Former St. Louis Fed Chief Warns Higher Rates Might Be Needed; Slump in U.S. Home Sales Continues

Former St. Louis Fed Chief Warns Higher Rates Might Be Needed; Slump in U.S. Home Sales Continues By James Christie

Good day. Wall Street overestimated the risk of the U.S. economy falling into a recession, former Federal Reserve Bank of St. Louis president James Bullard said during an interview with The Wall Street Journal. Bullard also said it appears inflation might not fall as fast as anticipated, and if growth remains resilient, interest rates may need to go higher. Meanwhile, the U.S. housing market is feeling the sting of the central bank’s rate-raising campaign, with home sales in July posting their fourth decline in five months, extending one of the deepest housing slumps in recent memory. A combination of high mortgage rates, near-record home prices and limited inventory has been suffocating sales. Existing-home sales fell 16.6% last month from a year earlier. With mortgage rates last week rising back above 7% to a two-decade high, sluggish home sales activity is expected to continue for a while.

Now on to today’s news and analysis.

Top News Bullard Says Recession Fears Have Been ‘Blown Out of the Water’

James Bullard, who was the longest tenured of the 12 regional Federal Reserve Bank presidents when he stepped down last month, thinks the U.S. economy faces new risks of stronger growth that could require higher interest rates to keep up the fight against inflation in the months ahead.

Bullard took over as the dean of Purdue University’s Daniels School of Business this month. In an interview Monday, ahead of the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyo., he said central bankers ought to be pleased with the economy so far this year.

Fed officials raised interest rates last month by a quarter percentage point to a 22-year high. Bullard said he thought they would need to lift them again this fall. The Fed might have to raise rates even more if the recent economic acceleration continues in the coming months, he said. “I don’t think markets are really ready for that.”

Here’s what he had to say .

What Are Real Yields, and Why Do They Matter?

Real yields-a measure of the stated return on Treasury bonds, minus inflation-have climbed to heights not seen since 2009 . Based on 10-year Treasury inflation-protected security yields, real rates (as they are also known) are around 2% in the U.S.

Higher real yields are good news for savers, but the picture gets more complicated as they ripple through the markets and the economy. They reflect the fact that borrowing is getting more expensive, which tends to slow growth. And higher real yields tend to drive investors into cash-like products such as money-market funds and out of riskier assets, from stocks to cryptocurrencies to gold, which can have an economic impact, too, if that movement goes on long enough.

U.S. Economy U.S. Home Sales Fell in July, Extending Prolonged Slump

Sales of existing homes, the majority of purchases, decreased 2.2% in July from the prior month to a seasonally adjusted annual rate of 4.07 million, the slowest monthly sales pace since January.

Goodbye Bathtub and Living Room. America’s Homes Are Shrinking.

Pay for New Hires Is Shriveling

As the U.S. job market cools and businesses become more cautious in their hiring, many companies are paying new recruits less than they did just months ago-and in some cases, much less.

Key Developments Around the World Wall Street’s China Dreams Slip Away

Deal flow for many American investment banks in China has slowed to a trickle with local companies increasingly turning to their Chinese peers. U.S. asset managers are struggling to expand their businesses as tensions escalate.

Commerce Secretary Gina Raimondo to Visit China

Commerce Secretary Gina Raimondo will head to China for meetings with senior Chinese officials Aug. 27-30, as the Biden administration seeks to stabilize rocky U.S.-China relations and deepen communications with Beijing.

Ukraine Hatches Plan to Reopen Black Sea Grain Route

Ukraine is devising a plan to reopen a crucial grain-export route for vessels navigating the Black Sea. It says ships can avoid Russian strikes and ship grain by hugging the country’s coast. But it needs insurers on board.

Financial Regulation Roundup The Biggest Player in Crypto Is Facing Legal Risks Over Russia

Binance is helping Russians move money abroad, potentially adding to its sprawling legal problems in the U.S., as its exchange continues to handle substantial ruble trading volumes , externally compiled data show.

Investors Are Finally Making Money on Bonds and CDs

Americans are taking advantage of higher returns on their Treasury bills and other fixed-income investments. That joy might be dampened when they see their tax bills. Here’s what to know .

Forward Guidance Wednesday (all times ET)

10 a.m.: EU FCCI flash consumer confidence indicator; U.S. new home sales for July

Thursday

Time N/A: Federal Reserve Bank of Kansas City’s Jackson Hole Economic Policy Symposium

8:30 a.m.: U.S. durable goods advance report for July; U.S. weekly jobless claims; Chicago Fed National Activity Index

Research U.K. Output Weakness Adds to BOE’s Challenge

The Bank of England will have a tough decision to make at its next policy meeting after business activity unexpectedly slumped in August, says Rhys Herbert, senior economist at Lloyds Bank. The composite purchasing managers’ index was dragged by worse-than-expected output in goods and services, and last month’s retail sales suggest further weakness in the coming months, Herbert says in a note. The sluggish output is accompanied by difficulties in recruiting that lead to wage growth, he notes. “The Bank of England will need to consider [this] carefully in its next decision for interest rates,” he says.

-Joshua Kirby

ECB Rates Could Peak in September as Services Activity Slumps

Data from eurozone PMIs add to evidence that services inflation should ease enough over the coming months to convince the European Central Bank not to hike interest rates beyond September, Pantheon Macroeconomics senior Europe economist Melanie Debono says in a note. The services PMI slid below the 50 no-change level for the first time in seven months, as activity in Germany fell. And though services input price pressures did increase in August, according to the PMIs, likely a sign of greater wage demands, these firms still raised their prices for clients at a slower pace than in July, she says. Meanwhile, industrial prices are now in outright deflation, though the decline in prices eased in August, as German firms decided to cut prices less than in July, Debono notes.

-Ed Frankl

Basis Points Manufacturing activity in the central U.S. continued to contract in August, but at a slower rate as firms brightened their outlook, according to data from the Federal Reserve Bank of Richmond. Its Fifth District Survey of Manufacturing Activity’s index edged up two points this month to minus seven from minus nine in July, a better reading than the decline to minus 10 expected by economists polled by The Wall Street Journal. (Dow Jones Newswires) Rents across the U.S. fell for the third month in a row amid an increasing supply of apartments. The median asking monthly rent in July fell 1% from a year earlier to $1,759, according to a http://Realtor.com report. (MarketWatch) Singapore’s consumer prices rose at a slower pace in July, due to moderation in core inflation and lower private transport costs. (DJN) The Australian economy continues to cool quickly with Judo Bank’s purchasing managers index for August showing a marked decline. The Judo Bank Flash Australia composite PMI output index posted below the 50.0 no-change mark in August, falling to 47.1 from 48.2 in July, to indicate a solid reduction in private sector activity. (DJN) New Zealand retail sales remained weak in the second quarter, which is consistent with the economy being in recession as consumers struggle under the weight of soaring interest rates. (DJN) Business activity in the eurozone weakened further in August, as the bloc’s economic downturn extended from manufacturing to the services sector, data from a purchasing managers’ survey showed Wednesday. The HCOB Flash Eurozone Composite PMI Output Index–a gauge of activity in the manufacturing and services sectors–fell to a 33-month low of 47.0, from 48.6 in July. (DJN) German business activity recorded its steepest decline in more than three years in August, as the country’s key manufacturing sector continues to struggle, data from a purchasing managers’ survey showed Wednesday. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco and Perry Cleveland-Peck in Barcelona.

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08-23-23 0715ET