A Recession Isn't Here, but Risks Grow; BOJ Cools Rate-Hike Talk

A Recession Isn't Here, but Risks Grow; BOJ Cools Rate-Hike Talk By Hardika Singh

A closer look suggests that while recession risk has risen, the U.S. isn't in one now. The distinction is crucial because it means it isn't too late to head off a downturn. It all depends on the Fed, and on the unpredictable moods of investors, consumers and employers, according to The Wall Street Journal's Greg Ip. Global stock markets came roaring back Tuesday after an epic selloff that drew comparisons with Black Monday nearly 37 years ago. A week after Japan's top central banker shook up markets worldwide with comments about raising interest rates, one of his deputies walked them back Wednesday and promised not to raise rates when markets are unstable. Meanwhile, U.S. household debt grew at a slower pace in the second quarter, but consumers are becoming delinquent at a faster rate. And a new standard for financial advice from the Labor Department would require advisers on IRAs to recommend what is best for the saver and avoid misrepresentations and excessive charges. Read on for this news and more.

Top News This Doesn't Look Like Recession. Here's How One Could Happen.

A recession isn't a switch that is arbitrarily thrown on or off ; it's a process: a self-reinforcing cycle of weakening spending, employment and income, usually triggered by tight financial conditions such as high interest rates or a credit crunch, or a shock such as higher oil prices or, in 2020, a pandemic.

The increase in unemployment to date, according to a rule-of-thumb popularized by the economist Claudia Sahm, in the past has only occurred during recessions. However, this isn't the definition of recession. It isn't even a leading indicator of recession, like the yield curve. Rather, it correlates to the conditions that exist when the academic National Bureau of Economic Research has decided the U.S. is in recession. In a similar way, open umbrellas usually correlate to the weather service's declaration of rain.

Bank of Japan Walks Back Talk of Rate Increases After Roiling Markets

In a speech to business leaders in northern Japan, Bank of Japan Deputy Gov. Shinichi Uchida said Japan wasn't in the position of the U.S. and Europe several years ago, when surging inflation led central bankers to push rates up rapidly. "Therefore, the bank will not raise its policy interest rate when financial and capital markets are unstable," Uchida said.

Japan Stocks Climb as Global Market Turmoil Eases U.S. Economy Household Debt Grows at a Slower Pace. Why Caution Is Warranted.

Household debt rose by just over $100 billion in the second quarter, moderating slightly from the first quarter's increase. But consumers are becoming delinquent at a faster rate-indicating that they're feeling the sting from tighter economic conditions.

Financial Regulation The Insurance Industry Is Winning a Fight to Kill New Protections for Retirement Savers

The insurance industry is waging a legal war against new protections for retirement savers. The courtroom offensive appears likely to kill a yearslong effort to curb advice steering people toward products packed with hidden fees.

Forward Guidance Wednesday (all times ET)

3 p.m.: Consumer credit

Tuesday

8:30 a.m.: Initial jobless claims

10 a.m.: Wholesale inventories

Research Markets Price Recession Risks

Recession risks remain relatively low, so assets priced for recession risk "should be relatively attractive," Bank of America's Yuri Seliger says in a note. BofA estimates that investment-grade spreads widened about 18 basis points over the past three sessions. That's when markets reacted to signs of U.S. economic slowdown and the Fed turning more dovish. "While many factors impact spreads, they have been relatively well correlated with recession concerns," Seliger says, adding that current IG index spread is consistent with recessions risks about half as high as they were in 2022/2023. - Paulo Trevisani

Basis Points The U.S. trade deficit fell by 2.5% in June and receded from a 19-month high, owing to higher exports of aircraft and U.S.-produced oil and gas. The deficit dropped to $73.1 billion in June from $75.0 billion in May, government data showed. Still, a bigger trade gap in the second quarter shaved 0.7 percent points off the 2.8% annual rate of growth in the second quarter. Higher deficits subtract from gross domestic product. - MarketWatch The Bank of Canada revealed Tuesday its schedule for its eight rate-policy decisions in 2025. The central bank has three remaining rate-policy decisions this year, on Sept. 4, Oct. 23 and Dec. 11. The Bank of Canada cut its benchmark interest rate by a quarter-point in both June and July, and now sits at 4.5%, or a 17-year high. Economists expect another rate cut in September. Canada's central bank intends to release next year's rate-policy decisions starting on Jan. 29, followed by March 12, April 16, June 4, July 30, Sept. 17, Oct. 29 and Dec 10. - Paul Vieira Mexico's production of cars and light trucks rose moderately in July from the year-earlier month amid a fall in exports, statistics institute Inegi said Tuesday. Output last month totaled 302,309 units, up 2.7% from July of 2023. Exports were down 1.6% at 271,469 units, while domestic new-car sales were up 13% at 124,761. - Anthony Harrup Germany's industrial sector picked up pace in June , with the country's automotive industry in particular helping output, although questions remain as to whether this represents a sustained recovery for the sector. Industrial output rose 1.4% on month in June, on a seasonally and calendar-adjusted basis, its fastest rate in 2024, but only partially offsetting the 3.1% decline in May, German statistics agency Destatis said Wednesday. Economists expected a 0.9% uptick according to a Wall Street Journal poll. - Ed Frankl Germany's trade surplus narrowed in June as exports fell more than expected in a new headwind for Europe's powerhouse. The eurozone's most important economy, which traditionally has boasted strong exports of manufactured goods, recorded 20.4 billion euros ($22.30 billion) in its trade surplus, a measure of the difference between imports and exports. That was less than the EUR24.9 billion surplus it booked in May and below economists' expectations of EUR21.5 billion, according to forecasts compiled by The Wall Street Journal. - Joshua Kirby China's trade figures for July were a mixed bag , with exports slowing unexpectedly but imports growing at a faster-than-expected clip, signaling some improvement in domestic demand. Outbound shipments rose 7.0% from a year earlier in July, down from June's 8.6% increase, said the General Administration of Customs on Wednesday. That was below the 9.4% growth expected by economists in a Wall Street Journal survey, but analysts say the outlook for exports still appears bright. China's foreign-exchange reserves rose in July after declining in June, likely boosted by a valuation gain from a weaker U.S. dollar, official data showed Wednesday. Data released by the People's Bank of China showed that the FX reserves rose by $34.01 billion last month to $3.256 trillion at the end of July. That undershot the $3.262 trillion expected by economists in a Wall Street Journal poll. Kenya's central bank lowered its key lending rate by 25 basis points to 12.75% citing easing inflation as East Africa's largest economy seeks to rev up growth amid public outrage over worsening social economic conditions. The central bank had kept the rate unchanged for three consecutive meetings since February in a bid to boost its failing currency and cool spiraling inflation. - Nicholas Bariyo Uganda's central bank cut its key lending rate to 10% from 10.25%, signaling the commencement of a policy easing stance in Africa's top coffee exporter and upcoming oil producer. Michael Atingi-Ego, deputy governor at the Bank of Uganda, told a news conference in Kampala that inflation is projected to ease despite the recent increase in food prices. The inflation rate rose marginally to 4% in July from 3.9% in June, but was still below the central bank target of 5%. - Nicholas Bariyo New Zealand's unemployment rate rose to its highest level since early 2021 in the second quarter, signaling a further slowing in the economy and shining a spotlight on the growing potential for the Reserve Bank of New Zealand to start cutting interest rates before the end of the year. The jobless rate rose to 4.6% in the second quarter, slightly below the expected rate of 4.7%, but above the prior quarter's rate of 4.4%, and 3.6% from a year earlier, Stats NZ said Wednesday. - James Glynn The Nobel Peace Prize winner Muhammad Yunus, a widely respected microcredit pioneer, was chosen Tuesday to lead Bangladesh's caretaker government after Prime Minister Sheikh Hasina resigned following weeks of violent protests and fled the country. The appointment was decided in talks between the president, armed-forces chiefs and more than a dozen student protest leaders, said Bangladesh's news agency, citing the president's press secretary. - Tripti Lahiri About Us

WSJ Pro Central Banking brings you central banking news, analysis and insights from WSJ's global team of reporters and editors. This newsletter was compiled by markets reporter Hardika Singh in New York. Send your tips, suggestions and feedback to [[e-mail]].

This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

08-07-24 0716ET