ECB Considers Pause in Lifting Rates; GDP Report Suggests U.S. Steering Clear of Recession; BOJ Hints It Will Accept Higher Rates By James Christie
Good day. The European Central Bank lifted interest rates by a quarter percentage point, yesterday similar to the move made by the Federal Reserve a day earlier. However, ECB President Christine Lagarde signaled a potential pause to rate increases, noting the outlook for the eurozone economy had deteriorated. "We have an open mind as to what decisions will be in September and subsequent meetings," she said. "We might hike and we might hold. And what is decided in September is not definitive, it may vary from one meeting to another." In the U.S., the Commerce Department reported gross domestic product grew at a seasonally- and inflation-adjusted 2.4% annual rate in the second quarter, faster than economists expected and above the 2% growth of the first quarter. The growth along with easing inflation and the resilient jobs market helps build a case for the prospect of a soft landing for the U.S. economy in which inflation returns close to the Federal Reserve's 2% target without a recession. And in Asia earlier today, Japanese government bond yields surged and Tokyo stocks wobbled after the Bank of Japan indicated it would tolerate higher interest rates as inflation picks up.
Now on to today's news and analysis.
Top News European Central Bank Raises Rates, Says Pausing Is an Option
The European Central Bank raised its key interest rate by a quarter percentage point but signaled it might soon pause its yearlong campaign of rate increases, sending the euro tumbling.
The ECB's rate increase, its ninth in a row, took the bank's deposit rate to a 22-year high of 3.75% from below zero a year ago. It echoed a quarter-point raise by the Federal Reserve a day earlier, though eurozone rates remain clearly below the Fed's benchmark rate of 5.25% to 5.5%.
BOJ Indicates It Will Tolerate Higher Interest Rates, Lifting Bond Yields
Japanese government bond yields surged and Tokyo stocks wobbled after the Bank of Japan indicated earlier Friday that it would tolerate higher interest rates as inflation picks up . The central bank said it would consider its 0.5% cap on the 10-year government bond yield as a suggestion, not a rigid limit.
U.S. Economy U.S. Economic Growth Accelerates, Defying Slowdown Expectations
Gross domestic product grew at a seasonally and inflation adjusted annual rate of 2.4% in the second quarter, picking up slightly from 2% growth in the first three months of the year, the Commerce Department said Thursday.
Supreme Court Allows Work on Mountain Valley Pipeline to Resume
The U.S. Supreme Court said Thursday that work can resume on the long-stalled Mountain Valley Pipeline, overturning a lower-court ruling and potentially moving the 303-mile project closer to completion as a legal fight continues.
Key Developments Around the World China's Housing Troubles Derail a Developer's Comeback
Growing pessimism about China's housing market is dragging down the country's largest surviving developer , 31-year-old property giant Country Garden, which is again struggling to convince investors that it can weather the storm.
Europe Avoids China's Belt and Road Forum
After three years of Covid isolation, Chinese leader Xi Jinping is planning a blowout bash for his signature Belt and Road infrastructure initiative. The R.S.V.P.s aren't exactly rolling in. European countrie are skipping the festivities .
Great Power Rivalry Looms Over Ukraine Grain Deal
Russia's decision to pull out of a deal allowing Ukrainian grain to be exported globally is a high-stakes gamble by Vladimir Putin that risks diplomatic tensions with two of his country's most influential partners, China and Turkey.
Niger Coup Upends U.S. Security Plans in West Africa
A military coup in Niger threatens to disrupt the entire U.S. strategy for fighting Islamist militants as they expand across western Africa, and potentially hand Russia a strategic advantage as it tries to widen its own influence in the region.
Financial Regulation Roundup Banks Are Halting Stock Buybacks Again as New Capital Rules Loom
Regulators have announced a long-awaited proposal on stricter new rules governing the safety nets banks build under themselves. That, in turn, will impact the amount of profits banks return to investors through buybacks.
New Bank Capital Plan Targets Wealth-Management, Other Fees
U.S. regulators plan to make large banks bolster their financial footing , moves that could have an outsize effect on companies such as American Express and Morgan Stanley that rely on types of fee income targeted by the new rules.
Forward Guidance Friday (all times ET)
8:30 a.m.: U.S. personal income and outlays for June; U.S. employment cost index for second quarter; Canada gross domestic product for May
10 a.m.: University of Michigan consumer survey, final for July
4:15 p.m.: Fed report on assets and liabilities of commercial banks in U.S.
Monday
5 a.m.: Flash estimate for euro area inflation for July; Eurozone gross domestic product, first estimate for second quarter
9:45 a.m.: Chicago Business Barometer for July
10:30 a.m.: Dallas Fed Manufacturing Survey
2 p.m.: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices
Research BOE Likely to Slow Pace of Rate Increases in August
The Bank of England is likely to slow the pace of interest-rate rises at its next meeting on Aug. 3 to 25 basis points from 50 basis points previously as recent U.K. economic data has been less strong than data released before the June meeting, Bank of America analysts write in a note. The analysts haven't ruled out a 50 basis point rate increase in August, but they think that is less likely. U.K. economic data released over the past month has been mixed, showing signs of softening inflation and economic resilience. Markets place a 69% probability of a 25 basis point BOE rate rise, Refinitiv data show.
-Miriam Mukuru
Financing Conditions in U.S. to Remain Challenging
U.S. nonfinancial corporate borrowers are entering the second half of the year simultaneously buoyed by resilient economic activity and weighed down by persistent price pressures and the virtual certainty of higher-for-longer interest rates, S&P Global Ratings says in a report. Financing conditions look set to remain challenging through the end of the year, especially for the lowest-rated borrowers, according to S&P. The higher-for-longer environment means refinancing at prevailing rates can as much as double the interest expense for the lowest-rated companies, S&P says. S&P also says it expects the Federal Reserve to keep its policy rate at 5.25%-5.5% at least until mid-2024.
-Stephen Nakrosis
Commentary Steady Growth, Moderating Inflation Lift Odds of Extended Expansion
The Federal Reserve has never pulled off a soft landing when inflation was so far above its goal and the labor market this overheated, but there is a plausible case this time is different , Greg Ip writes in Capital Account.
Recession Odds Just Got Longer
The U.S. could still enter the recession economists have been forecasting for over a year now , but as of the second quarter it hadn't started, and it probably won't start in the third, either, Justin Lahart writes.
Executive Insights
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Drugmaker Mallinckrodt is talking to hedge funds about filing for bankruptcy and avoiding payments intended to help people addicted to opioids.
Companies are cutting executive salaries , typically untouched in corporate belt-tightening, as they trim budgets and lay off workers. For many executives, it's largely symbolic-most of their pay comes in bonuses and equity.
Hospital operators have collaborated on an extensive list of best practices for third-party cybersecurity risk management , which some security chiefs say is their top priority.
Large U.S. companies have filed for bankruptcy at a faster pace this year , in part from tighter financial markets and lingering pandemic effects.
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Basis Points Initial jobless benefit claims in the U.S. fell by 7,000 to 221,000 in the week ended July 22, the lowest level of claims since February, according to Labor Department data. (MarketWatch) Manufacturing activity in the central U.S. edged slightly higher in July and expectations for future activity held steady in negative territory, according to Federal Reserve Bank of Kansas City data. The bank's Tenth District manufacturing survey's composite index rose to minus 11 from minus 12 in June. Readings below zero suggest activity contracted compared with the previous month. (Dow Jones Newswires) New orders in the U.S. for durable goods, including appliances, computers, cars and other manufactured products, increased 4.7% in June from a month earlier to a seasonally adjusted $302.5 billion, the Commerce Department said. The rise marks the fourth straight month of increasing durable goods orders, following a revised increase of 2% in May. (DJN) The number of houses under contract in the U.S. rose slightly in June for the first time in four months as demand increased, according to the National Association of Realtors. The Pending Home Sales Index rose 0.3% to 76.8 in June, turning positive after successive months of decreases. An index of 100 is equal to the level of contract activity in 2001. (DJN)) The U.S. international trade deficit in goods narrowed 4.4% to $87.8 billion in June, according to the Commerce Department's advance estimate released Thursday.
(MORE TO FOLLOW) Dow Jones Newswires
07-28-23 0715ET
