs from mortgages to student loans. Yields, which move inversely to bond prices, crashed to just over 0.5% in the depths of the pandemic in early 2020. They have since rebounded, as the Federal Reserve has hiked interest rates to tame inflation and reversed its earlier bond-buying program, and as the U.S. government's borrowing requirements have shot up.

Atlanta Fed's Bostic Doesn't See First Rate Cut Until Late Next Year

The Federal Reserve may not cut interest rates until late 2024 , Atlanta Fed President Raphael Bostic said Friday during an interview on CNBC. Asked when the Fed would cut rates, he said, "When we get really close to 2%." Pressed for a date, Bostic added, "so I would say late 2024." Earlier in the interview, Bostic had said he didn't think the first cut would come before the middle of the year, at the earliest. "We have to get a lot closer to 2% [inflation target] before I would consider any relaxation of our posture," he added. In a speech earlier this month, Bostic said he didn't think the Fed needed to increase interest rates again in this cycle. (MarketWatch)

Mester Says Fed Must Get Away From 'Guessing Game' on Rates

Federal Reserve Bank of Cleveland President Loretta Mester said Friday the Fed needs to find a way next year to get away from the constant questions over what it will do at every meeting. Fed officials, including Mester, think it will be important to hold interest rates at their peak level "for some time" to continue to put downward pressure on inflation, and it will be useful if unending questions about the length of that period could be laid to rest, she said. "Getting away from the meeting-to-meeting guessing game of will they or won't they increase the funds rate would seem to add some beneficial stability allowing firms and financial markets to absorb the increases in the pipeline," Mester said in a speech to the Shadow Open Market Committee, a group of monetarist economists, in New York. (MarketWatch)

U.S. Economy Food Is on Sale Again. You Might Still Have Sticker Shock.

In grocery stores, the portion of food sold on promotion has reached a level not seen since 2019, according to research firm NielsenIQ, but shoppers are still paying more than one-third more than they did then.

UAW Leader Cites Progress in Bargaining, Forgoes More Walkouts

The United Auto Workers' leader said talks for a new labor contract with Detroit's three car companies have been progressing, but he threatened to expand the union's now six-week-long strike if they don't move more.

Smaller Banks Look to Shrink Their Way Back to Health

Regional banks have shelled out more and more to depositors to get them to stick around. For many, that still hasn't been enough. After an ugly third quarter, banks rolled out plans last week to try to shrink themselves back to health.

America's Downtowns Are Empty. Fixing Them Will Be Expensive.

Experts say American downtowns instead face the biggest urban makeover in 50 years. Even optimists estimate it will take years and cost billions to complete the large-scale changes to usher central-city office districts into a new role.

Key Developments Around the World Fed Rate Moves Squeeze a Key U.S. Ally

South Korea's economy is looking increasingly shaky , and uncertainty about U.S. interest rates is making life difficult for the country's central bank, which wants to protect its currency at the same time as boosting the economy.

As U.S. Debt Surges, Europe Brings Its Own Under Control

Even as the U.S. continues to let deficits rip, Europe's are on track to narrow significantly, a contrast to a decade ago , when deficits in the wake of the global financial crisis pushed some members of the euro area to the brink of default.

U.S. and Europe Struggle to Put Trump-Era Tariffs Behind Them China Tightens Its Chokehold on Graphite Needed for EV Batteries

China is strengthening restrictions on exports of graphite, a key mineral needed for making electric-vehicle batteries and fuel cells, the latest move in an intensifying global tussle over the building blocks of critical technologies.

Australia Decides Chinese Firm Can Keep Operating Strategic Port

Australia said it won't cancel a Chinese company's lease on a commercial port despite concerns that the firm's operations pose a security risk at a strategic location in the north of the country.

Why Investors Are Heading Back to Ukraine

Prospects for Ukraine's economy remain fragile, but steel-nerved investors are trickling back into the country, lured by the chance to help the economy in its fight against Russia-and to score assets on the cheap.

Financial Regulation Roundup Why Hamas Uses Crypto to Raise Money

The role of cryptocurrencies in illicit finance has come under renewed scrutiny after The Wall Street Journal's report that Hamas and other militant groups used the technology to raise millions of dollars before recent attacks in Israel.

China Raids Offices of WPP Unit GroupM, Detains Executive

Chinese police have raided the Shanghai offices of GroupM , a media-investment group and unit of London-based WPP, and detained an advertising executive, said a person familiar with the matter.

Will Sam Bankman-Fried Bet on His Own Testimony?

While taking the stand in one's own defense is usually considered too perilous a step to leave to chance, FTX founder Sam Bankman-Fried's limited options in his trial point toward testifying as his best shot, lawyers said.

Forward Guidance Monday (all times ET)

8:30 a.m.: Chicago Fed National Activity Index

10 a.m.: FCCI flash consumer confidence indicator for EU for October

Tuesday

2 a.m.: U.K. unemployment for September

4 a.m.: Eurozone flash PMI for October

8:30 a.m.: Philadelphia Fed Non-Manufacturing Survey

10 a.m.: Richmond Fed Survey of Manufacturing Activity

Research Weak Canadian Retail Sales Supports View Rates Have Peaked

The latest Canadian retail sales data is another signpost that consumer strength continues to fade, with an advance estimate for unchanged sales in September implying a weak lead-in to the final quarter, says CIBC's Katherine Judge, who reckons that with domestic demand clearly responding to higher interest rates the Bank of Canada likely won't need to take rates any higher from here. Judge notes that discretionary subsectors and those tied to the housing market saw weaker sales volumes in August, something expected to continue as the labor market softens and mortgage renewals squeeze discretionary consumption.

-Robb Stewart

Commentary Housing's Other Threat to the Economy

The GDP report this week will probably show housing helped boost third-quarter growth, but that shouldn't mask that what housing faces is utterly and horribly bad , and the economy is worse off for it, Justin Lahart writes.

There's Never Been a Worse Time to Buy Instead of Rent

The cost of buying a home versus renting one is at its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent, according to CBRE analysis, Carol Ryan writes.

Hong Kong's Financial-Sector Feast Turns to Famine

Hong Kong's lackluster stock market epitomizes the challenges the city is grappling with-China's economic slowdown, which looks increasingly structural, and Beijing's tightened grip on the semiautonomous city, Jacky Wong writes.

Basis Points

A Federal Reserve survey of financial stability risks released Friday showed growing concerns of persistent inflation and the potential for real estate losses. Inflation and real estate were the two most frequently cited topics among participants in the survey, conducted bi-annually by the central bank. The Fed interviews researchers, academics and market contacts about their concerns. (MarketWatch)

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10-23-23 0718ET