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Good morning. Today we look at extraordinary U.S. economic growth, rising bond yields, collateral damage in emerging markets, why U.S. worker wages might take a step back in September, and the continuing demise of the shopping mall.
HOW ABOUT THAT ECONOMY!
The 10-year U.S. Treasury yield rose to its highest level in more than seven years as investors bet on strong economic growth and rising inflation. The immediate cause: robust economic data and easing trade tensions after the U.S., Mexico and Canada hashed out a new pact.
The 10-year Treasury is a closely watched barometer of sentiment toward growth and inflation. Investors appear to expect more of both. It’s also used as a reference for everything from auto loans to mortgages. Higher yields likely mean higher rates and a potential brake on growth.
STRONGER FOR LONGER
Is the latest economic data too good to be true? Not for Federal Reserve Chairman Jerome Powell. “There’s no reason to think this cycle can’t continue for quite some time, effectively indefinitely,” he said Wednesday. The Fed has been gradually raising its benchmark rate and doesn’t look ready to stop. Mr. Powell said policy was “a long way from neutral”—meaning there is significantly more room for interest rates to rise before they start to hinder growth.
That’s not to say Mr. Powell is complacent. Asked by PBS NewsHour’s Judy Woodruff what keeps him awake at night, he said: “Basically, everything.”
WHAT TO WATCH TODAY
U.S. jobless claims, out at 8:30 a.m. ET, are expected to remain at historically low levels.
U.S. factory orders for August, out at 10 a.m. ET, are expected to rise 2.2% from the prior month.
Fed vice chairman for supervision Randal Quarles speaks on community banks at 9:15 a.m. ET.
SERVICE WITH A SMILE
One example of robust economic data: Activity in the U.S. service sector—the biggest chunk of the economy—rose to the highest level on record last month. The Institute for Supply Management’s nonmanufacturing index showed production, new orders and employment all picked up rapidly, Sharon Nunn reports.
The numbers are good but there’s a catch. Much of September’s growth appears to come from anticipation of tariffs. Businesses increased inventories, imports and exports to beat the clock on possible and probable duties on goods from China and elsewhere.
MORE GOOD NEWS FRIDAY?
U.S. workers in August saw the largest annual increase in hourly pay since the recession ended. There probably wasn’t a a repeat in September. The reason? Back in September 2017, a pair of hurricanes, including one that caused Walt Disney World and other Orlando tourist attractions to close, temporarily removed low-wage workers from the wage calculation. That boosted the monthly average and raised the bar for year-over-year gains. Economists still forecast very solid 0.3% monthly wage growth for September—an 8-cent an hour gain—but such an increase would still mean year-over-year earnings growth in retreat. And yes, Hurricane Florence could have a similar effect of removing some low-wage workers from last month’s calculation, but the cities impacted by that storm are much smaller than Houston, Tampa and Orlando, which were struck last year. – Eric Morath
OUT OF SYNCH
More fallout from strong U.S. growth and gradually rising interest rates: A stronger dollar.
The good: Cheaper imports and less inflation in the U.S.
The bad: U.S. exports are effectively more expensive in overseas markets.
The ugly: It’s more expensive for emerging-market countries and companies to service and repay dollar debt. Many central banks have been forced to raise rates to defend currencies, making domestic borrowings costlier too. And higher U.S. rates reduce the relative appeal of riskier assets elsewhere, Saumya Vaishampayan writes.
U.S. employers are raising wages. They’re also shelling out more on benefits. The average cost of employer health coverage offered to workers rose to nearly $20,000 for a family plan this year, capping years of increases that experts said are chiefly tied to rising prices paid for health services. Annual premiums rose 5% to $19,616 for an employer-provided family plan in 2018, according to the yearly poll of employers by the nonprofit Kaiser Family Foundation. Employers, seeking to blunt the cost of premiums, also continued to boost the deductibles that workers must pay out of their pockets before insurance kicks in, Anna Wilde Mathews reports.
THERE’S STILL TRADE TENSION
Vice President Mike Pence will deliver a stinging rebuke to China in a speech scheduled for Thursday. The focus is more on Beijing’s attempts to influence U.S. elections and global politics than commerce, but trade is clearly in the picture. Mr. Pence will build on President Trump’s remarks last week at the United Nations, where the president accused China of interfering in the coming midterm elections in an effort to derail the administration’s tough trade policies and unseat him from the White House, Michael C. Bender reports.
Consumer confidence is surging. Consumer spending is solid. The holiday shopping season is expected to be strong. And mall vacancy rates rose to 9.1% in the third quarter, their highest level in seven years. Much of the retail sector has bounced back this year after years of losing out to online competitors. But many lower-end malls are still struggling to benefit from the economic revival, especially in some of the more economically depressed areas in Pennsylvania, Ohio and Michigan. They suffer from a glut of shopping centers but not enough consumers, Esther Fung reports.
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
Workers of the world unite? Nah. Communists are more likely to worry about immigration than capitalists. “I find that the effect of living in East Germany is driven by former East Germans who were born during, and not before, the communist rule and that differences in attitudes persist even after Germany’s reunification. People’s trust in strangers and contact with foreigners represent two salient channels through which communism affects people’s preferences toward immigration,” the Fed’s Matthew Carl writes in a research paper.
Chinese spies hacked nearly 30 U.S. companies, including Apple and Amazon, with tiny microchip worked into the tech supply chain. “This attack was something graver than the software-based incidents the world has grown accustomed to seeing. Hardware hacks are more difficult to pull off and potentially more devastating, promising the kind of long-term, stealth access that spy agencies are willing to invest millions of dollars and many years to get,” Jordan Robertson and Michael Riley write at Bloomberg.
UP NEXT: FRIDAY
U.S. nonfarm payrolls are expected to grow by 180,000 and the unemployment rate is expected to tick down to 3.8% in September. The report is out at 8:30 a.m. ET.
The U.S. trade deficit for August, out at 8:30 a.m. ET, is expected to widen to $53.4 billion from $50.08 billion a month earlier.
Canada’s employment report for September is out at 8:30 a.m. ET.
U.S. consumer credit for August is out at 3 p.m. ET.
The Atlanta Fed’s Raphael Bostic speaks on financial literacy at 12:40 p.m. ET.
Read more: blogs.wsj.com