Economy

WASHINGTON (Reuters) – The Federal Reserve is expected to hold interest rates steady at a two-day policy meeting this week but open the door to interest rate cuts as soon as September by acknowledging inflation has edged nearer to the U.S. central bank’s 2% target.Policymakers in advance of the July 30-31 meeting were reluctant to commit to the timing of a first rate cut, but audibly cheered recent data showing price pressures were easing broadly, with headline inflation moving closer to the Fed’s target and evidence from job, housing and other markets suggesting that trend would continue.Data on Friday showed the Fed’s preferred personal consumption expenditures price index, which was accelerating by as much as 7.1% on a year-over-year basis in 2022, rose by 2.5% in June after a 2.6% gain in May. Since March, in fact, the annualized month-to-month changes in the PCE price index show it rising at just 1.5% – half a percentage point below the Fed’s target. A companion measure stripping out volatile food and energy prices is trending at 2.3% over that same window – within sight of the 2% goal.Combined with a broader sense that price pressures are easing, that data may be enough for Fed officials to change their description of inflation as “elevated” in next week’s policy statement, and note rising confidence that the pace of price increases will return to 2%. Policymakers have said they should start cutting interest rates before inflation fully returns to their target, and if upcoming data stays in line with recent months they may be running out of time.The Fed “is only 50 basis points from the target … so it seems that is not very far,” said Jim Bullard, the former president of the St. Louis Fed and now dean of Purdue University’s Mitchell E. Daniels Jr. School of Business. “Is it still elevated? Sure. But it is not as elevated as it was,” Bullard said. A slight change in the statement, perhaps describing it as “moderately elevated,” would “send a major signal to markets that you are taking on board all that disinflation that has occurred over the last year and you think it is for real and you don’t think it is going to turn around.” The Fed lifted its benchmark interest rate to slow the economy after inflation surged, and has held it steady in the current 5.25%-to-5.50% range since last July, making the current run of tight monetary policy among the longest in recent decades.Despite warnings last year that such strict financial conditions could trigger a recession, the Fed at least for now appears to have hit a sweet spot. Inflation has fallen, and while the unemployment rate has risen gradually it remains, at 4.1%, around what many Fed officials see as representing full employment.Some data, including disappointing recent home sales and rising loan delinquencies, may point to weakness. But the most recent report on overall economic output was surprisingly strong, with growth at a 2.8% annualized rate in the second quarter. The Fed regards the economy’s underlying potential growth, consistent with stable inflation, at about 1.8%. “They have had encouraging inflation data … Clearly the economy is slowing. The balance of risks is different than it was four months ago. Full stop,” said Nathan Sheets, global chief economist at Citi. “It feels like they want to be a little more certain, so signal in July and cut in September.”POLITICAL VIBESThe U.S. central bank will release its latest policy statement at 2 p.m. EDT (1800 GMT) on Wednesday, and Fed Chair Jerome Powell will hold a press conference half an hour later. Acknowledging that rate reductions are imminent would put the Fed in line with investors who consider it a near certainty that it will deliver at least a quarter-percentage-point cut at the Sept. 17-18 meeting, the first step in reversing the most rapid series of rate increases in four decades.It would also put the Fed in the spotlight of a tumultuous U.S. presidential race.Inflation may be less of a centerpiece issue in an election that has included an assassination attempt against former President Donald Trump, the Republican nominee, and the withdrawal from the race of President Joe Biden, who was replaced by Vice President Kamala Harris as the Democrats’ presidential nominee.But Republican lawmakers earlier this month told Powell in a hearing that a rate cut in September could seem like an effort to tilt the playing field against Trump, who installed him as Fed chief early in 2018 only to turn deeply critical of his leadership of the central bank.Among Fed officials, however, sentiment is broadly shared that inflation is easing, including among some of the central bank’s more hawkish voices. Fed Governor Christopher Waller, another Trump appointee, in particular said that inflation data was close to the point where rate cuts would be warranted and the labor market close to the point where the unemployment rate might be at risk of rising fast.Prices and inflation, meanwhile, may still figure into the election.In its latest election modeling, Oxford Economics said that how swing voters interpret coming economic data could push them towards Trump and the Republicans if they still “fixate on the level of prices and how much they have risen,” or towards Harris and the Democrats if they “focus on recent trends in inflation and the low level of unemployment.”Fed rate cuts could be felt quickly on that front, potentially translating into lower borrowing costs for home mortgages, credits cards, and an array of household and business financial products. More

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RIO DE JANEIRO (Reuters) – The global economic uncertainties that led Brazil’s central bank to halt its monetary easing cycle have persisted, preventing an interest rate cut this week, a Finance Ministry official told Reuters.In a Friday interview on the sidelines of the G20 finance leaders’ meetings in Rio de Janeiro, Guilherme Mello said Brazil’s interest rates are far above the level considered neutral for the economy. Nonetheless, he noted that the environment has not significantly improved since June, when the central bank held borrowing costs at 10.5% following seven consecutive rate cuts.Mello’s comments echo the central bank’s unanimous call for increased caution when it decided to pause the easing cycle due to an “uncertain global and domestic scenario,” amid the prospect of prolonged high interest rates in the U.S. and a stronger-than-expected economy in Brazil, where inflation expectations have risen.They contrast with leftist President Luiz Inacio Lula da Silva, who repeatedly criticized the level of interest rates and the monetary policy decisions of the central bank.The central bank’s Monetary Policy Committee (Copom) will meet again on July 30-31. “Copom decided in the last meeting that in light of these growing uncertainties — which evidently also unanchor domestic expectations and have affected the price of some assets, such as the exchange rate — they preferred to pause,” Mello said.”What I observe is that this set of uncertainties still exists,” he said, highlighting doubts about when monetary easing will kick off in the U.S. and the possibility of a policy shift in Japan.Since the latest Copom meeting, the Brazilian real has weakened more than 6% from the 5.30 per U.S. dollar that the central bank used in its inflation projections. Market concerns about leftist Lula’s commitment to controlling public finances have also weighed on local assets, impacting the exchange rate and interest rate futures.Amid the impasse over a lack of compensation for payroll tax relief passed by Congress, Mello said that the impact of the measure is significant enough to jeopardize the government’s goal of eliminating the primary budget deficit this year. However, he said that the ministry continues to support Congress in seeking compensatory measures.”We would like to balance the budget this year, but we face these difficulties. We have not yet resolved a significant amount of the revenue we were counting on, but we intend to solve this soon,” he said. “We will continue to make progress step by step to dispel these uncertainties and create an environment that will eventually allow us to resume the cycle of rate cuts.” More

WASHINGTON (Reuters) – Inflation is nearing the Federal Reserve’s 2% target, and the central bank is expected to begin cutting interest rates as soon as September.While it may take a while for the pace of price increases to fall all the way to 2% – and policymakers will be sensitive to signs inflation is taking off again – the last chapter of the battle appears to be underway.It was a disruptive period. But after a decade when inflation largely ran below the Fed’s target, the overall price level in the U.S. economy is now not too far from where it would have been had the central bank hit its inflation goal month-by-month all along. HOW BAD WAS IT?It wasn’t the worst bout of inflation the U.S. has experienced.But it was bad and moreover it happened fast, with food prices skyrocketing, home prices stretching the limits of affordability, and an array of services like auto insurance still in the process of resetting higher.The concern wasn’t so much the price increase for any given category. Fed officials focus on the overall price level, not the relative cost among goods that rise and fall over time. But when prices for the types of items consumers pay most attention to – gas, food and housing, for example – rise fast it can influence public psychology, and it’s the need to control expectations that led the Fed to raise interest rates as fast as it did.WILL PRICES DROP FROM HERE?The bad news for consumers moving forward: Even if price increases have been tamed by and large, higher prices are here to stay. Price level shocks don’t reverse, and even overall price drops from one month to the next are rare. Economists would argue that it wouldn’t even be healthy if they did, since deflation – a chronic drop in prices – can be even more corrosive to the economy than prices that rise too fast.In fact guarding against deflation, and the falling wages and living standards that go with it, is why the central bank sets an inflation target to begin with.The Fed’s mandate from Congress is to keep prices “stable.” While some have argued that implies no inflation, central banks globally feel a slow, steady rise in prices and wages – 2% is considered the norm for what amounts to background noise in the economy, though that is based more on intuition than formal modeling – keeps both households and businesses looking forward without distorting their decisions. PCE VS CPIThe other bad news for consumers is that the Fed’s target is set using what is known as the Personal Consumption Expenditures price index, a measure of inflation derived from the national income accounts used to calculate overall economic growth.The Fed feels that the PCE index better reflects the general movement of prices throughout the economy.The more broadly known measure, the Consumer Price Index, is calculated from a representative basket of consumer goods, and there are key differences between PCE and CPI. For example, CPI puts a heavier weight on housing, which comes directly out of a household’s budget, and less on medical care, which tends to be covered by health insurance with a complicated cost-sharing structure. By contrast, PCE puts more weight on the actual cost of medical care regardless of whether it is borne by the patient or an insurance company.PCE tends to run a bit lower than CPI, and the gap has widened somewhat during the pandemic. In other words, consumers may still find their bills rising far more than they would like even at the point where the Fed says it’s time to ease the brakes on the economy by cutting interest rates. The Fed next meets on July 30-31, when it is expected to hold rates steady. More

NEW YORK (Reuters) – The longest and deepest U.S. Treasury yield curve inversion in history, a key bond market signal of an upcoming recession, could be nearing its end.While an inverted curve has typically preceded a recession, this time there is debate about the predictive power of the curve, with optimism that the U.S. could escape prolonged economic pain. Some indicators in recent weeks have pointed to a slowdown, but growth remains strong thanks to a resilient labor market.”I’m not looking at it as recessionary as of now, I think it’s a very different time,” said Phil Blancato, chief market strategist at Osaic.Investors observe the shape of the Treasury yield curve – which plots the yields of all Treasury securities – because it reveals market expectations on monetary policy and the economy. An inverted yield curve, which occurs when short-term debt yields more than long-term paper, has been a harbinger of a recession in nine out of 10 instances over the last 70 years, according to Deutsche Bank data.Several Wall Street firms expected a recession to occur last year because of higher borrowing costs, but continued economic resilience defied those projections. Economists polled by Reuters this month expect the U.S. economy will keep expanding over the next two years. A majority of bond strategists polled by Reuters earlier this year said the curve was no longer a reliable recession signal.”It is one of those indicators that may be not as perfect as the data suggests,” said Lawrence Gillum, chief fixed income strategist for LPL Financial (NASDAQ:LPLA). “Right now, as the yield curve disinverts it’s not because of recession, it’s just getting back to a normal upward-sloping yield curve.”A key part of the Treasury yield curve that plots two-year and 10-year yields has been continuously inverted since early July 2022, exceeding a previous inversion record from 1978. The inversion followed a cycle of interest-rate increases by the Federal Reserve that started in March 2022 to tame inflation.In recent weeks, that curve has steepened – meaning that the spread of two-year yields over 10-year (2/10 curve) has narrowed – amid signs of a cooling economy. On Wednesday, the curve hit minus-14.5 basis points, the least inverted it has been since July 2022, Tradeweb data showed. On Friday it was at minus-18.5.The curve typically turns positive because a slowing economy leads to markets anticipating the Fed will cut rates, causing a rally in short-term debt more than in longer-dated bonds. Yields decline when bond prices increase. But while a disinversion could happen amid signs of the economy only moderately slowing, as it appears to be doing now, some analysts warn recent yield curve history suggests an economic contraction could still be in the cards.”In recent cycles, a re-steepening back out of inversion has occurred shortly before a recession, so that’s one to keep an eye on, given how it’s moved ahead of the past few downturns,” Deutsche Bank strategist Jim Reid said in a note on Thursday.In every case Deutsche Bank examined, the curve had re-steepened before the recession started. In the past four recessions – 2020, 2007-2009, 2001 and 1990-1991 – the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis published last year. The interval between a disinversion and the beginning of recession varied, ranging roughly between two and six months in those four instances.“We are at an important point today, because now the yield curve … is getting steeper, and that’s usually when we run into some trouble,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management.Another closely watched part of the curve comparing three-month yields with 10-year yields also disinverted before the last four U.S. recessions started, said Campbell Harvey, a finance professor at Duke University, who pioneered the idea that the yield curve is an indicator of future economic performance.That curve inverted in November 2022 and was still deeply inverted at minus-109 basis points on Friday. The longest interval between an inversion of the three month/10-year yield curve and a recession is 22 months, he has observed. “It’s too early to rule the signal out like a false signal,” he said.  More

The bank cited a significant growth miss in the second quarter of 2024, with real GDP growth falling short of expectations at 4.7% YoY. This underperformance, alongside a continuation of incremental support policies, prompted the revision to account for the observed economic weakness.Further softening in economic activity was noted in July, with high-frequency data pointing to a deceleration. In particular, property sales in the top 30 cities saw a contraction of 20.0% YoY in the period from July 1-28, compared to a 19.5% YoY decline in June. Industrial activity also faced challenges due to weather events such as floods and typhoons, which disrupted supply chains and kept production ratios low for materials like asphalt and cement.Citi also highlighted the measured nature of recent policy efforts following the Third Plenum. Despite a new round of policies, they were characterized as reactive and targeted rather than sweeping changes. The bank noted that the pace of rate cuts and fiscal easing did not introduce new stimuli but rather reallocated existing funds, dampening expectations for immediate economic boosts.The current economic environment has not been conducive to a revival of confidence, with consumption and private investment likely to remain subdued. Citi anticipates that stimulus measures may become more prominent in 2025, in anticipation of potential external demand fluctuations and the upcoming US Presidential election. The bank forecasts a potential rise in the headline fiscal deficit to around 3.5% of GDP in 2025 and anticipates cuts in the 7-day Reverse Repo rate the following year, suggesting a growing urgency for policy stimulus if external conditions worsen.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

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The spotlight this week will be on central banks, with the Federal Reserve, the Bank of England and the Bank of Japan all set to hold policy meetings.The Fed concludes its July policy meeting on Wednesday, and is widely expected to maintain its benchmark overnight interest rate in the current 5.25%-5.50% range, as it has done since last July.However, markets are overwhelmingly expecting a September rate cut, especially after Friday’s personal consumption expenditures price index, the Fed’s favorite gauge of inflation, showed signs of cooling prices.Thus the statement by Fed Chair Jerome Powell will be studied carefully to see if he sets the stage for a rate cut at the next meeting.The Bank of Japan concludes its latest policy setting meeting on Wednesday, and speculation over the prospect of a rate hike is mounting despite a fragile economy and weak consumer sentiment.The Bank of England meets on Thursday amid a great deal of uncertainty over whether policymakers will deliver their first rate cut since 2020.Last month, the BoE’s Monetary Policy Committee voted 7-2 to keep rates on hold, but this decision is expected to be more finely balanced with policymakers having to judge between higher-than-expected service price inflation and weak growth.U.S. stock futures edged higher Monday at the start of a week dominated by a Federal Reserve meeting as well as a number of key corporate earnings. By 04:05 ET (08:05 GMT), the Dow futures contract was 60 points, or 0.2%, higher, S&P 500 futures climbed 12 points, or 0.2%, and Nasdaq 100 futures rose by 70 points, or 0.4%.The major indices slipped lower last week, with the Nasdaq Composite hit hard, in particular, by the cooling off of the tech trade.Big Tech earnings are set to continue in the coming days, with Microsoft (NASDAQ:MSFT) scheduled to report earnings on Tuesday, followed by Facebook-parent Meta (NASDAQ:META) on Wednesday and Apple (NASDAQ:AAPL) as well as Amazon (NASDAQ:AMZN) on Thursday.Disappointing numbers could reignite the worries that caused a bruising selloff last week, with the Nasdaq suffering its worst day since late 2022 on Wednesday.Apple (NASDAQ:AAPL) is taking longer than expected to include its recently unveiled artificial intelligence features, known as Apple Intelligence, into its flagship iPhone and iPad devices, and they will not be included in an initial software update, according to a report by Bloomberg. Apple’s AI plans will miss the initial September releases of iOS 18 and iPadOS 18, the Bloomberg report showed, but should be included with the October updates. The company had in June unveiled a slew of new AI-powered features for its flagship devices, hoping the seemingly insatiable demand for all things AI would help the firm offset steadily slowing sales of its flagship iPhone.Apple is set to report its June quarter earnings later this week, and is expected to log a sustained decline in device sales amid increased competition and saturation in the smartphone market. There are also earnings in Europe to digest, as the second-quarter results season continues.Heineken (AS:HEIN) shares slumped 7% after the world’s second-largest brewer missed half-year estimates and announced a hefty impairment, as it wrote down the value of its 40% stake in China Resources Beer.That said, Heineken also raised its full-year profit guidance, expecting to deliver organic operating profit growth of between 4% and 8% in 2024, compared to its previous guidance of between low and high single-digit growth.Philips (AS:PHG) stock rose 10% after the Dutch medical device maker reported second-quarter results that beat expectations, boosted by higher earnings, the implementation of its restructuring program and insurance income linked to its Respironics product liability claims. Pearson (LON:PSON) stock fell 3.5% after the educational publisher posted a drop in pretax profit compared with a year earlier, even as the company said it is on track to meet full-year expectations.Crude prices rose Monday on concerns of a widening conflict in the Middle East, potentially impacting global supply, after a deadly rocket strike in the Israeli-occupied Golan Heights. By 04:05 ET, the U.S. crude futures (WTI) climbed 0.1% to $77.20 a barrel, while the Brent contract rose 0.1% to $80.38 a barrel.The weekend’s strike reportedly killed at least 12 people, and has been blamed by both Israel and the U.S. on Iran-backed Hezbollah, who have denied responsibility for the attack.Israel has vowed retaliation against Hezbollah in Lebanon, and Israeli jets hit targets in southern Lebanon on Sunday.These increasing tensions are also seen diminishing the prospect of a ceasefire between Israel and Hamas, as hopes of a ceasefire in Gaza had been gaining momentum.Still, gains are limited as the outlook for crude demand remains bleak.  More