Fed Is Facing a Dilemma; In China, a Focus on Paying Down Debt

Fed Is Facing a Dilemma; In China, a Focus on Paying Down Debt By James Christie

Good day. The Federal Reserve aims to avert a potential credit crunch while also fighting inflation, challenges typically demanding opposite policies. As things stand, price pressures and the U.S. economy haven't cooled as much as Fed officials anticipated, but there remain concerns about the banking system, the reason why some officials are leaning toward holding interest rates steady at their meeting this week. Should banking stresses worsen, Fed Chair Jerome Powell and his colleagues would have to choose between focusing on failing banks or high inflation. Elsewhere, after years of heavy borrowing many in China are focused on paying down their debts. The result could be weaker growth for a long time to come in the world's No. 2 economy. Consumers are hoarding cash, with many refusing to take out loans, private businesses are barely investing, and local governments are cutting spending on everything from roads to salaries to bring debts under control.

Now on to today's news and analysis.

Top News Jerome Powell's Big Problem Just Got Even More Complicated

Federal Reserve Chair Jerome Powell finds himself in a place no central banker wants to be : working to avert a credit crunch, which calls for looser monetary policy, while fighting high inflation, which demands the opposite.

Strains in the banking industry, which followed the collapse of three midsize lenders this spring, help explain why some central bank officials are leaning toward holding interest rates steady at their meeting this week-even though the economy and inflation haven't slowed as much as they expected.

Fueled by Long Credit Binge, China Faces Drag From Debt Purge

China now finds itself facing a protracted period of what economists call deleveraging-the painful process in which borrowers divert income to pay down debts instead of spending and investing.

U.S. Economy This Summer, Lifeguards Have Better Job Prospects Than Interns

Swim instructors, ice-cream scoopers and camp counselors are among this summer's most sought-after workers , as American consumers are spending freely on summer travel, dining out and day camps.

Here's How West Coast Port Talks Led to Disruption

U.S. retailers and manufacturers are facing mounting delays at West Coast ports as tensions rise between unionized dockworkers and employers locked in labor talks for more than a year. Here is how we got to this point .

Titanium Mine Proposal Could Reshape Georgia's Swamp Country

An Alabama-based company's plans to mine titanium dioxide-used commercially as a white pigment-near the Okefenokee has set off a political battle reaching from Atlanta and Washington.

Key Developments Around the World Even Japan Wants More Foreign Workers, Letting Them Stay for Good

Long known for keeping out immigrants, Japan is opening the door to a range of foreigners to enter and potentially stay for good, the latest sign worker shortages in wealthy nations are spurring greater openness to foreign labor.

The Real-Estate Market Caught in a Tangle of Ownership and Debt

Sweden, one of the world's most overstretched real-estate markets, has a knotty problem : Many of its top property tycoons own stakes in rival companies-and when one firm wobbles, others can feel the pain.

India's Conundrum for Its Sprawling Railways: Fix or Build

A burst of investment in India's railways in recent years brought high-speed trains and modern technology to a colonial-era system, but did far less to repair old tracks, improve safety and hone the skills of its workforce.

Financial Regulation Roundup How North Korea's Hacker Army Stole $3 Billion in Crypto

Digital heists have netted more than $3 billion for North Korea, according to the blockchain analytics firm Chainalysis, and that money is being used to fund about 50% of the country's ballistic missile program , U.S. officials say.

Russians Are Charged in Crypto-Theft in Hack of Mt. Gox Exchange

Two Russian nationals were charged with stealing about 647,000 bitcoin in a hack of Mt. Gox, draining the now-defunct crypto exchange between 2011 and 2014 of digital currency that today would be valued at $17 billion.

Forward Guidance Monday (all times ET)

11 a.m.: New York Fed's consumer expectations survey for U.S.

Tuesday

2 a.m.: U.K. unemployment report for May

8:30 a.m.: U.S. consumer-price index for May

Research Fed Expected to Lift Growth and Inflation Projections

The Federal Reserve's Summary of Economic Projections, to be released after the June 13-14 Federal Open Market Committee meeting, is likely to show the 2023 gross domestic product growth forecast rising from 0.4% to 1%, Goldman Sachs economists write in a report. They also expect the unemployment rate projection to be lowered from 4.5% to 4.1%, and core personal-consumption expenditures price index inflation at 3.8%, versus 3.6% in the March forecast. "We expect the median dot to show one additional hike to a new peak of 5.25-5.5%," they add. Goldman Sachs considers its views more hawkish than what the market is pricing for the next two years, as its economists see "a lower probability of recession [and] a somewhat higher bar for cuts."

-Paulo Trevisani

Bank of Canada Still Tracking Toward Another Rate Rise in July

TD Securities strategists Andrew Kelvin and Chris Whelan say they don't believe Canada's jobs data for May is weak enough to change the Bank of Canada's direction in July, and they continue to pencil in another quarter-point rate increase. While employment surprised to the downside with a dip and unemployment rose, wage growth was in line with expectations and the six-month trend in employment remains quite strong at more than 50,000 jobs a month, they say. They add that the jobless rate at 5.2% is still consistent with excess demand.

-Robb Stewart

Commentary Making Turkey Market-Friendly Again Comes With Dangers Too

With his announcement of a new central bank chief, investors may be tempted to celebrate President Tayyip Erdogan's apparent move away from unorthodox economics, but a hard swerve comes with perils too, Jon Sindreu writes.

The Chinese Tourism Tsunami Is Late

China's "revenge travel" has mostly happened at home so far, but bottlenecks in ramping up international flights are a major factor holding back the globe-trotting Chinese, Jacky Wong writes.

SEC Crypto Action Leaves Stablecoins in Limbo

The Securities and Exchange Commission has taken on two of the biggest players in crypto, but there is a key part of the crypto market it still seemingly hasn't addressed head-on: stablecoins, Telis Demos writes.

Basis Points Russia's central bank left its key interest rate unchanged at 7.5% for the sixth straight policy meeting Friday, and repeated its warning that it may tighten policy if the war in Ukraine threatens to drive inflation higher. UBS and the Swiss government have signed a loss protection agreement with the Swiss covering up to 9 billion francs ($10 billion) of losses once the takeover of Credit Suisse is completed. The finalized deal sets the stage for the merger of the Swiss banks to be completed as early as June 12. (MarketWatch) The jobless rate in Canada rose slightly in May even as wage growth remained elevated. The number of employed working-aged people in Canada slipped by 17,300 from April, while the unemployment rate rose to 5.2% after holding steady at 5.0% for five straight months, Statistics Canada reported Friday. (Dow Jones Newswires) The U.K. windfall profit tax on oil and gas companies will remain in place, unless both oil and natural gas prices fall below their 20-year averages, the U.K. government said Friday. (DJN) Vietnam is grappling with a severe power shortage during an early summer heat wave, hitting manufacturers that have flocked to the country because they view it as an alternative to China. Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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06-12-23 0715ET