How the Bank of Japan's Monetary Policy Shift Could Play Out; U.S. Set for Soft Landing, Predict Economists By Perry Cleveland-Peck
Good day. The Bank of Japan is making important changes to its monetary policy, tolerating higher yields on longer-term Japanese government bonds and hinting that it might put an end to negative interest rates. The bank has been an outlier among the world's major central banks in not aggressively raising interest rates to fight inflation, and investors around the world have been closely attuned to any shifts in its unorthodox policy of actively controlling bond yields. Meanwhile, a recession might not be in the cards for the U.S. should the Federal Reserve halt its campaign of raising interest rates, according to economists at the biggest U.S. banks, MarketWatch reports. They point to a strong labor market, the first increase in a few years in inflation-adjusted incomes and easing inflation pressures helping the U.S. economy to chug along.
Now on to today's news and analysis.
Top News How the Bank of Japan's Shift Could Play Out in U.S. Markets
The Bank of Japan said in July that a 0.5% cap on 10-year government bond yields was now a suggestion, not a rigid limit, and that the new hard cap was 1%. In addition, BOJ Gov. Kazuo Ueda said in recent days that he would consider raising short-term interest rates into positive territory if he was confident that wages and prices were rising in a sustainable way.
Here's what Wall Street is watching.
ABA Economists Say U.S. Poised for Soft Landing
The U.S. economy is likely to dodge a recession if the Federal Reserve is done raising interest rates. So say American Bankers Association-affiliated economists at the biggest U.S.-based banks. They predict gross domestic product will slow to 1.2% in 2024 from an estimated 2% this year as higher rates take a bite out of growth. Yet they are increasingly optimistic the Fed can achieve a rare "soft landing," raising rates just enough to lower high inflation without triggering a recession. Eight months ago, the same group of economists predicted growth would flatline this year and put the U.S. perilously close to recession. Read more . (MarketWatch)
U.S. Economy Why Bipartisan Support Isn't Enough to Change This Tax Provision
Republicans and Democrats agree that Congress should reverse a piece of the 2017 tax law that sticks research-intensive startups and military contractors with enormous tax bills. But don't expect them to fix it quickly.
Luxury Apartment Glut in South Florida Offers Some Price Relief
Developers are racing to build more luxury rental apartments in South Florida, threatening to create a glut at the higher end of the market despite the stream of affluent new residents still pouring in.
Key Developments Around the World More Than 5,000 Feared Dead After Storm Batters Libya
Libyan authorities scrambled to reach survivors and provide food, water and shelter to tens of thousands of people after a lethal storm that officials say likely killed at least 5,000 people in the North African country's east.
Earthquake Strikes at Heart of Morocco's Troubled Economy The Three Roadblocks Keeping Ukraine Mired in War
The course of the war has defied predictions of generals, intelligence services and military pundits, from the failure of Russia's initial attack on Kyiv to Ukraine's surprise victories in the Kharkiv and Kherson regions last year.
Financial Regulation Roundup Banks Load Up on $1.2 Trillion in Risky 'Hot' Deposits
U.S. banks collectively held more than $1.2 trillion in brokered deposits in the second quarter, according to a Wall Street Journal analysis of data from the Federal Deposit Insurance Corp. The total marked an 86% increase from a year earlier . Lots of banks are loading up on them-a sign of the distress that continues to afflict many lenders who now must compete for customer funds they long took for granted. Regulators are growing concerned.
Japan Has Long Disappointed Investors. This Rally Might Be Different.
Corporate policy changes pushed by Japan's stock exchange, an endorsement from Warren Buffett and relatively low valuations have helped Japanese stocks become one of the best-performing markets in the world this year.
Forward Guidance Wednesday (all times ET)
2 a.m.: U.K. gross domestic product and industrial production for July
5 a.m.: EU industrial production for July
8:30 a.m.: U.S. consumer-price index for August
Thursday
8:15 a.m.: ECB interest-rate decision
8:30 a.m.: U.S. producer-price index for August; U.S. retail sales for August; U.S. weekly jobless claims
10 a.m.: U.S. manufacturing and trade inventories and sales for July
Research Norges Bank Tightening Cycle Coming to an End
Norwegian core inflation came in slightly below the Norges Bank's estimate in August, and even though the deviation is too small to question the planned rate increase next week, it dampens the risk of the central bank raising rates beyond 4.25%, Handelsbanken's Norway chief economist Marius Gonsholt Hov writes in a note. August inflation readings strengthen the impression that the peak has passed, and while there is still no question regarding the planned rate increase to 4.25% next week, the Norges Bank's hiking campaign is nearing an end, he writes. "In isolation, the probability for a terminal level of 4.50%, as the market has been anticipating, should have been reduced," he adds.
-Dominic Chopping
Bank of England Risks Leaning Too Hard on UK Jobs
Squeezing the jobs market too hard could have tough consquences for U.K. workers despite good signs for pay packets, says Danni Hewson, head of financial analysis at AJ Bell. Wage growth remained strong in the three months to July, overtaking the rate of inflation despite rising unemployment and falling openings, figures showed Tuesday. The Bank of England looks likely to continue its cycle of raising interest rates in the face of still-high inflation, Hewson notes. But what then, she says. "The labor market has been resilient but there are signs that the stress of the last couple of years has created a few cracks," she notes. "The fear is that any more pressure might mean those cracks start to crumble."
-Joshua Kirby
Interview ECB Could Leave Door Open to Rate Raises Even if It Hikes This Week
The European Central Bank will likely opt for a 25 basis-point interest-rate increase at its meeting on Thursday, possibly also leaving its options open for further tightening until it sees convincing evidence inflation will return to its 2% target, Roman Gaiser, head of fixed income, EMEA at Columbia Threadneedle Investments, told Dow Jones Newswires in an interview.
"I expect a 25 basis-point rate rise now and thereafter it is still somewhat open," he said. "There is clearly a slowdown in the economy but there's still some concern about core inflation and second-round effects, such as in wage inflation."
The ECB's upcoming policy decision is a very close call between a 25 basis-point rate hike, which would bring the deposit rate to 4.0%, and unchanged rates, according to analysts and investors.
Money markets, meanwhile, tilt toward unchanged rates, pricing in a 60% probability the central bank will leave the policy rates unchanged and a 40% probability of a 25 basis-point rate increase, according to Refinitiv data.
"The market currently is very keen to price in the end of the hiking cycle," Gaiser said.
Inflation in the eurozone is still clearly above the ECB's 2% target, with headline annual inflation remaining unchanged at 5.3% in August and core inflation falling to the same level, according to provisional data.
"We have to see more evidence that we have truly come off the peak of inflation," Gaiser said, adding that talking about interest-rate cuts is premature.
"The second quarter of 2024 is about the right time to price in rate cuts, but it isn't given that we will see rate cuts because we need to get more evidence that core inflation, not just headline inflation, is truly coming off as well," he said.
-Emese Bartha
Commentary As India rises, the G-20 Reveals a Shifting World Order
The G-20 summit reflected three important continuing shifts , with one working to America's advantage while the other two will be more challenging to navigate, WSJ Global View columnist Walter Russell Mead writes.
Basis Points A record number of Americans reported finding it harder to obtain credit in August than a year earlier, which could put a damper on consumer spending in coming months, according to a monthly survey by the Federal Reserve Bank of New York. Expectations of future credit availability also sank in the survey, which the bank launched in June 2013. (MarketWatch) Mexico's industrial production had a positive start to the third quarter, rising 0.5% seasonally adjusted in July from June in a fifth consecutive monthly gain, the National Statistics Institute said Monday. (Dow Jones Newswires) Chinese banks issued a higher-than-expected amount of new loans in August, as Beijing tapped financial institutions to step up support for the cooling economy. New yuan loans extended by banks in China reached 1.36 trillion yuan ($185.20 billion) in August, up from CNY345.9 billion in July, the People's Bank of China said, beating the CNY1.2 trillion expected by economists in a Wall Street Journal poll. (DJN) Australian business activity remains resilient despite the vice-like grip that rising mortgage interest rates is applying to household budgets, and growing concerns around China's misfiring economy. (DJN) Germany's economic outlook improved unexpectedly in September on higher expectations of interest-rate pauses, coming ahead of the next European Central Bank meeting, according to a monthly survey. (DJN) The U.K.'s jobless rate rose slightly in the three months to July, with wage growth holding steady and now ahead of inflation, potentially easing the pressure on the Bank of England as it looks for signs of a cooling labor market. (DJN) Feedback Loop
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09-12-23 0715ET
