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    House Committee Targets U.C. Berkeley Program for China Ties

    A House select committee is requesting more information about a university collaboration that it said could help China gain access to cutting-edge research.A congressional committee focused on national security threats from China said it had “grave concerns” about a research partnership between the University of California, Berkeley, and several Chinese entities, claiming that the collaboration’s advanced research could help the Chinese government gain an economic, technological or military advantage.In a letter sent last week to Berkeley’s president and chancellor, the House Select Committee on the Chinese Communist Party requested extensive information about the Tsinghua-Berkeley Shenzhen Institute, a collaboration set up in 2014 with China’s prestigious Tsinghua University and the Chinese city of Shenzhen.The letter pointed to the institute’s research into certain “dual-use technologies” that are employed by both civilian and military institutions, like advanced semiconductors and imaging technology used for mapping terrain or driving autonomous cars.The committee also questioned whether Berkeley had properly disclosed Chinese funding for the institute, and cited its collaborations with Chinese universities and companies that have been the subjects of sanctions by the United States in recent years, like the National University of Defense Technology, the telecom firm Huawei and the Chinese drone maker DJI.It also said that Berkeley faculty serving at the institute had received funding from the Defense Advanced Research Projects Agency and other U.S. funding for the development of military applications, raising concerns about Chinese access to those experts.In April, for example, a team from a Shenzhen-based lab that describes itself as being supported by the Tsinghua-Berkeley Shenzhen Institute said it had won a contest in China to optimize a type of advanced chip technology that the U.S. government is now trying to prevent Chinese companies from acquiring, the letter said.It is not clear what role the university had in that project, or if the partnership, or the institute’s other activities, would violate U.S. restrictions on China’s access to technology. In October, the United States set significant limits on the type of advanced semiconductor technology that could be shared with Chinese entities, saying that the activity posed a national security threat.“Berkeley’s P.R.C.-backed collaboration with Tsinghua University raises many red flags,” the letter said, referring to the People’s Republic of China. It was signed by Representative Mike Gallagher, a Wisconsin Republican who chairs the committee, and Representative Virginia Foxx, a Republican of North Carolina who is the committee chair on education and the work force.In a statement to The New York Times, U.C. Berkeley said it takes concerns about national security “very seriously” and was committed to comprehensive compliance with laws governing international academic engagement. “The campus is reviewing past agreements and actions involving or connected to Tsinghua-Berkeley Shenzhen Institute” and would “fully and transparently cooperate with any federal inquiries,” it said.The university also said it had responded to inquiries from the Department of Education with detailed information about gifts and contracts related to the institute, that it was committed to full compliance with laws governing such arrangements, and that it “follows the lead of Congress and federal regulators when evaluating proposed research relationships with foreign entities.”Universities have also emphasized that foreign governments might have little to gain from infiltrating such partnerships, since academic researchers are focused on fundamental research that, while potentially valuable, is promptly published in academic journals for all to see.“As a matter of principle, Berkeley conducts research that is openly published for the entire global scientific community,” the university said in its statement.The letter, and other accusations from members of Congress about U.S. universities with partners in China, underscores how a rapid evolution in U.S.-China relations is putting new pressure on academic partnerships that were set up to share information and break down barriers between the countries.The Chinese government has sought to improve the country’s technological capacity through legitimate commercial partnerships, but also espionage, cybertheft and coercion. Those efforts — along with a program to meld military and civilian innovation — has led to a backlash in the United States against ties with Chinese academic institutions and private companies that might have seemed relatively innocuous a decade ago.The select committee, which was set up earlier this year, describes its mission as building consensus on the threat posed by the Chinese Communist Party and developing a plan to defend the United States. The bipartisan committee, which is led by Republicans, can provide legislative recommendations but cannot legislate on its own. It has been busily naming and shaming major companies and others over ties to China in congressional hearings, investigations and letters.Tensions between the United States and China are high, and some lawmakers have called for decoupling the two economies. But severing academic ties is a tricky prospect. American universities are geared toward open and collaborative research and count many Chinese scholars among their work force. China’s significant technology industry and huge population of science and technology doctorates make it a natural magnet for many research collaborations.Still, the rapid expansion of export controls in the United States is putting more restrictions on the type of information and data related to advanced technologies that can be legally shared with individuals and organizations in China. Under the new rules, even carrying a laptop to China with certain chip designs on it, or giving a Chinese national a tour of an advanced U.S. chip lab, can violate the law.The House committee has requested that the university provide extensive documents and information by July 27 about the partnership, including its funding, structure and technological work, its alumni’s current and past affiliations, and its compliance with U.S. export controls. More

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    China’s Second-Quarter G.D.P. Shows Post-Covid Rebound Faltered

    The NewsChina’s economy slowed markedly in the spring from earlier in the year, official numbers released on Monday showed, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.The new gross domestic product data for the second quarter — from April through June — underlined what has been apparent for weeks: China’s recovery after abandoning its extensive “zero Covid” measures will be harder to achieve than Beijing and many analysts had hoped.The NumbersCovid not only still hangs over China’s economy; it also skews some of its official data. The main G.D.P. number reported by Beijing on Monday, comparing this year with the same quarter last year, showed that the economy expanded 6.3 percent. But that reflected improvement from a sharp slowdown in 2022’s second quarter, a period when China’s largest city, Shanghai, was in a two-month lockdown. More

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    America’s Foreign Vacations Tell Us Something About the U.S. Economy

    Prices are high, but Americans are opening their wallets for international flights and hotels. It’s the latest evidence of consumer resilience.Forget Emily. These days, a whole flood of Americans are in Paris.People spent 2020 and 2021 either cooped up at home or traveling sparingly and mostly within the continental U.S. But after Covid travel restrictions were lifted for international trips last summer, Americans are again headed overseas.While domestic leisure travel shows signs of calming — people are still vacationing in big numbers, but prices for hotels and flights are moderating as demand proves strong but not insatiable — foreign trips are snapping back with a vengeance. Americans are boarding planes and cruise ships to flock to Europe in particular, based on early data.According to estimates from AAA, international travel bookings for 2023 were up 40 percent from 2022 through May. That is still down about 2 percent from 2019, but it’s a hefty surge at a time when some travelers are being held back by long passport processing delays amid record-high applications. Tour and cruise bookings are expected to eclipse prepandemic highs, with especially strong demand for vacations to major European cities.Paris, for example, experienced a huge jump in North American tourists last year compared with 2021, according to the city’s tourism bureau. Planned air arrivals for July and August of this year climbed by another 14.4 percent — to nearly 5 percent above the 2019 level.“This year is just completely crazy,” said Steeve Calvo, a Parisian tour guide and sommelier whose company — The Americans in Paris — has been churning out visits to Normandy and French wine regions. He attributes some of the jump to a rebound from the pandemic and some to television shows and social media.“‘Emily in Paris’: I never saw so many people in Paris with red berets,” he said, noting that the signature chapeau of the popular Netflix show’s heroine started to pop up on tourists last year. Other newcomers are eager to take coveted photos for their Instagram pages.“In Versailles, the Hall of Mirrors, I call it the Hall of Selfie,” Mr. Calvo said, referring to a famous room in the palace.Robust travel booking numbers and anecdotes from tour guides align with what companies say they are experiencing: From airlines to American Express, corporate executives are reporting a lasting demand for flights and vacations.“The constructive industry backdrop is unlike anything that any of us have ever seen,” Ed Bastian, the chief executive officer at Delta Air Lines, said during a June 27 investor day. “Travel is going gangbusters, but it’s going to continue to go gangbusters because we still have an enormous amount of demand waiting.”Transportation Security Administration data shows that the daily average number of passengers who passed through U.S. airport checkpoints in June 2023 was 2.6 million, 0.5 percent above the June 2019 level, based on an analysis by Omair Sharif at Inflation Insights.And in many foreign airports, the burst of American vacationers is palpable: Customs lines are packed with U.S. tourists, from Paris’s Charles de Gaulle to London’s Heathrow. The latter saw 8 percent more traffic from North America in June 2023 than in June 2019, based on airport data.“This year is just completely crazy,” said Steeve Calvo, a tour guide in Paris.Jessica Chou for The New York Times In a weird way, the rebound in foreign travel may be taking some pressure off U.S. inflation.International flight prices, while surging for some routes, are not a big part of the U.S. Consumer Price Index, which is dominated by domestic flight prices. In fact, airfares in the inflation measure dropped sharply in June from the previous month and are down nearly 19 percent from a year ago.That is partly because fuel is cheaper and partly because airlines are getting more planes into the sky. Many pilots and air traffic controllers had been laid off or had retired, so companies struggled to keep up when demand started to recover after the initial pandemic slump, pushing prices sharply higher in 2022.“We just didn’t have enough seats to go around last year,” Mr. Sharif said, explaining that while personnel issues persist, so far this year the supply situation has been better. “Planes are still totally packed, but there are more planes.”And as people flock abroad, it is sapping some demand from hotels and tourist attractions in the United States. International tourists have yet to return to the United States in full force, so they are not entirely offsetting the wave of Americans headed overseas.Domestic travel is hardly in a free fall — July 4 weekend travel probably set new records, per AAA — but tourists are no longer so insatiable that hotels can keep raising room rates indefinitely. Prices for lodging away from home in the U.S. climbed by 4.5 percent in the year through June, which is far slower than the 25 percent annual increases hotel rooms were posting last spring. There is even elbow room at Disney World.Even if it isn’t inflationary, the jump in foreign travel does highlight something about the U.S. economy: It’s hard to keep U.S. consumers down, especially affluent ones.The Fed has been raising interest rates to cool growth since early 2022. Officials have made it more expensive to borrow money in hopes of creating a ripple effect that would cut into demand and force companies to stop lifting prices so much.Consumption has slowed amid that onslaught, but it hasn’t tanked. Fed officials have taken note, remarking at their last meeting that consumption had been “stronger than expected,” minutes showed.The resilience comes as many households remain in solid financial shape. People who travel internationally skew wealthier, and many are benefiting from a rising stock market and still-high home prices that are beginning to prove surprisingly immune to interest rate moves.Those who do not have big stock or real estate holdings are experiencing a strong job market, and some are still holding onto extra savings built up during the pandemic. And it is not just vacation destinations feeling the momentum: Consumers are still spending on a range of other services.“There’s this last blowoff of spending,” said Kathy Bostjancic, chief economist for the insurance company Nationwide Mutual.It could be that consumer resilience will help the U.S. economy avoid a recession as the Fed fights inflation. As has been the case at American hotels, demand that stabilizes without plummeting could allow for a slow and steady moderation of price increases.But if consumers remain so ravenous that companies find they can still charge more, it could prolong inflation. That’s why the Fed is keeping a close eye on spending.Ms. Bostjancic thinks consumers will pull back starting this fall. They are drawing down their savings, the labor market is cooling, and it may simply take time for the Fed’s rate increases to have their full effect. But when it comes to many types of travel, there is no end in sight yet.“Despite economic headwinds, we’re seeing very strong demand for summer leisure travel,” said Mike Daher, who leads the U.S. Transportation, Hospitality & Services practice at the consulting firm Deloitte.Mr. Daher attributes that to three driving forces. People missed trips. Social media is luring many to new places. And the advent of remote work is allowing professionals — “what we call the laptop luggers,” per Mr. Daher — to stretch out vacations by working a few days from the beach or the mountains. Mr. Calvo, the tour guide, is riding the wave, taking Americans on tours that showcase Paris’s shared history with France and driving them in minivan tours to Champagne. “I have no clue if it’s going to last,” he said. More

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    JPMorgan, Citigroup and Wells Fargo Report Better-than-Expected Profits

    The NewsThree of the biggest banks in the United States made a cumulative $22.3 billion in profit last quarter, a hefty jump from the same period last year, the lenders reported Friday.The largest bank in the nation, JPMorgan Chase, led the way with $14.5 billion in profit, helped by growth virtually across the board, including increases in lending and credit-card transactions. Wells Fargo pulled in $4.9 billion and Citi earned $2.9 billion in the quarter. All of the earnings were higher than analysts had expected.JPMorgan Chase’s headquarters in New York. The bank made $14.5 billion in profit last quarter.Haruka Sakaguchi for The New York TimesWhy It MattersGiven its size, JPMorgan in particular is a proxy for the banking industry. Jamie Dimon, the bank’s chief executive, has deep political connections, and his prognostications on the economy are scrutinized in some circles as closely as a central banker’s musings.On Friday, Mr. Dimon told analysts that he expected the U.S. economy to experience “a soft landing, mild recession or a hard recession,” though he didn’t put a time frame on the prediction. “Obviously, we shall hope for the best,” he said.In its latest report, the bank listed a litany of risks, including that consumers are burning through their cash buffers and that inflation remains high. Last quarter, JPMorgan lost $900 million on investments in U.S. Treasury bonds and mortgage-backed securities, which have dropped in value as rates have risen — but that was barely a dent in its results.Wells Fargo, one of the nation’s largest mortgage lenders, is watched by analysts for signs of economic stress. The U.S. economy “continues to perform better than many had expected,” said Charles W. Scharf, the bank’s chief executive.The bank said Friday that soured loans in its commercial business had increased, but that its consumer business had held fairly steady, with a slight rise in credit-card defaults offset by a drop in losses on auto loans. Commercial real estate, especially loans on office space, is a pain point, and the bank set aside nearly $1 billion more for losses.Unlike the other banks, Citigroup reported a fall in second-quarter profit, although the decline was not as severe as analysts had predicted. “The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” Citi’s chief executive, Jane Fraser, said in a statement.BackgroundThe three major banks that reported earnings Friday have been all over the news this year, thanks to their prominent role attempting to be a stabilizing force during the spring banking crisis that felled three smaller lenders. JPMorgan bought one of those failed banks, First Republic. In an indication of how troubled that institution had become, JPMorgan said Friday that it was setting aside $1.2 billion to deal with losses in First Republic’s lending portfolio.Analysts still expect the acquisition to prove worthy in the end, thanks to First Republic’s base of wealthy clients and coastal branches, which Friday’s results show are already buoying JPMorgan’s asset and wealth management arms.The U.S. government debt-limit standoff in April and May was also reflected in the banks’ results, with Citi citing anxiety during the negotiations as pushing investment-banking clients to the “sidelines” during the second quarter.What’s NextIn the next week or so, a slew of other banks will report quarterly earnings. Among the most closely watched will be Wednesday’s results from Goldman Sachs, which has hinted publicly of a disappointing stretch, and regional banks like Western Alliance and Comerica, which will be looking to prove they have bounced back from their recent troubles. More

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    For Many Small-Business Owners, a Necessary Shift to Digital Payments

    The pandemic accelerated a transition to cashless payments, forcing a reckoning among small-business owners. But there are benefits: One owner said the switch saved her $3,000 a month.“Making It Work” is a series about small-business owners striving to endure hard times.When Egypt Otis opened her business, Comma Bookstore and Social Hub, three years ago in Flint, Mich., the pandemic was full blown. But her neighbors welcomed the literature and art she sold in her store that celebrated people of color, as well as the community programs she hosted.Despite the warm reception, Ms. Otis quickly found that she had a sales problem: Her customers wanted to pay with their cellphones.“I realized that people were hardly keeping a wallet or a physical card, which limited my ability to sell and make money,” Ms. Otis said. So she upgraded her transactions platform to include tap-and-go purchases on mobile devices. “People are not carrying cash,” she said. “It’s becoming obsolete.”The number of Americans who say they are “cashless” has jumped in the last five years. Forty-one percent of Americans said they did not use cash for their purchases in a typical week in 2022, up from 29 percent in 2018, according to a Pew Research Center survey released last October.Small-business owners increasingly are making the switch to cashless payments for several reasons, including rising consumer demand, faster checkout, lower labor costs and increased security. Those who wait risk losing revenue, experts say.But there are drawbacks to going cash-free, including a learning curve for entrepreneurs who may not understand how to set up digital payments, a lack of accessibility to credit cards for low-income consumers, and privacy concerns.Signs at a pizza joint in New York indicating it takes multiple forms of cashless payments, a switch that accelerated in the pandemic.Karsten Moran for The New York TimesJuanny Romero was an early adopter of digital payments for her small business. Fifteen years ago, when she founded Mothership Coffee Roasters, a chain of coffee shops in Las Vegas, she began using Square, a low-cost digital payments system for small businesses.“​​I was a young businesswoman and not astute,” she said. But Square saved her $3,000 a month in merchant fees for credit card processing.As Ms. Romero expanded her businesses (to four locations in Las Vegas, with two more on the way), she added more payment options, including Apple Pay and Google Pay.But she noticed a shift during the pandemic: Her customers no longer wanted to use cash, and her employees did not want to handle it. “We didn’t know where Covid was coming from,” she said. “There were still people bringing in cash, but it was scary and dangerous.”When the coin shortage hit in 2020, she ran out of cash altogether, but Ms. Romero found it saved on labor costs. “My managers were standing in line for two hours to deposit the cash,” she said. “I can’t get an armored car service to pick up $100 in cash.”Even so, customer demand prompted her to return to cash sales, which Ms. Romero said are holding steady at about 11 percent of her overall revenue. She said she would go cashless if the share dipped below 10 percent.A digital transaction at Mothership Coffee Roasters in Las Vegas.Bridget Bennett for The New York TimesThe pressure to adapt is growing. More that 2.8 billion mobile wallets were in use at the end of 2020, and that is projected to increase nearly 74 percent to 4.8 billion — nearly 60 percent of the world’s population — by the end of 2025, according to a study released in 2021 by Boku, a fintech companyThe United States lags other countries in adopting cashless payments. Among the most cashless countries in the world is Britain, where the pound makes up only 1 percent of all transactions, according to a report from Merchant Machine, a payment research firm based in London. But in the United States, some small-business owners do not understand the complexities of digital payments.“Smaller merchants, they don’t always have the knowledge and resources to know what to do,” said Ginger Siegel, who leads the North America small-business segment at Mastercard, which offers training to business owners like Ms. Otis of Comma Bookstore.Ms. Otis said she noticed an increase in sales when she began offering mobile payments, which made the checkout process faster. “As a retailer, you want to make the experience as efficient as possible,” she said. “It is a matter of survival.”A veteran using a tap-and-go device to collect donations for the Royal British Legion in London in 2020.Guy Bell/AlamyBenefits include immediate payment, increased sales and the ability to sell to customers who might use other currencies. “You have to set it up, but it’s worth it,” said Kimberley A. Eddleston, a professor of entrepreneurship at Northeastern University.But some business owners say they are hesitant to move too quickly, worried that today’s technology could become obsolete tomorrow. And there are compatibility and cost issues to consider, said Wayne Read, the chief executive of Forged & Formed, an online jeweler with a physical store, Studio D Jewelers, in Woodstock, Ill. In his jewelry sales, where items can be pricey, he said a speedy transaction might not be suitable. “We don’t want people to feel they have rushed their decision,” he said.Despite advances in technology, many Americans still have little or no access to financial services like credit cards and mobile wallets, although that is slowly improving. An estimated 5.9 million households did not have a bank account in 2021, down from 7.1 million households in 2019, according to a survey by the Federal Reserve.Rewards points displayed on a checkout screen at Mothership. Mobile apps allow for cashless payments and can increase customer loyalty.Bridget Bennett for The New York TimesAnother obstacle to adoption is privacy concerns: Some people prefer the anonymity that cash provides. And cash is perceived as a way for consumers to remain aware of expenditures. Complicating the transition to the digital economy, the recent banking turmoil in the United States has made many depositors question the security of financial institutions.But experts agree that cash is unlikely to go away. Consumers in lower income households continue to rely on cash for payments, according to the Fed survey.And small-business owners say that despite the speed and efficiency that cashless payments offer, cash is still a viable option for their customers.“At the end of the day, I know the people I serve,” Ms. Romero said. “I would feel conflicted if I didn’t do the right thing.” More

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    June wholesale prices rise less than expected in another encouraging inflation report

    A customer shops in a Kroger grocery store on July 15, 2022 in Houston, Texas. 
    Brandon Bell | Getty Images

    The producer price index for June had a smaller than expected increase, the Labor Department reported Thursday, in the latest sign that inflation is calming in the United States.
    The PPI for final demand rose 0.1%. Economists surveyed by Dow Jones were expecting a rise of 0.2%. PPI rose 0.1% when excluding food, energy and trade services, which was in line with expectations.

    The producer report comes a day after the consumer price index showed a smaller-than-expected increase. The CPI rose just 3% year over year, its lowest since March 2021, bolstering hopes for investors that the Federal Reserve is near the end of its rate-hiking cycle.
    The wholesale producer numbers have declined faster than the consumer inflation data. In May, the headline PPI number actually declined 0.4%, and was unchanged when excluding food, energy and trade services. More

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    Strategist David Roche says we’ll avoid a global recession, central banks will ‘change the goalposts’

    The market is pricing a further 25 basis point hike from the U.S. Federal Reserve later this month, though a cooler-than-expected June consumer price inflation reading on Wednesday fueled optimism that prices are finally beginning to moderate.
    Veteran strategist David Roche suggested the Fed will be hesitant to begin cutting rates back from their current elevated levels until “well into next year.”
    The global economy is looking at a period of static growth with rates remaining high, according to Roche.

    A Now Hiring sign is seen inside a WholeFoods store in New York City.
    Adam Jeffery | CNBC

    The global economy will likely avoid a recession and central banks will need to “change the goalposts” on inflation, according to veteran strategist David Roche.
    With high inflation proving sticky across many major economies, central banks have tightened monetary policy aggressively over the past 18 months. Further hikes to interest rates are expected later this year amid tight labor markets and resilient economic activity.

    It’s led a growing number of economists to believe that the additional rate rises will tip several major economies into recession, with some even suggesting that a downturn could be necessary to achieve the levels of demand destruction and unemployment that would bring about disinflation.
    The market is pricing a further 25 basis point hike from the U.S. Federal Reserve later this month, though a cooler-than-expected June consumer price inflation reading on Wednesday fueled optimism that prices are finally beginning to moderate.
    Roche suggested that since figures are beginning to reflect year-on-year comparisons to the sudden spike in prices last spring following Russia’s invasion of Ukraine, the Fed will be hesitant to begin cutting rates back from their current elevated levels until “well into next year.”
    “I think a real fear is the fact that they could cut too early and be the culprits of engendering higher inflation for a second time, so I think if anything, they will stay the course,” said Roche, a veteran investor and president of research house Independent Strategy.
    “Will that produce deflation, will that produce recession? I actually don’t think so, and the reason for that is that labor markets and disposable income — what people have to spend — are behaving differently this time.”

    The year-over-year inflation rate dropped from 4% in May to 3% in June, largely due to falling energy and transportation prices, while core inflation — which excludes volatile food and energy costs — slowed to increase by just 0.2% month-on-month. Annual core CPI remained comparatively high at 4.8%.

    Roche, who correctly predicted the development of the Asian crisis in 1997 and the 2008 global financial crisis, noted that the global economy is currently seeing a “gradual reduction” in labor demand and a “gradual reduction in hourly wages,” but not the “catastrophic collapse in employment which would create a recession.”
    Unlike the oft-referenced “goldilocks scenario” in which borrowing costs are coming down and growth is accelerating, Roche suggested the global economy is looking at a period of static growth with rates remaining high. He said this raises the question of how to bring inflation back towards the Fed’s 2% target without a “long period of pain.”
    “Or do you simply change the goalposts, or change the goalposts without really saying so, which is what I think central banks are going to do?” he added.
    No chance of ‘immaculate disinflation’
    The dismissal of any possible “goldilocks” scenario for the global economy was echoed earlier this week by JPMorgan Asset Management, though on different grounds.
    Stock markets and other risk assets rallied Wednesday on the back of the cooler U.S. CPI print, and have enjoyed a bumper first half of the year despite persistent concerns about central banks having to continue driving down growth in order to rein in inflation.
    The S&P 500 is up more than 16% year-to-date, while the tech-heavy Nasdaq 100 has soared by almost 40%. Gains in Europe and Asia have been more modest, with the pan-European Stoxx 600 up more than 8% and the MSCI Asia ex-Japan almost 3% higher.
    At a roundtable event on Tuesday, JPMorgan Global Market Strategist Hugh Gimber said current market positioning is built on an economic outlook that is “too good to be true,” with investors less well prepared for the “necessary” slowdown that “central banks are determined to achieve.”

    “We are skeptical about this notion that we can see what I’d call immaculate disinflation. We don’t think core inflation gets back to target without a meaningful hit to growth, and therefore we’re uncomfortable with the markets seeing inflation coming down and therefore potentially a recession might be avoided,” Gimber said.
    He added that core inflation will not reach tolerable levels for central banks without a weaker period for the global economy.
    “Therefore, as a result of the market moves that we’ve seen in the first half of this year, we expect higher volatility ahead,” Gimber said.
    “We think that ultimately total returns on a 12-month forward basis across risk assets could be coming under significant pressure, and therefore this is a time for investors to be focused on portfolio resilience.” More

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    Inflation Drops to 3% in June

    The Consumer Price Index climbed far more slowly in June, a relief for shoppers and a hopeful — though inconclusive — sign that America might pull off a “soft landing.”Inflation cooled significantly in June, offering some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago — and boosting the chances that the central bank might be able to stop raising interest rates after its meeting this month.The Consumer Price Index climbed 3 percent in the year through June, according to data released Wednesday, less than the 4 percent increase in the year through May and just a third of its roughly 9 percent peak last summer.That overall measure is being pulled down by big declines in gas prices that could prove ephemeral, which is why policymakers closely watch a more slimmed-down version: the change in prices after stripping out food and fuel costs. That metric, known as the core index, offered news that was even better than what economists had expected.The core index climbed 4.8 percent compared with the previous year, down from 5.3 percent in the year through May. Economists had forecast a 5 percent increase. And on a monthly basis, it climbed at the slowest pace since August 2021.Slower inflation is unquestionably good news, because it allows consumer paychecks to stretch further at the gas pump and in the grocery aisle. And if inflation can come down sustainably without a big increase in unemployment or a painful economic recession, it could allow workers to hang on to the major gains they have made over the past three years: progress toward better jobs and pay that has helped to chip away at income inequality.The White House, which has spent over a year on the defensive over rising prices, celebrated the fresh report, with President Biden calling the current economic moment “Bidenomics in action.” And stocks soared as investors bet that the Fed would be able to be less aggressive in its fight against inflation — even halting its interest rate increases after a final July move — in light of the new data.“This is very promising news,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. “The pieces of the puzzle are starting to come together. But it’s just one report, and the Fed has been burned by inflation before.”Fed officials are likely to avoid declaring victory just yet. Policymakers are still trying to assess whether the moderation is likely to be quick and complete. They do not want to allow price increases to linger at slightly elevated levels for too long, because if they do, consumers and businesses could adjust their behavior in ways that make more rapid inflation a permanent feature of the economy.That’s why officials have signaled in recent weeks that they are likely to raise interest rates at their meeting on July 25 and 26. Policymakers had also indicated that one or more additional rate moves could be warranted after that.“Inflation is too high,” Thomas Barkin, the president of the Federal Reserve Bank of Richmond, said Wednesday in a speech in Maryland, according to Bloomberg. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”But economists and investors saw less of a chance that the Fed would raise rates again later this year in light of the fresh data.Policymakers have already slowed down the pace of rate moves sharply, skipping an adjustment at the June meeting. Assuming they hold off again in September, that could mean it would be November before they have to seriously debate lifting borrowing costs again — and by then, success in tamping down inflation could be clear.“They don’t want to unleash animal spirits too quickly here and have everyone go bananas,” said Julia Pollak, chief economist at ZipRecruiter. But by November, “it may be clear in the data that their job is done.”The details of the June report offered reasons for optimism. Inflation slowed down as a few key products and services posted steep price declines. Airfares fell 8.1 percent from the previous month, and used cars and trucks were down 0.5 percent. New vehicle prices were flat compared with May.Not all of those changes will necessarily last: Airline tickets, for instance, are not expected to continue to decline as sharply as they did in this report. But for the Fed, there were other encouraging signs that the cool-down is broad enough to prove sustainable.For one thing, the cost of housing as measured by the Consumer Price Index — which relies on rent prices — is coming down sharply. That is expected to continue in coming months. An index tracking the rent of primary residences slowed to a 0.46 percent change in June, the weakest increase since March 2022.Car prices are also stabilizing, and in some cases falling. After years in which semiconductor shortages and other parts problems limited supply, making it hard to meet booming demand, discounting is making a comeback on car dealer lots. Inventories are rebounding, and consumers have a less voracious appetite for new cars in particular.“It’s different from the past couple of years, and even different from the fall,” said Beth Weaver, who runs a Buick GMC car dealership in Erie, Pa. “Interest rates have certainly weighed on demand.”And more broadly, price increases for a basket of services excluding energy, food and housing costs — a metric that the Fed watches very closely — continued to slow in June. That progress comes even as unemployment is hovering near its lowest level in half a century and hiring remains stronger than before the pandemic.“This is very promising news,” the economist Laura Rosner-Warburton said. “But it’s just one report, and the Fed has been burned by inflation before.”Amir Hamja/The New York TimesFed interest rate increases work to slow inflation partly by slowing the job market and holding back wage increases, so the Fed’s fight against inflation and the strength of the labor market are closely tied.“The economy is defying predictions that inflation would not fall absent significant job destruction,” Lael Brainard, the director of the National Economic Council, said during a speech on Wednesday. “This economy is delivering strong results for America’s middle class.”Republicans highlighted that inflation is still higher than usual — a fact that has been biting into consumer confidence, though it may become less salient as consumers feel relief from cheaper fuel and find that they can replace their aging cars without facing eye-popping price tags.“Inflation that is almost double the Federal Reserve’s target is not a win for American wallets and budgets,” Representative Jason Smith, a Missouri Republican and chairman of the House Ways and Means Committee, said in an emailed statement, referring to the core inflation rate.Inflation does remain above the rate of increase that was normal before the 2020 pandemic, and it is still much faster than the Fed’s 2 percent goal. The Fed defines that target using a separate inflation measure, the Personal Consumption Expenditures index. That gauge is also slowing notably, and its June reading is scheduled for release on July 28.Even if central bankers are taking the slowdown cautiously — cognizant that price increases have slowed and then accelerated again before — many commentators welcomed the fresh data point as the latest sign that the economy might be able to slow gently.Officials at the Fed have been trying to engineer a “soft landing,” in which inflation slows gradually and without requiring a big jump in the unemployment rate. Jerome H. Powell, the Fed chair, has repeatedly said there was a “narrow path” to achieving one: There are few if any historical examples of the Fed wrestling significant inflation lower without a downturn.Challenges continue to loom. The economy has momentum, and the job market is strong, which could give companies the wherewithal to keep increasing prices. The war in Ukraine could always intensify, pushing up commodity prices.But there are also factors that could help out: China’s rebound has been weaker than expected, which means that fewer buyers are competing for goods in global markets. Consumers are buying fewer retail goods, and while spending on services is not plummeting, it has been gradually slowing.And as those trends combine with inflation that is easing more convincingly, the odds of a gentle deceleration may be improving.“Powell’s saying is that ‘it’s a narrow path to a soft landing,’” said Michael Feroli, chief U.S. economist at J.P. Morgan. “It’s looking maybe a little wider now.”Alan Rappeport More