U.S. Economy Shows Robust Growth; ECB Could Raise Rates While Fed Pauses; Standing Up for Paper Money

U.S. Economy Shows Strength; ECB Could Raise Rates While Fed Pauses; Fighting for Paper Money By Michael Maloney

Good day. U.S. economic activity rose in May to the highest pace in 13 months, showing persistent resilience to rising interest rates and high inflation ahead of a debt-ceiling deadline that threatens to bring the expansion to a halt. The monetary policy paths of the Federal Reserve and European Central Bank could diverge at least in the short term. And as businesses increasingly accept payment only by card or phone, some people are standing up for paper money and have no plans to fold.

Now on to today’s news and analysis.

Top News U.S. Growth Touches Fastest Monthly Rate in More Than a Year

Economic output in the U.S. posted the sharpest rise this month since April 2022, according to data firm S&P Global’s surveys of purchasing managers released Tuesday. The gain was led by service-providing businesses, which reported stronger demand for travel, dining out and other leisure activities. The improvement was offset by cooling activity among U.S. manufacturers.

Janet Yellen and BOE Governor to Speak at WSJ CEO Summit

U.S. Treasury Secretary Janet Yellen, U.K. Treasury Chief Jeremy Hunt, Bank of England Governor Andrew Bailey and UBS Chair Colm Kelleher will take the stage on day two of WSJ’s CEO Council Summit in London.

Paper Money Diehards Refuse to Fold

There’s another revolt brewing in the English heartlands. Many businesses take payment only by card or phone, but a pro-cash movement is urging people to “Resist! Defy! Don’t comply!”

U.S. Economy Biden Tries to Close Debt-Ceiling Deal Democrats Sought to Avoid

President Biden and Democratic leaders in Congress approached this year’s debt-ceiling drama with a mantra: They would absolutely never, ever, under any circumstances, negotiate over raising the country’s borrowing level.

But now they are very much negotiating on the debt limit, just about a week before the June 1 date when the Treasury Department estimates the U.S. could run out of measures to avoid default.

How a Debt-Ceiling Crisis Could Play Out on Wall Street For Banks, Debt-Ceiling Drama Doesn’t End With a Deal Spending Fight Is Main Event in Debt-Ceiling Talks A Housing Bust Comes for Thousands of Small-Time Investors

They were offered the benefits of owning apartment-building rentals without any of the work, in real-estate investments that have already left some people empty-handed.

Great Plains Drought Hits Hay Crops

The market for hay is overshadowed by wheat and other crops hit by a drought in the Great Plains, but it can have a similar impact on food prices . “If it don’t rain, there won’t be any hay,” said Tim Brandyberry, owner of Honeydew Hay in southeastern Kansas. Texas, Oklahoma and Kansas are typically among the top 10 hay-producing states, and swaths of each state are experiencing extreme drought.

Bank Stocks Are Now Meme Stocks

Shares of banks such as PacWest have seesawed wildly since March. Bad news, including lost deposits, has sent them spiraling. Good news, like hints of greater government support, has sent them soaring.

Key Developments Around the World U.S. and China See Fragile Opportunity to Repair Ties

After months of recrimination, U.S.-China relations are entering a new phase likely to determine whether the two powers are able to restore high-level exchanges derailed by a Chinese balloon earlier this year.

It Just Had an Energy Crisis, Now Europe Faces a Food Shock

Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts-literally.

RBNZ Signals Possible End to Interest Rate Hikes

The Reserve Bank of New Zealand raised its official cash rate by a further 25 basis points at a policy meeting on Wednesday, but indicated it could be done tightening the policy screws as consumers have slowed spending.

Financial Regulation Roundup JPMorgan Says U.S. Virgin Islands Failed to Stop Jeffrey Epstein

JPMorgan Chase, facing allegations it enabled the crimes of Jeffrey Epstein, claimed on Tuesday that the U.S. Virgin Islands’ government protected the convicted sex offender at his private compound.

SVB’s New Owner Sues HSBC for Poaching Key Bankers

First Citizens, which bought most of Silicon Valley Bank in late March, has sued the British lender for more than $1 billion in damages over a talent exodus .

Caymans Regulator Explores Options After FDIC Seized SVB Deposits Forward Guidance Wednesday (all times ET)

1:45 p.m.: European Central Bank’s Lagarde speaks at celebration to mark 25th anniversary of the ECB in Frankfurt

2 p.m.: FOMC minutes of May 2-3 meeting

Thursday

Time N/A: Bank of Korea releases policy statement; Central Bank of the Republic of Turkey releases policy statement; South African Reserve Bank releases policy statement; Bank Indonesia releases policy statement

5 a.m.: European Central Bank’s de Guindos presents ECB annual report at ECON Committee in Brussels

8:30 a.m.: Chicago Fed National Activity Index; U.S. weekly jobless claims; U.S. gross domestic product for first quarter, second estimate

10 a.m.: U.S. Pending Home Sales Index for April

10:30 a.m.: Fed’s Collins in fireside chat and Q&A, Community College of Rhode Island

12:30 p.m.: Speech by Bank of England’s Haskel to Peterson Institute for International Economics

Research Rising Rates Pose Fiscal Challenge to Rich and Emerging Economies

Developed and emerging economies face potentially damaging fiscal challenges stemming from rising interest rates, with even higher risks in case inflation proves stickier than expected, Oxford Economics’ Tamara Vasiljev says in a report. “Debt sustainability might come to the fore of the policy debate once more-and in places we are less used to seeing the issue raised.” Vasiljev notes that federal interest costs rose to $1.1 trillion in April in the U.S. and are mounting in Europe, too. For emerging markets, “the challenges of FX denomination, shorter maturities, and competition from [developed-market] sovereign interest rates will mean pressure they can ill afford,” she says. (Dow Jones Newswires)

Commentary ECB Set to Raise Rates Further as Fed Pauses, Fund Manager Says

The European Central Bank is likely to raise interest rates further just as the U.S. Federal Reserve’s cycle of rate increases comes to an end, said David Arnaud, senior fixed-income fund manager at Canada Life Asset Management. Eurozone rates should rise by at least a further 50 basis points, leaving the ECB’s policy decoupling from that of the Fed which should keep rates on hold in June, he said in an interview with Dow Jones Newswires . “The message coming from the ECB is very different from the one we hear from the Fed,” Arnaud said.

Basis Points An ongoing and persistent lack of homes in the resale market is pushing more home buyers into new construction, which caused sales to surge for the second month in a row. U.S. new home sales rose 4.1% to an annual rate of 683,000 in April, from a revised 656,000 in the prior month, the Commerce Department reported Tuesday. (Dow Jones Newswires) Manufacturing activity in the U.S. central Atlantic region contracted again in May, data from the Richmond Fed showed Tuesday. The Fifth District Survey of Manufacturing Activity’s index fell to minus 15 in May from minus 10 in April, missing economists’ consensus estimate of minus 8 in a poll by The Wall Street Journal. (DJN) Indonesia’s central bank is expected to keep its benchmark seven-day reverse repo rate unchanged at 5.75%, according to eight economists polled by The Wall Street Journal. (DJN) Business sentiment in Germany fell in May for the first time in seven months, hampered by bleaker expectations among companies, especially in the country’s key manufacturing sector. (DJN) The U.K.’s inflation rate fell less than expected in April, kept elevated by rising food prices, and the closely watched core rate unexpectedly rose, indicating that the Bank of England may need to raise interest rates again to halt persistently high prices. (DJN) Feedback Loop

This newsletter was compiled by Michael Maloney in New York and Perry Cleveland-Peck [mailto:[email protected]] in Barcelona.

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05-24-23 0715ET