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Bloomberg.com — Jerome Powell has a judgment to make on how hard monetary policy is biting down on the U.S. economy.

The signal came from two words: “for now,” used by the Federal Reserve chairman as a caveat in his description on Tuesday of the central bank’s plan to “keep gradually raising the federal funds rate.”

His simple phrase in testimony before the Senate Banking Committee highlights the uncertainty facing the Fed as it gauges how high to raise rates as fiscal stimulus boosts growth, amid potential headwinds from an escalating trade war.

“This chair is trying to retain optionality and flexibility with all the uncertainty about fiscal policy’s impact on long-term growth,” said Priya Misra, head of global rates strategy at TD Securities in New York. “He is leaving the door open to slow down the pace of hikes or not hike beyond neutral.”

Investors heard the chairman loud and clear. The Standard and Poor’s 500 index rose 0.4 percent to 2,810, while yields on U.S. 10-year notes were little changed at 2.86 percent.

The conditional description of the outlook for interest rates was a small but important check against the certainty sometimes falsely conveyed by the Fed’s “dot plot,” or the estimates that policy makers update every quarter on their expectations for future policy.

Fed Tightening

In June, officials signaled they thought monetary policy would need to become restrictive by the end of next year. They penciled in rates of 3.1 percent by end-2019, versus their 2.9 percent median estimate of the neutral rate which neither supports nor slows the economy. Rates were seen at 3.4 percent by the end of 2020.

Powell’s “for now” reference “speaks to the idea that if the data starts to deteriorate, say because of trade tensions, they’ll slow down,” said Joseph Song, senior U.S. economist at Bank of America Corp in New York. “But it works the other way. The tax cuts potentially could be more stimulative and could lead to a faster pace of tightening.”

Several regional Fed presidents including Neel Kashkari of Minneapolis and Raphael Bostic of Atlanta have already warned about the Fed’s need to avoid inverting the yield curve by hiking rates so that short-term borrowing costs rise above longer-term bond yields.

Powell, who will appear before the House Financial Services committee at 10 a.m. on Wednesday, said his interpretation of the narrowing spread between short- and longer-term rates is that it might be saying something about how close the Fed is to the neutral rate.

That judgment is a hard one to make in real time, and estimates of the neutral rate vary quite widely.

The Fed’s July Monetary Policy Report, which it prepares as part of the chairman’s semi-annual appearance before Congress, included a section on various policy models that produced estimates of neutral ranging from 0.1 percent to 1.8 percent in real terms. Adjusting for the Fed’s 2 percent inflation target would put that range for neutral rates between 2.1 percent to 3.8 percent in nominal terms.

Officials often don’t know if monetary policy is too tight or too loose until it’s too late — that is, when the economy’s momentum starts to slow with rising unemployment, or when financial bubbles emerge.

With a couple of quarter-point hikes to go before the Fed enters the bottom of policy makers’ own range of estimates for the neutral rate, which in June was 2.3 percent to 3.5 percent, Powell used his testimony on Tuesday to underscore that policy isn’t on a preset path.

“‘For now,’ suggests that the recent Fed policy of raising rates a quarter point every quarter or so is not set in stone,” Roberto Perli, a partner at Cornerstone Macro LLC and a former Fed staff economist, said in a note to clients. “One good reason for the Fed to slow down or even take a break is that the funds rate is approaching its present neutral level.”

Bloomberg.com — Asian stocks advanced after an upbeat assessment on the U.S. economy from Federal Reserve Chairman Jerome Powell comforted investors wary of a blowout in protectionism.

Equities climbed in Japan, with the Topix index set to close at a four-week high, as well as in Australia and China, and in emerging markets in the region. Stocks in Hong Kong and South Korea pared gains with U.S. futures. The Nasdaq Composite Index hit a record high despite disappointing subscriber numbers from Netflix Inc. The dollar climbed against major peers as it held gains after Powell told a Senate committee that the Fed will continue to gradually raise interest rates “for now,” suggesting no iron-clad plan to keep tightening through next year.

Earnings and U.S. monetary policy have become the main drivers of market sentiment this week. That’s giving respite from a worsening in trade relations between the world’s biggest economic powers. Company results have been mixed thus far, with Deutsche Bank AG and Bank of America Corp. beating estimates, counterbalancing the Netflix reading.

Powell addressed Congress with the underpinnings of the U.S. expansion looking solid. Unemployment stands close to an 18-year low and inflation is around the Fed’s 2 percent target, though some sentiment indicators are starting to flash warning signs over escalating trade disputes. He will appear before the House Financial Services Committee Wednesday.

Elsewhere, oil declined after an industry group reported a surprise increase in U.S. crude inventories. Gold traded around the lowest in a year as its safe haven appeal was eroded by the strong outlook for the U.S. economy. Asian emerging-market currencies tumbled, led by the won and rupiah.

Bloomberg.com — U.K. employment rose to a record high in the three months through May after the economy created jobs at a stronger-than-expected pace.

The number of people in work rose by 137,000, taking the employment rate to 75.7 percent, the highest since records began in 1971, the Office for National Statistics said Tuesday. Unemployment held at a 43-year low of 4.2 percent.

Pay growth eased during the period, with wages excluding bonuses rising by 2.7 percent, as forecast. However, the slowdown may do little to ease concerns among Bank of England policy makers about inflationary pressures building in the labor market.

Money markets are pricing in an about 80 percent chance of an interest-rate hike in August, a move also expected by more than 70 percent of economists in the latest Bloomberg survey. The pound rose following the labor-market data and was at $1.3261 as of 9:34 a.m. London time, up 0.2 percent on the day.

The figures point to healthy demand for labor as the economy picked up from a snow-blighted first quarter. The number of vacancies rose to the highest since records began in 2001 and inactivity — those neither in work nor looking for a job – – dropped by 86,000 to an all-time low of 21 percent.

“It’s clear that the labor market is still growing strongly,” said Matt Hughes, a senior statistician at the ONS.

With wage growth running ahead of inflation, households are enjoying a return to real spending power after a year-long pay squeeze. They may not be out of the woods just yet though, with a report tomorrow forecast to show inflation picked up again in June.

In May, private-sector pay growth picked up to 2.8 percent, but the public sector saw a slowdown. Unemployment fell to 4 percent in the month. Earnings growth including bonuses slowed to 2.5 percent between March and May.

Bloomberg.com — China’s home prices rose at the fastest pace in 21 months in June even as the government stepped up a campaign against property speculation.

New-home prices in 70 cities tracked by the government gained 1.1 percent from the previous month, according to Bloomberg calculations based on data from the National Bureau of Statistics released Tuesday. That compared with a 0.8 percent increase in May. It was the fourth straight monthly acceleration.

So-called second-tier cities led the price gains, which are picking up even as officials extend more than two years of efforts to cool the housing market. In late June, the authorities announced a six-month campaign against property speculation in 30 cities, tightened approvals for loans for shanty-town redevelopments, and looked into further restricting developers’ sales of offshore debt.

“All these second-tier cities are growing phenomenally right now, we see huge population inflows which see huge demand for housing,” CLSA Ltd. analyst Nicole Wong told Bloomberg Radio.

Two cities in the tropical island of Hainan were among those to report big increases. Haikou posted a 3.9 percent gain from the previous month, the biggest of any of the 70 cities. In Sanya, the increase was 3.2 percent. In Beijing and Shanghai, prices were flat.

An index of 22 developers mostly listed in Hong Kong was down 1 percent as of 11 a.m.

Prices increased in 63 cities in June, compared with 61 in May. For the full year, home prices will gain, while sales will be slightly down from 2017, JPMorgan Chase & Co. property analyst Ryan Li said before the data release.

Bloomberg.com — Equities in Asia were mixed Tuesday as investors assess whether corporate earnings can deliver on high expectations against a backdrop of trade tensions. Treasuries and the dollar were steady ahead of testimony from Federal Reserve Chairman Jerome Powell.

Japanese stocks outperformed in the region as the yen slipped, while the steepest declines were in China and Hong Kong as evidence mounts of a slowdown in the Chinese economy. Futures tipped a mixed open in Europe. The yen was trading near its lowest since January. West Texas Intermediate crude extended a more than 4 percent slump overnight. Disappointing subscriber growth at Netflix Inc. sent its shares plunging and dragged Nasdaq futures down in the final hour of the U.S. session.

The escalation in U.S.-China trade tensions could weaken economic growth and upend the current market-friendly backdrop of low volatility in equities and rates, the International Monetary Fund and BlackRock Inc. Chief Executive Officer Larry Fink warned. Stock investors are assessing whether prices justify what’s being delivered from companies as the earnings season ramps up. It’s been a mixed bag so far and Goldman Sachs Group Inc. is up next.

Some investors are positioning portfolios in case the trade war gets out of hand.

“What we are saying is stay invested but hedge,” Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, said on Bloomberg Television. “We are late cycle and normally that delivers quite good performance and again earnings look good, growth looks good and we don’t go for a full trade war. We moved from stay invested to stay invested but hedge if the market is too complacent and things go wrong.”

Elsewhere, oil consolidated at about a three-week low below $68 a barrel, as global trade anxiety combined with an offer from Saudi Arabia to add more crude on top of its contractual supplies to some buyers in Asia to boost market volatility.

The New Zealand dollar jumped after the central bank’s core inflation measure accelerated at the fastest pace in seven years. Australian dollar rose after the Reserve Bank of Australia said it expects a strengthening economy to gradually cut unemployment and lift inflation.

Bloomberg.com — U.S. retail sales rose for a fifth month in June and figures from May were revised upward amid gains at auto dealers and nonstore vendors, capping a quarter that probably saw consumer spending pick up after a tepid start to the year.

The value of overall sales advanced 0.5 percent, matching economists’ projections, after the prior month was revised up to a 1.3 percent gain from 0.8 percent, Commerce Department figures showed Monday. Excluding purchases of autos and gasoline, sales climbed 0.3 percent.

At the same time, a key subset of the data signaled less momentum: So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, were unchanged in June after an upwardly revised 0.8 percent increase. The median estimate of economists was for a 0.4 percent gain in June.

A tight labor market and lower taxes have supported solid gains in household purchases, the biggest part of the economy. That, along with steady business investment, are among reasons growth was projected to double in the second quarter from the first three months of the year, while the Federal Reserve continues its gradual pace of interest-rate increases. Economists expect the pace of gains in household purchases to settle back in coming quarters. […]

Bloomberg.com — China’s economic expansion slowed in line with expectations, signaling broadly stable output as the trade conflict with the U.S. intensifies.

Gross domestic product increased 6.7 percent in the second quarter from a year earlier. That was the slowest pace since 2016 and down slightly from the 6.8 percent pace in the previous quarter. Investment growth and industrial output also slowed in June.

• Industrial output rose 6 percent last month from a year earlier, versus the forecast of 6.5 percent, the statistics office said.
• Retail sales increased 9 percent in June, compared with the forecast 8.8 percent
• Fixed-asset investment climbed 6 percent in the first six months, the same as forecast
• The urban monthly surveyed unemployment rate stood at 4.8 percent at end-June

Source: National Bureau of Statistics […]

Bloomberg.com — Asian stocks fell as mixed economic data in China failed to allay concern about the world’s second largest economy’s ability to the withstand the impact of the trade dispute. Crude slid and the yen traded near the weakest level since January.

Equities from Sydney to Shanghai dropped, while those in Hong Kong recouped losses during the morning. Volumes were down in most markets with Japan shut for a public holiday. The yen held its recent losses after posting its biggest weekly slide in 10 months. Oil fell below $71 a barrel amid speculation the Trump administration is considering tapping into emergency crude supplies. U.S. equity futures ticker higher after Friday’s gains pushed the S&P 500 back above 2,800, with a pause in trade tensions outweighing a mixed start to the earnings season.

Trade tensions have eased somewhat as officials in Beijing appeared to moderate their response to President Donald Trump’s tariff threats amid a slowing economy, falling stock market and weakening currency. Data Monday showed China’s economic expansion slowed down slightly from the previous quarter, with industrial output in June missing estimates. Later this week investors expect Federal Reserve Chairman Jerome Powell to lay the groundwork for further tightening.

Bloomberg.com — Asian stocks are set for the first weekly advance in five as trade tensions appeared to ease after China refrained from detailing retaliation plans against threatened U.S. tariff increases. The pound slipped on the latest woes from the Brexit quagmire.

Shares in Japan, Hong Kong and South Korea all rose Friday as the quiescence on the trade front allowed investors time to refocus on a solid outlook for corporate earnings. Shanghai’s benchmark dipped, while the yuan was steady for a second day, though still headed for a weekly drop. The pound slipped after President Donald Trump warned U.K. Prime Minister Theresa May that her Brexit proposal could “kill” any future U.S. trade deal. Ten-year Treasury yields were little changed while West Texas crude held above $70 a barrel.

Officials in Beijing appear to be toning down their responses to President Donald Trump’s tariff threats, amid a slowing economy, falling stock market and weakening currency. China’s exports in June beat estimates, while imports slowed much more than expected, official data showed Friday. Gross domestic product report for the second quarter is due for release on Monday.

Despite optimism a bumper earnings season can propel equities higher, there remains disagreement as to length of the economic cycle. Former U.S. Treasury official Jim Millstein says the next economic downturn could strike in less than two years, while Guggenheim Partners’ Scott Minerd says there is now a higher chance of a deep U.S. recession as soon as next year.