Nymex crude oil futures have dropped 3% in two days to $94.48 per barrel and they’re down 10% from a year ago. The bad news in this drop is the implication of soft global demand when many economists were looking for a lift in worldwide economic growth. The good news is that markets have weathered months of grisly conflicts in the Middle East and Ukraine and the supply worries that come with the shooting. If Iraqi and Kurdish forces continue to push back Islamic State forces which are deeply opposed to advanced economy values, or if Russian and Ukrainian adversaries cool off, market angst about Middle East and Russian energy supplies could further dissipate.
Whether looked at from the supply side or demand side, the energy price drop takes some pressure off the Federal Reserve and other central banks to move toward tighter monetary policies. The U.S. consumer price index rose 0.1% in July from a month earlier on a seasonally adjusted basis and was up 2% from a year earlier. Given the recent descent of crude, headline consumer prices in August appear on a path for another tepid reading.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Slower July Price Gains Could Give Fed Leeway. U.S. consumer prices advanced in July at their slowest pace since February, a sign of muted inflation pressure that could give the Federal Reserve more flexibility as it considers how much longer to keep short-term interest rates near zero.
Market Betting on ‘Full Dovish’ Yellen at Jackson Hole. The Fed’s annual conference in Jackson Hole, Wyo., historically has been good for stocks. The market is betting this year’s iteration will continue that trend.
Bank of England Officials Break Ranks on Rates. Two officials at the Bank of England pushed for an immediate rise in interest rates in August, minutes published Wednesday showed, marking the first dissent on policy faced by Gov. Mark Carney since he took office in July 2013. The push for a rate rise by Martin Weale and Ian McCafferty, two external members of the nine-member Monetary Policy Committee, will reinforce expectations the BOE remains on course to lift borrowing costs early next year. Their dissent may even fuel speculation that a rate rise could come sooner, perhaps before the end of 2014.
The BOE’s Euro-Zone Inflation Conundrum. U.K. inflation and wage pressures continue to be weak, justifying the BOE’s preference for lower-for-longer interest rates notwithstanding strong domestic growth and a dangerous property boom. The absence of price pressures against the backdrop of strong growth reflects continued spare capacity in the economy. But there are external factors involved as well, not least the state of the euro-zone economy.
Australian Central Bank Summons Animal Spirits. Investors have increasingly been pricing in a rate cut in Australia, as its economic data remain lackluster. But the central bank governor, Glenn Stevens, attempted to douse any such expectation on Wednesday. Mr. Stevens said the central bank had done all it could to boost the economy—referring to a series of rates cuts to a record low 2.5%–and that now it was up to business to respond with “animal spirits.”
Bank of China Meets European Fund Managers. Officials from Bank of China Ltd., one of China’s four big banks, visited fund managers in London last week to gauge interest and gather opinions on the $6.5 billion of preferred shares it plans to sell offshore, according to people familiar with the matter. China’s banks are rushing to raise cash through equity and debt sales to help bolster their balance sheets to meet tough new regulatory requirements and to defend against a slowing economy and souring loans.
Iceland Leaves Rates Unchanged–Bloomberg. Iceland’s central bank left its benchmark interest rate unchanged for a 14th meeting after currency interventions stabilized the krona and brought down inflation.
To understand why the U.S. housing market this year isn’t providing the lift many economists expected, look at Phoenix. There, and elsewhere, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier.
-Federal Reserve releases minutes from its July 29-30 policy meeting at 2 p.m. EDT
On the Relationships Between Wages, Prices and Economic Activity. Wages aren’t a reliable way to predict future inflation and economic growth, Edward S. Knotek II and Saeed Zaman write in a paper released Tuesday by the Cleveland Fed. “We find that causal relationships between wages and prices are difficult to identify, and the ability of wages to help predict future inflation is limited. Wages appear to be useful in assessing the current state of labor markets, but they are not necessarily sufficient for thinking about where the economy and inflation are going.”
“The Fed should hold off raising rates, for the sake of fuller employment,” writes Adam Posen, president of the Peterson Institute for International Economics, in the Financial Times. “Allowing excess unemployment to persist is likely to do more lasting damage than allowing inflation to rise above the target – and any such overshoot will be temporary.”
James Bullard, president of the St. Louis Fed, “has moved decisively and vocally from the dove to hawk camp over the past year” and now predicts a rate hike in early 2015, Benn Steil and Dinah Walker write for the Council on Foreign Relations’s Geo-Graphics blog. Improvement in several measures of unemployment and inflation indicates “that Bullard is right to be asking whether the Fed is at risk of ‘get[ting] behind the curve’ if it doesn’t adjust its tightening timetable.”
One of the welcome lessons of the financial crisis was “the need to put in place macroprudential frameworks,” Claudio Borio writes in Central Banking Journal. “But intellectual pendulums have a habit of swinging too far. There is a risk of entertaining unrealistic expectations about what macroprudential schemes can do on their own. If these expectations become entrenched in policy, there is even an outside risk that, so far from being part of the solution, macroprudential frameworks could, paradoxically, become part of the problem. Complacency is always not too far around the corner. If the quest for financial stability has proved so elusive, it must be for a reason.”
– Check out this video of NBC’s Andrea Mitchell taking the ice water bucket challenge, with a little help from a former Fed chairman.
-True to its habit of offering a steady flow of rosy economic forecasts, the Brazilian government is expecting the second half of 2014 will be better than the first.
– Japan’s exports rose in July for the first time in three months, but the gain was muted by the continuing shift of production facilities to overseas.
– Asian banks are finding deposits harder to come by, posing a risk to economies increasingly dependent on credit for growth.
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