The pinballing U.S. economy

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Jul 11, 2022 View in browser   By Kate Davidson Presented by Sallie Mae® Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. DING! — Is anyone else noticing a pattern? Recession talk hits a fever pitch, only to be knocked down by yet another reminder that the U.S. economy — or at least, the labor market — still appears to have quite a bit of momentum. The pinballing continued last week, as worries over an imminent downturn hit a crescendo. That is, until another buoyant report reaffirmed the resiliency of the job market, swinging the narrative back again. That was good for the White House for a few days, but don't expect it to stick. A sign offering a $300 hiring bonus is posted at a McDonalds restaurant last month in Miami. | Marta Lavandier/AP Get ready for another ride this week, as we see fresh data on consumer prices on Wednesday that economists expect will show inflation climbed close to 9 percent last month, pushed up by rising gasoline prices that have since ebbed. We'll also get producer price data Thursday and retail sales data on Friday, along with the University of Michigan's consumer sentiment and inflation expectations survey. And we'll hear from several Fed speakers about how they see the data shaping their plans for further rate increases, before officials enter their so-called blackout period ahead of their July 26-27 meeting. "The significant market uncertainty surrounding economic growth, inflation, and Fed policy has led to the sharp increase in volatility" in the Treasury market, Oxford Economics' John Canavan said in a note to clients. "That has also hampered liquidity, which has further fueled the volatility." Treasury yields fell last week by the most since March 2020 amid recession worries, Canavan noted, only to jump right back following better-than-expected data on services spending and the robust June employment figures. Markets now see a more than 90 percent chance the central bank will raise its benchmark federal-funds rate by another three-quarters of a percentage point at its next meeting. A reminder: The numbers all but confirmed the economy was not in a recession in the second quarter. Remember that later this month, when the Commerce Department releases its first estimate of second-quarter gross domestic product. GDP is the broadest measure of economic output, and two consecutive quarters of declining GDP is often used as a rule of thumb to identify when the U.S. is in a recession. We expect to see a full-blown freakout if the April-June data comes in negative, following the first-quarter decline. But as we've reminded you before, the National Bureau of Economic Research, the official arbiter of recessions, looks at a range of monthly data, including Americans' income and spending, hiring and manufacturing, to determine when a downturn has begun. Recent data suggests the economy's temperature is starting to slowly come down. A recession may be coming, but it's not at all clear that it's imminent. HAPPY MONDAY — Rested and ready for another big week? Have story ideas, tips or feedback to share? Let us know: kdavidson@politico.com, aweaver@politico.com, or @katedavidson or @aubreeeweaver. A message from Sallie Mae®: Now, more than ever, students and families need help making informed decisions about planning and paying for college. Sallie Mae helps by offering free tools to help all students and families calculate college costs, evaluate financial aid offers, and discover and apply for scholarships. In fact, our scholarship search tool helped more than 24,000 students cover $67 million in college costs in 2020. At Sallie Mae, being responsible goes beyond responsible lending. That's why Sallie Mae makes sense.   Driving the Day TODAY — New York Fed's Survey of Consumer Expectations, including three-year inflation expectations, released at 11 a.m. … New York Fed President John Williams speaks about the LIBOR transition at 2 p.m. THIS WEEK — Richmond Fed President Tom Barkin speaks Tuesday … Senate Banking hearing on public transportation Tuesday … Consumer price data released Wednesday … House Financial Services subcommittee hearing on the Community Reinvestment Act proposed rule Wednesday … Monthly Treasury budget figures released Wednesday … Producer price data released Thursday … Senate Banking hearing on export controls Thursday … Fed Governor Chris Waller speaks Thursday … Retail sales data released Friday … University of Michigan consumer sentiment and inflation expectations survey data released Friday. SHAMBAUGH SENATE CONFIRMATION HEARING — The Senate Finance Committee is set to consider the nomination of Jay Shambaugh on Tuesday to be the Treasury undersecretary for international affairs. It's a long time coming: The position, one of the most important diplomatic posts in the government, has been vacant since the start of the Biden administration. The White House appeared close to nominating Heidi Crebo-Rediker, a former State Department chief economist who had the support of Treasury Secretary Janet Yellen, to the job last summer, but passed on her. Biden finally got around to nominating Shambaugh on Feb. 25, and it's not clear what's taken so long to move his nomination through the Senate at a time when the Treasury is at the center of some of the biggest global challenges facing the administration. SUNUNU TO BIDEN: FIRE YELLEN — Gov. Chris Sununu's advice for President Joe Biden on dealing with inflation? Get a new Treasury secretary. The New Hampshire Republican, one of the most popular governors in the country, said on CNN's State of the Union Sunday that he would fire Yellen because "she completely misled America, because she didn't want to own the bad news. But that's part of public service. You've gotta own the good with the bad." "The more the administration keeps telling people a recession isn't inevitable — of course, it is," he added. A Treasury spokesman declined to comment. RAIMONDO: DON'T SEE REASON TO EXPECT 'A SERIOUS RECESSION' — Commerce Secretary Gina Raimondo, speaking on ABC's This Week Sunday, said she thinks the U.S. can avoid a downturn and that we shouldn't "talk ourselves into a recession." "I do think at some point, you know, we will see a less rapid growth in the economy, but I don't see any reason to think that we will have a serious recession," Raimondo said. She also weighed in on China tariffs , FT's Colby Smith reported — "Lifting tariffs isn't going to bring down top-line inflation in a very significant way," she said in an interview with NBC on Sunday. "What it will do potentially is help consumers on certain . . . household goods. And so for that reason, given where inflation is, I think it could make sense to do it." BRAINARD ON CRYPTO MARKET RISK — Fed Vice Chair Lael Brainard, speaking in London Friday, said crypto's innovative technology hasn't saved it from being subject to the same risks that have dogged traditional financial markets for centuries, our Sam Sutton reports. PAXOS UNVEILS NEW DISCLOSURES — Sam also reports stablecoin issuer Paxos said Friday it will begin publishing more robust monthly financial disclosures to address growing skepticism around stablecoin tokens that helped fuel crypto's boom over the past two years. ABE REMEMBERED FOR SAVING TPP — To the Washington trade community, former Japanese Prime Minister Shinzo Abe is remembered as the man who saved the Trans-Pacific Partnership after former President Donald Trump pulled the U.S. out of the mega-regional trade pact, our Doug Palmer wrote. "In recalling PM Abe's legacy, let's remember his bold move to bring Japan into TPP, despite strong domestic opposition, and then keep the deal alive with others after the US exited," Wendy Cutler, vice president of the Asia Society Policy Institute, wrote on Twitter. "That's leadership." HOUSING AFFORDABILITY INDEX DROPS — WSJ's Nicole Friedman: "Record home prices and higher mortgage rates in May made it the most expensive month since 2006 to buy a home, prompting more buyers to give up and pressuring sellers to cut asking prices."   A message from Sallie Mae®:   Russia FEARS OF ANOTHER GAS PRICE SHOCK DRIVE BIDEN'S PUSH FOR OIL PRICE CAP — NYT's Jim Tankersley: "White House officials fear a new round of European penalties aimed at curbing the flow of Russian oil by year-end could send energy prices soaring anew , slamming already beleaguered consumers and plunging the United States and other economies into a severe contraction. That chain of events could exacerbate what is already a severe food crisis plaguing countries across the world." — Yellen is heading out on her first trip to Asia this week since taking office, aiming to use sitdowns with global counterparts to help build momentum for the effort to cap prices for Russian oil, Bloomberg's Chris Condon reported. PUTIN WARNS OF 'CATASTROPHIC' ENERGY CRISIS — FT's David Sheppard and Polina Ivanova: "Russian President Vladimir Putin has threatened 'catastrophic consequences' for world energy markets if western powers impose further sanctions on Moscow, as G7 members discuss plans to try to cap Russia's oil revenues following its invasion of Ukraine. The Russian president admitted that sanctions were undoubtedly hurting Russia's economy but said western powers stood to inflict more harm on themselves as they wrestle with rising inflation and a growing cost of living crisis." Meanwhile, in the Middle East — "Even if Joe Biden secures a pledge for more oil when he visits Saudi Arabia this week, it may do little to drive down the high fuel prices roiling the global economy," Bloomberg's Grant Smith writes.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Fed File AVOIDING A RETURN TO THE STOP-AND-GO 1970s — WSJ's Nick Timiraos: "Just as it proved difficult for the Fed last year to tell when to start raising rates, it is tough to know when to stop. … "Were the Fed to ease because of growth fears before inflation has been vanquished, it would risk repeating its stop-and-go tightening of the 1970s, which economists now see as a costly policy error. To avoid that mistake, 'the Fed may not be able to pivot and cut rates quickly or at all' if a recession begins later this year, said Krishna Guha, vice chairman of Evercore ISI, in a recent report." THE MYSTERY OF QUANTITATIVE TIGHTENING — FT's Katie Martin and Colby Smith: "Central banks are starting to shrink their balance sheets, but fund managers say they have no clue as to how QT will play out."   INTRODUCING POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don't miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY.     Fly Around Bobby Van's on Broad Street shut its doors for the last time last week, marking the end of the establishment's 16-year stint as one of the New York Stock Exchange's go-to canteens. — Bloomberg's Shubham Saharan Investors expect concerns about hot inflation and strapped consumers to dominate the corporate-earnings season that kicks off this week, creating winners and losers in the battered stock market. — WSJ's Hannah Miao The euro is hurtling toward parity with the U.S. dollar for the first time since its early years of existence. Investors are betting it could get a lot worse for the common currency. — WSJ's Chelsea Delaney and Caitlin McCabe With Elon Musk attempting to terminate his $44 billion takeover of Twitter Inc. and the company vowing to force him to follow through, the social-media powerhouse and the world's richest person appear headed for a messy courtroom battle. — WSJ's Cara Lombardo A message from Sallie Mae®: At Sallie Mae, we want students and families to make responsible choices when it comes to planning and paying for college. That's why we offer free tools and resources to help calculate college costs, evaluate financial aid offers, plus discover and apply for scholarships. We also reward our customers who make payments while in school. More than half choose to do just that, saving them money in the long run and setting them up for financial success. That's why Sallie Mae makes sense.     Follow us on Twitter Mark McQuillian @mcqdc Kate Davidson @KateDAvidson Aubree Eliza Weaver @aubreeeweaver Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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