Fed's Inflation Fight Struggles; U.S. Jobs Report Fuel for Rate Increase

Fed's Inflation Fight Struggles; U.S. Jobs Report Fuel for Rate Increase By James Christie

Good day. Federal Reserve officials will need to keep monetary policy tight until the U.S. labor market weakens, judging by the state of average hourly earnings. They grew 0.4% in June from May and were up 4.7% at an annual rate in the last three months, faster than the Fed considers compatible with its 2% inflation target. Without a slowdown, wage growth could remain elevated, supporting stronger demand for goods and services that, in turn, boosts demand for labor. And if consumers feel secure in their jobs, they will keep spending, making it more difficult to tame price pressures. Meanwhile, the solid June jobs report that came out on Friday is likely to leave the Fed on course to raise interest rates to a 22-year high later this month to combat inflation. And The Reserve Bank of Australia's Assistant Gov. (Economic) Luci Ellis is leaving the bank to take on a new role as chief economist at Westpac in October, the second recent departure of a senior official.

Now on to today's news and analysis.

Top News Last Mile of the Inflation Fight Will Be the Hardest

There is good news on inflation in store for Americans. This week, the Labor Department is expected to report that overall inflation fell to about 3% in June, the lowest in two years.

Excluding volatile food and energy prices, core consumer price inflation is expected to drop to around 5%, an 18-month low, from 5.3%. Economists think core inflation could ebb further in coming months, to between 3.5% and 4%, depending on the price index.

The bad news: Getting inflation down further from there, to the Federal Reserve's 2% target, will prove difficult if the economy keeps chugging along. That could force the Fed to keep monetary policy tight until the labor market weakens.

Jobs Report Keeps Fed on Track to Raise Rates in July Recharged Bond Rout Unnerves Investors

Banks' Newest Fed Headache: Nonstop Instant Payments

Although it is a boon to consumers and many businesses, some analysts warn FedNow could destabilize banks' reliance on customer cash, fanning the flames of deposit flight that became the bane of several regional banks this spring.

U.S. Economy Jobs Report Shows Hot Hiring Cooled in June; Wages Rose

U.S. employers added 209,000 workers in June, a solid monthly gain but down from May's revised 306,000, while the unemployment rate fell to 3.6% from 3.7% in May. Average hourly earnings grew 4.4% in June from a year earlier.

Biden's Dilemma: Fight Inflation or Protect Unions?

Steel industry executives and the United Steelworkers union say tariffs are needed to level the playing field, but food manufacturers say levies will hit consumers already grappling with high food prices .

Yellen Trip Aids Fragile Effort by U.S., China to Keep Talking

The U.S. and China cleared a hurdle in a tentative effort to rebuild dialogue, with Treasury Secretary Janet Yellen's Beijing trip yielding some progress-though entrenched tensions will test the fragile momentum.

Key Developments Around the World Deflation Looms in China as Rebound Continues to Lose Steam

China's consumer inflation flatlined in June after two months of meager growth, stirring fears among economists and investors that the world's second-largest economy is on the verge of slipping into deflation. The country's manufacturing sector, already in the grip of deflation, saw factory-gate prices fall at their fastest pace in more than seven years, the National Bureau of Statistics reported on Monday, reflecting soft demand abroad to match the weak demand at home.

China Controls Minerals That Run the World, Fires Warning Shot China's Pivot to the Middle East Set to Fuel Investment Boom Immigration Backlashes Spread Around the World

Record immigration to affluent countries is sparking bigger backlashes across the world, boosting populist parties and putting pressure on governments to tighten policies to stem the migration wave.

Biden to Meet With Rishi Sunak, King Charles, Kicking Off Europe Trip

President Biden kicks off his four-day swing through Europe meeting with British Prime Minister Rishi Sunak and King Charles III-the president's first in-person discussions with the monarch since his coronation.

Glynn's Take: RBA Loses Old Hands at Critical Juncture for Economy By James Glynn

The departure of Luci Ellis as chief economist from the Reserve Bank of Australia is part of a recent exodus from the central bank that has stripped it of decades of experience and talent just as the economy approaches its most challenging moment in a generation.

Ellis, who will take on the role of chief economist at Westpac in October, leaves after the exit of the equally talented former deputy governor, Guy Debelle, who left the RBA suddenly in early 2022 for a job in the green-energy sector.

Other departures include Jonathan Kearns, a former head of the RBA's domestic markets section, who left in January for the private sector.

The most profound loss has yet to come, with Treasurer Jim Chalmers expected to announce within days that Gov. Philip Lowe won't have his seven-year term extended beyond September. Read more .

Financial Regulation Roundup Binance Unravels as Executives Flee and Layoffs Proliferate

Binance's general counsel, chief strategy officer, head of investigations and a senior vice president for compliance, among others, departed in recent weeks, a sign of the turmoil rattling the largest crypto exchange.

China's Ant Group Slapped With Nearly $1 Billion Fine

Ant Group, the financial-technology company associated with billionaire Jack Ma, was fined close to $1 billion by China's financial regulators, taking the company closer to the end of its long-running business overhaul .

Help Wanted: Retired Bank Examiners to Unravel Bond Mess

Federal regulators are trying to coax retired bank examiners back onto the payroll to help unravel the financial mess caused by rising interest rates , with the Office of the Comptroller of the Currency touting a "boomerang" program.

Forward Guidance Monday (all times ET)

10 a.m.: Fed's Barr gives speech on financial regulation to Bipartisan Policy Center; U.S. wholesale trade report for May

11 a.m.: New York Fed consumer expectations survey; San Francisco Fed's Daly speaks at Brookings Institution; Cleveland Fed's Mester speaks to University of California, San Diego's 2023 Economics Roundtable Lecture Series; Bank of England's Bailey speech at The Financial and Professional Services Dinner

12 p.m.: Atlanta Fed's Bostic in armchair conversation at Cobb Chamber of Commerce's Marquee Monday

3 p.m.: Federal Reserve consumer credit report

Tuesday

2 a.m.: U.K. unemployment for June

9 a.m.: St. Louis Fed's Bullard participates in National Association for Business Economics webinar

11 a.m.: New York Fed's William in moderated discussion, Economic Club of New York webinar

Research Economists Largely Expect RBNZ to Hold Rate

The Reserve Bank of New Zealand's interest rate decision on Wednesday will capture attention this week, if only for a few minutes. Market consensus is unanimous the RBNZ will keep the cash rate unchanged at 5.5%. Having hiked the cash rate from 0.25% in October 2021 to 5.5% currently, it is time for the RBNZ to pause, watch, without worry, and wait, says Jarrod Kerr, chief economist at Kiwibank. Monetary policy works with significant lags, of up to two years, and New Zealand is feeling the full force of previous rate hikes. Households with mortgages are still migrating from low fixed-rate loans to much higher variable-rate loans, which is further tightening monetary conditions. The RBNZ has most likely done enough to contain inflation, Kerr adds.

-James Glynn

Commentary The Job Market vs. Inflation

If inflation doesn't slip enough, the Federal Reserve will decide more interest rate hikes are in order, and the unhappy game of chicken between the job market and inflation will continue, Justin Lahart writes.

Basis Points Canada's jobless rate ticked higher for a second month running in June as more people looked for work and even as hiring rebounded. The number of employed working-aged people rose 59,900 from May, while the unemployment rate was 0.2 percentage point higher at 5.4%, the highest since February last year, Statistics Canada reported Friday. (Dow Jones Newswires) Mexico's inflation slowed in June to its lowest level in more than two years, helped by lower energy and fresh produce costs. The country's consumer price index rose 0.10% last month, with the 12-month inflation rate falling from 5.84% in May to 5.06%, the lowest annual inflation level since March 2021, the National Statistics Institute said Friday. (DJN) Mexico produced 331,700 cars and light trucks in June, 16% more than in the year-earlier month, while exports rose 20% to 286,300 units, statistics institute Inegi said. (DJN) China's factory-gate price index tumbled deeper into deflation in June, while the country's consumer prices were flat on year, official data showed Monday. The producer-price index fell 5.4% from a year earlier in June, compared with a 4.6% decline in May, the National Bureau of Statistics said. (DJN) Chinese banks likely issued CNY2.55 trillion in new yuan loans in June, higher than the CNY1.36 trillion extended in May but lower than in the same month a year earlier, according to a poll of 14 economists by WSJ. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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07-10-23 0716ET