Real Time Economics: Inflation in Focus | Trump Kills Qualcomm Deal | US Allies Speak Softly on Trade

Mar 13, 2018 6:10 am ET

THE PRICE IS RIGHT

Inflation watch No. 1: U.S. inflation numbers Tuesday should be fairly muted.

The headline consumer price index for February is expected to rise 2.3% from a year earlier. Economists are forecasting a 1.9% gain for core prices, which exclude food and energy, the highest reading since April but hardly a sign of runaway inflation. Of course, if the monthly core increase is on the high side (like last month) that could put a lot of people on edge.

Inflation watch No. 2: Economists expect inflation to pick up this year. This is starting to sound like a broken record. But a tightening labor market, rising import prices, wonky technical effects and some other factors should work together to sustain inflation figures closer to the Federal Reserve’s target. (Wonky technical note: Core CPI prices fell in March 2017 from the prior month, the first time that had happened in more than seven years, largely because of plunging costs for cell phone plans. That will soon drop out of the data.)

Inflation watch No. 3. Even if February is an inflation dud, Fed officials don’t need to see any of the various measures above 2% to raise the central bank’s benchmark interest rate later this month. Already, many economists expect a quarter-point increase at the March 20-21 meeting and confirmation that three more moves will follow this year.

“A stronger than expected performance would do little to the already near-certain expectations for a March rate hike, but would add further ammunition for greater rate tightening than what is currently priced in,” said Wells Fargo Sam Bullard.

Comments or suggestions for Real Time Economics? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest.

WHAT TO WATCH TODAY

The National Federation of Independent Business survey for February, out at 6 a.m. ET, hit its highest mark since 1983. The Index of Small Business Optimism increased 0.7 points to 107.6, the second-highest level in its 45-year history.

The U.S. consumer price index for February is out at 8:30 a.m. ET. January’s reading on inflation was fairly strong, though that’s not expected to repeat. The consensus for the headline number is a 0.2% gain from the prior month and a 2.3% gain from the prior year; excluding food and energy the forecast is for 0.2% and 1.9%.

TOP STORIES

TRUMP KILLS QUALCOMM DEAL

Qualcomm is off the market. President Donald Trump blocked Broadcom’s $117 billion bid for the U.S. tech company, a decision that reflects administration concerns about competition with China over advanced technologies, Kate O’Keeffe reports.

While Broadcom is a Singapore-based company, the Committee on Foreign Investment in the U.S., known as CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm—and thereby the U.S.—against foreign rivals racing to develop next-generation wireless technology known as 5G, such as China’s Huawei Technologies Co.

U.S. ALLIES WEIGH TARIFF RESPONSES

U.S. allies are weighing how much ground to give on other White House trade grievances. For now, they appear to be following a two-pronged strategy, confirming strategic alignment with the U.S. while pledging not to be cowed by threatened tariffs.

Mr. Trump has indicated a willingness to drop his planned tariffs of 25% on steel imports and 10% on aluminum if trading partners make concessions on other trade issues.

In one notable, development, German Chancellor Angela Merkel said she wanted to overcome the trade dispute through talks rather than retaliation, striking a more conciliatory tone than European Union officials, Andrea Thomas, Paul Vieira and David Winning report.

RED INK

Expect more of this: U.S. tax revenue declined in February and government spending rose, pushing the budget deficit wider.

Government revenue declined by 9% in February compared with the same month a year earlier, due to a decrease in the amount withheld from workers’ paychecks and a jump in refunds for individuals and corporations, Harriet Torry reports. The deficit stood at $391 billion for October (the first month of the fiscal year) through February. That was $40 billion, or 12%, higher compared with the same period a year earlier.

Deficit spending isn’t inherently bad, though economists have questioned a runup in outlays, big tax cuts and expanding government debt while the economy appears to be doing just fine on its own.

DIGGING DEEP

Miners, with their rather pure exposure to commodity and currency prices, are an interesting window into the global economy.

Diggers and drillers cashed in on a commodity-market rebound. Now, they are grappling with rising costs as commodity and labor prices bite back, Rhiannon Hoyle writes. Oil rallied more than 20% this past year. Raw materials including coke and caustic soda are rocketing higher. Workers are demanding higher wages in many countries. And a depreciating U.S. dollar is also putting pressure on margins.

It’s a new challenge for firms like BHP Billiton, Rio Tinto and Glencore, which already have cut costs by introducing drones and driverless trucks, cutting tens of thousands of jobs and seeking advice from other industries, including the automobile business, to make their pits more efficient.

U.S. TAXES, SPENDING JUICE GLOBAL GROWTH

The Organization for Economic Cooperation and Development said it expects economic growth to ease off in some economies this year, but not by as much as it did when it last released projections in November.

The big difference between then and now is the combination of tax cuts and government spending increases passed by Congress. According to the OECD, these measures will boost U.S. economic growth to 2.9% this year and 2.8% next, compared with the 2.5% and 2.1% expansions it forecast previously.

But the OECD warned the global economy could be weakened by a series of tit-for-tat tariff increases initiated by proposed U.S. charges on steel and aluminum imports. “Escalation usually goes down fairly badly for everybody. It’s important to rely on global solutions to excess capacity in the steel industry,” said OECD economist Alvaro Pereira.

QUOTE OF THE DAY

The historically high readings indicate that policy changes–lower taxes and fewer regulations–are transformative for small businesses. After years of standing on the sidelines and not benefiting from the so-called recovery, Main Street is on fire again. -National Federation of Independent Business President and CEO Juanita Duggan

WHAT ELSE WE’RE READING

The U.S. government isn’t a family and shouldn’t budget like one. Specifically, there isn’t necessarily any reason for federal officials to tighten their belts in response to higher indebtedness. “Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations,” USLA’s Roger Farmer and the Bank of England’s Pawel Zabczyk write.

Bitcoin has captured the imagination of some, perhaps many. But is it money? Is it a commodity? Is it in a bubble? A survey of economists by the Initiative on Global Markets finds that the bulk think of bitcoin more like a commodity such as gold or 17th century Dutch Tulips than actual currency. “Bitcoins are bubble like tulips. And not even pretty to look at. Gold not bubble (and is rather pretty),” London Business School’s Richard Portes said in one survey response.

The fallout from trade disputes can really linger. The New York Times looks at one spat between the U.S. and Europe 36 years ago. At the time, the European Common Market tripled the tariff on U.S. poultry to fend off a surge of cheap American birds. The United States struck back with retaliatory tariffs on French brandy, Dutch dextrin and potato starch, and Germany’s Volkswagen bus and other light trucks. All but the 25% light-truck levy have since been lifted. “It is not a coincidence that light trucks account for 82 percent of the vehicles sold by the three big Detroit automakers.”

UP NEXT

U.S. retail sales for February are due out at 8:30 a.m. ET on Wednesday. Economists expect a 0.3% rise from the prior month for headline sales and a 0.4% increase excluding autos.

The U.S. producer price index for February, out at 8:30 a.m. ET, is expected to climb 0.1% from the prior month. The forecast excluding food and energy is +0.2%; excluding food, energy and trade +0.2%.

U.S. business inventories for January, out at 10 a.m. ET, are expected to rise 0.6%.

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