Economy Withstands Fed Rate Hikes; Deficit Surges but Inflation Falls; Pace of Hiring Slows

Economy Withstands Fed Rate Hikes; Deficit Surges but Inflation Falls; Pace of Hiring Slows By Michael Maloney

Good day. There's a saying that economic expansions don't die of old age: They're murdered by the Federal Reserve. If that's the case, then the U.S. economy is outrunning its would-be assailant this year. The gap between federal spending and revenue is widening, but not for reasons that stimulate the economy. And the readings from Friday's jobs report keep the Fed on track to hold rates steady at its meeting this month, but won't resolve a debate over whether to raise rates again in November or December.

Now on to today's news and analysis.

Top News Resilient U.S. Economy Defies Expectations

Steady hiring and robust consumer spending offer the latest evidence that the pandemic's effects and the government's unprecedented policy responses made the economy surprisingly resilient to the Fed's most aggressive interest-rate increases in 40 years.

Do Higher Deficits Cause Inflation? Not This Year

Something strange is happening with the federal budget this year. The deficit has exploded, more than doubling in the first 10 months of the fiscal year compared with the same period last year. Such a surge typically could be expected to stimulate growth and, in turn, inflation. But inflation has steadily dropped over the same period.

Labor Is a Terrible Guide to Inflation, but Nobody Wants to Admit It

In a world of volatile commodity prices, clogged supply chains and government stimulus checks, the tightness of the labor market seems to be the only guide central banks really trust in their push to steer inflation below 2%. Unfortunately, it is a compass that rarely points north, writes Jon Sindreu for Heard on the Street.

U.S. Economy Job Gains Eased in Summer Months

Hiring slowed this summer and unemployment rose in August, signs the labor market is cooling in the face of high interest rates. Other data show the broader economy remains strong, with consumer spending surging this summer and inflation easing.

Hurricanes and High Yields Come Together on Wall Street

The mounting cost of extreme weather events is turbocharging the market for catastrophe bonds. Designed in the mid-1990s in the aftermaths of Hurricane Andrew and the Northridge earthquake, these bonds allow insurers, companies and even governments to transfer some of the risk of a disaster to investors.

Investors Head Into Fall With Jitters After Summer Rally

Stock market bulls are on edge heading into September. The S&P 500 is up 18% so far this year, even after falling in August for its first monthly decline since February. The benchmark index rallied in the final week of the month, finishing near its monthly highs for the sixth consecutive month. Now investors are questioning whether stocks can continue defying expectations and hang onto this year's gains.

Key Developments Around the World China's Country Garden Makes Overdue Dollar-Bond Payments

Embattled Chinese property giant Country Garden Holdings made two overdue bond-coupon payments shortly before the end of a 30-day grace period, averting an international debt default that many investors saw as inevitable.

China Creates Government Body to Support Private Sector Italy Seeks to Leave China's Belt and Road Initiative Russia Won't Rejoin Ukraine Grain Deal Until West Meets Demands

President Vladimir Putin said Russia won't rejoin a deal enabling Ukrainian grain to be shipped globally until the West meets its demands to facilitate Russian agricultural exports, after quitting an agreement that guaranteed the safety of a crucial part of the global food supply chain.

Western Officials Plan to Warn U.A.E. Over Trade With Russia Russia-Led Theatrics Take Center Stage at U.N. RBA Stands Pat for a Third Month; Option to Hike Further Still on Table

The Reserve Bank of Australia left its official cash rate unchanged for the third month in a row, but remained cautious about the outlook, saying that further interest-rate increases remain a possibility as inflation remains too high.

Financial Regulation Private Equity, Hedge Funds Sue SEC to Fend off Oversight

A coalition representing the biggest private-equity and hedge funds sued the Securities and Exchange Commission to block new regulations aimed at giving investors more transparency and better terms from asset managers.

Research Central Banks Should Admit Mistakes to Regain Trust, Lagarde Says

Central banks should do a better job facing up to their mistakes and explaining the uncertainty they come up against, and the difficulty of policymaking in the current economic climate, European Central Bank President Christine Lagarde said in a speech. "Right now, it is important for us to acknowledge that, like other central banks, we underestimated both the dynamics of inflation and its persistence," she told a seminar in London on Monday. Central banks should show more "humility" in their communication in fostering trust, which includes "being open about the limits of what we know, the areas where we have missed the mark, and what we are doing about it," Lagarde says. Policymakers in the last decade have faced crises that undermined the public's faith in how the macroeconomic environment is managed, she added.

-Ed Frankl, Dow Jones Newswires

Forward Guidance Tuesday (all times ET)

8:30 a.m.: European Central Bank's Schnabel chairs panel at ECB Legal Conference

10 a.m.: U.S. manufacturers' shipments, inventories and orders for July

10:30 a.m.: European Central Bank's de Guindos chairs panel at ECB Legal Conference

Wednesday

8:30 a.m.: U.S. trade for July; Canada trade for July

9:15 a.m.: Bank of England officials speak at hearing on financial stability, monetary policy reports

10 a.m.: Bank of Canada interest-rate decision; ISM Report on Business Services PMI

2 p.m.: U.S. Federal Reserve releases beige book report

3 p.m.: Dallas Fed's Logan moderates community listening session in Lubbock, Texas

Commentary Jobs or Inflation: Which Will Cool Quicker?

The job market is cooling, and inflation is cooling, too. That counts as welcome news to Federal Reserve policy makers, but for the economy the outlook is still murky, writes WSJ's Justin Lahart .

China's Neighbors Shouldn't Cheer On Its Slowdown

China's economic troubles have so far been a boon to other Asian markets. But if the world's second largest economy continues to turn sour, things could start to look uglier for them too, writes WSJ's Jacky Wong .

Basis Points The average U.S.-stock fund declined 2.6% in August , according to Refinitiv Lipper data, to trim the year-to-date gain to nearly 13.7%. A private gauge of China's service activities fell to its lowest level in eight months, signaling that the service sector's growth may have lost steam. The Caixin China services purchasing managers index slid to 51.8 in August from 54.1 in July, Caixin Media Co. and S&P Global said Tuesday. (Dow Jones Newswires) South Korea's headline inflation accelerated at a faster-than-expected pace in August, picking up again after six straight months of cooling. (DJN) The eurozone's economic output declined by more than initially estimated in August, and by the fastest rate since November 2020, data from a purchasing managers' survey showed Tuesday, a further signal of coming challenges facing the bloc's economy. (DJN) Germany's trade surplus narrowed in July by more than expected, reflecting weaker global demand for the country's goods as signs of an economic slowdown weigh. The country's adjusted trade surplus fell to 15.9 billion euros ($17.13 billion) in July, compared with 18.7 billion euros in June, data from the country's statistics office Destatis showed Monday. (DJN) Retail sales in the U.K. increased in August, supported by improved costumer confidence, according to the latest sales-monitor report from the British Retail Consortium published on Tuesday. (DJN) Feedback Loop

This newsletter was compiled by Michael Maloney in New York and Perry Cleveland-Peck in Barcelona.

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09-05-23 0719ET