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Mar 27, 2019

Real Time Economics | Markets Are Betting Fed Will Cut Rates

The Wall Street Journal.
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Real Time Economics
Good morning. Jeff Sparshott here to take you through the latest on interest rates, the housing market and corporate taxes. Send us your questions, comments and suggestions by replying to this email.

Too Soon

Markets are starting to think the Federal Reserve will cut rates this year. Some Fed officials are saying it’s too soon to consider such a move. The latest development to spook investors: Yields on 10-year Treasury notes fell below yields on three-month Treasury bills last week for the first time since August 2007. A so-called inverted yield curve has preceded past recessions.
“I’d need to see an inversion of some magnitude and/or some duration, and right now we don’t have either,” Dallas Fed President Robert Kaplan tells the WSJ's Nick Timiraos. An inversion that lasts “for three or four or five months, then that starts to show some persistence. That’s a different kettle of fish,” he added. “We’re not there.”

What to Watch Today

The "ECB and Its Watchers" conference in Frankfurt features speakers from the European Central Bank throughout the day.
The U.S. trade deficit for January is expected to narrow to $57.4 billion from $59.8 billion a month earlier. (8:30 a.m. ET)
The Kansas City Fed’s Esther George speaks on the economy and monetary policy at 7 p.m. ET.
U.K. lawmakers will hold a series of votes to see if there is consensus on an alternative to Prime Minister Theresa May's Brexit plan.

Top Stories

Negative Thinking

European Central Bank President Mario Draghi signaled the bank is starting to worry about the adverse effects of negative interest rates, a policy tool it introduced almost five years ago to encourage banks to lend, Tom Fairless reports.
  • Casting doubt on negative rates could be risky for the ECB if investors interpret it as a sign that the central bank doubts its own strategy.
  • Bank executives have complained for years that negative rates curb profits.
  • The ECB's key eurozone interest rate is set at minus 0.4%.

Meanwhile, In the Antipodes

Federal Reserve officials are cautious about signaling a rate cut. Not so much on the other side of the world. The Reserve Bank of New Zealand kept interest rates on hold at a policy meeting on Wednesday, but warned: “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next overnight cash rate move is down.”

On the Road Again

The exurbs are back. Rising prices, especially in urban centers, and low gas prices are once again motivating buyers to drive until they can afford a home. Analysis by the National Association of Home Builders shows that single-family construction rose nearly 7% in exurban areas in 2018 compared with a year earlier. Home building overall rose less than 3% in the same period, Laura Kusisto reports. 
The exurbs have historically blossomed late in the housing cycle, when more established areas are already saturated and buyers have become financially stretched. These fringe areas saw a similar rise during the last housing boom. When the bubble burst, home values plummeted. 

Closer Look: Housing

The U.S. economy is cranking out jobs and household formation is solid, so demand for homes is high. But buying appears out of reach for many. 
Prices: Slower price growth, along with lower mortgage rates and a growing inventory of homes for sale, are all potentially good news for home buyers this spring. Nonetheless, affordability remains a challenge for many first-time buyers, Laura Kusisto reports.

Builders: Housing starts and residential building permits, which can signal how much construction is in the pipeline, both dropped last month. Taken together, the two gauges signal construction is hiccuping at the start of the year, Sharon Nunn reports.

Losing Confidence

A measure of U.S. consumer confidence fell in March. The decline was primarily driven by more pessimistic views about current business and labor market conditions. Consumer confidence hit a postrecession peak in October and has since fallen, David Harrison reports. “The overall trend in confidence has been softening since last summer, pointing to a moderation in economic growth,” said the Conference Board's Lynn Franco.

Tax Time

When Republicans rewrote the international tax system in 2017, they were trying to help U.S. companies like Procter & Gamble compete in foreign markets and create domestic jobs. Fifteen months later, P&G and other U.S. multinationals warn the new law could instead put them at a disadvantage globally and reduce their incentive to invest at home, Richard Rubin reports.
  • P&G executives thought they would avoid paying a new U.S. minimum tax designed to prevent companies from shifting profits overseas.
  • Instead, P&G now expects to pay U.S. $100 million annually because of that minimum tax. In contrast, non-U.S. competitors generally don’t pay home-country taxes on global earnings.
  • The easiest way for P&G to respond: shift some research and headquarters expenses out of the U.S.

China Watch

Earnings at China’s large industrial firms dropped sharply in the first two months of the year, as lower factory-gate prices and slower sales ate into profits. China’s industrial profits tumbled 14% in the January to February period, extending a 1.9% decrease in December, the National Bureau of Statistics said. The latest figures may add to doubts about Chinese economic growth heading into 2019.

What Else We're Reading

So, what happens if Congress OKs the U.S.-Mexico-Canada Agreement? "At the aggregate level, effects of the USMCA are relatively small. ... [K]ey provisions in USMCA would lead to diminished economic integration in North America, reducing trade among the three North American partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million. Effects of the USMCA on real GDP are negligible," Mary  Burfisher, Frederic Lambertand Troy Matheson write in an International Monetary Fund working paper.
McDonald's will no longer lobby against minimum-wage increases. "We believe increases should be phased in and that all industries should be treated the same way," Genna Gent, McDonald's vice president of government relations, wrote in a letter to the National Restaurant Association. "The conversation about wages is an important one; it’s one we wish to advance, not impede." (via Politico's Rebecca Rainey)

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