Pricing in a soft landing

There was a collective sigh of relief from central bankers, Wall Street and regular folk this week when a measure of underlying US inflation cooled for the first time in six months. The Federal Reserve has of course been trying to finish off residual price pressures by weakening demand through higher borrowing costs. And while much progress has been made, the last battle in the Fed’s war on inflation has proven harder than first expected, with the central bank’s 2% target still out of reach. But the April downtick in the “core consumer price index,” a measure that excludes volatile food and energy costs, helped temper growing fears that inflation was becoming entrenched (in a glitch, the report was released to inflation watchers 30 minutes early). The data reanimated investor bets that the central bank will be able to start lowering interest rates later this year as some of its peers, including the Bank of England and European Central Bank, prepare to do so. Adding to the Fed’s arsenal were reports showing US retail sales stagnating in April, an indicator that high borrowing costs and mounting debt are encouraging greater prudence among consumers.

The trick of course is slowing down the economy without hitting stall speed. And on this front, the US economy continues to deliver. Two years of recession predictions have been blown to pieces by healthy consumer spending and near-record employment. Still, despite the strongest job market in decades and rising wages, residual post-pandemic inflation has slowed gains in living standards—and that’s an issue for voters, some of whom have decided to blame President Joe Biden. Walmart, for its part, is benefiting from a decision to roll out more discounts and products and revamp stores as higher-income consumers lower their sights for deals. In the end, it was a week of good news for the Fed’s inflation fight, but Jamie Dimon still urged caution. The JPMorgan chief executive warns that costs linked to the green economy, re-militarization, infrastructure spending, trade disputes and large fiscal deficits may mean inflation will stay sticky. “Stocks are very high, and I think the chance of inflation staying high or rates going up are higher than people think,” he said. “Whatever the world is pricing in for a soft landing, I think it’s probably half of that. I think the chances of something going wrong are higher than people think.”

Chinese leader Xi Jinping and Russian leader Vladimir Putin met in Beijing, pledging to intensify cooperation against US “containment” of the two authoritarian countries, a Washington strategy they say is both economic and military. Pledging cooperation with “no limits,” Xi and Putin have shown a shared determination to crush dissent at home while ending their perceived humiliation abroad. On the economic battlefront, the US and European Union have funneled almost $81 billion toward cranking out the next generation of semiconductors in a growing showdown with China for chip supremacy. And Biden this week unveiled sweeping tariff hikes on a range of Chinese imports, the latest US move in a campaign that is rewiring Asian trade routes.

Israeli Prime Minister Benjamin Netanyahu is increasingly isolated. As mass demonstrations against him and the carnage in Gaza continue, his two war-cabinet partners are openly challenging his indecision over a postwar strategy. That includes siding with an increasingly angry Biden administration in pushing for Palestinian rule of the devastated coastal strip, where tens of thousands have been killed in the eight-month war. After pausing one shipment of its deadliest conventional bombs, the US is now warning Israel that it risks creating a power vacuum in Gaza and urged Netanyahu to focus more on what comes next. The US has dispatched National Security Adviser Jake Sullivan to the region for talks and has finished building a floating pier that will help bring more aid to Gaza, even as officials acknowledge the structure won’t be enough to alleviate hunger among Gaza’s 2.2. million inhabitants. Netanyahu however appears undeterred by global calls for a ceasefire or warnings from America, Israel’s biggest ally and weapons supplier, as he pledges to destroy Hamas. Indeed, his gradual deployment of troops into the southern city of Rafah is starting to look like the full-blown invasion—the kind that may cross Biden’s red lines.

Slovakia’s Russia-leaning prime minister, Robert Fico, remained in serious condition after being shot, allegedly by a 71-year-old pensioner and poet. The close-range assassination attempt exposed the political fissures in Slovakia: Fico has been a polarizing figure—an ally of the Kremlin who evinces skepticism of the European Union. He’s also close with Viktor Orban, Hungary’s far-right prime minister and another friend of Putin. Fico has been accused of adopting Orban’s playbook for eroding independent institutions to consolidate power and degrade democracy.

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