A RECESSION ALARM IS RINGING ON WALL STREET — NYT's Joe Rennison: "Wall Street's most talked about recession indicator is sounding its loudest alarm in two decades, intensifying concerns among investors that the U.S. economy is heading toward a slowdown. That indicator is called the yield curve, and it's a way of showing how interest rates on various U.S. government bonds compare, notably three-month bills, and two-year and 10-year Treasury notes. "Usually, bond investors expect to be paid more for locking up their money for a long stretch, so interest rates on short-term bonds are lower than those on longer-term ones. Plotted out on a chart, the various yields for bonds create an upward sloping line — the curve. But every once in a while, short-term rates rise above long-term ones. That negative relationship contorts the curve into what's called an inversion, and signals that the normal situation in the world's biggest government bond market has been upended." ECB LIFTS RATES FOR FIRST TIME IN OVER A DECADE — From our colleagues in Europe: "The European Central Bank took a long-awaited step Thursday to raise interest rates in response to the record inflation that has inflicted a massive cost-of-living crisis across the region. By opting for half a percentage point, rather than the quarter percentage point it previously flagged, the bank sought to send a clear signal of its inflation-fighting resolve. Its decision came amid rising market jitters about Italy's fresh political crisis following Prime Minister Mario Draghi's resignation. "The ECB has lagged most major central banks on countering inflation, which climbed to a record high of 8.6 percent in the eurozone in June. Thursday's 50-basis-point move — the first hike of that size in more than two decades — aligns the Frankfurt institution more closely with its counterparts, which have moved in 50- and 75-basis-point steps." But some ECB officials were initially in favor of a smaller hike — Bloomberg's Carolynn Look and Jana Randow: "A small number of European Central Bank officials initially would have preferred a quarter-point increase in interest rates at Thursday's Governing Council meeting, according to people familiar with the debate. The official proposal made by Chief Economist Philip Lane was for a half-point step, said the people, who asked not to be identified because the discussions were private. Officials ultimately supported that as they also agreed on a new instrument to prevent disorderly bond-market moves, the people said." INFLATION FORCES CENTRAL BANKS TO DITCH MESSAGING TOOL — Reuters Sujata Rao and Dhara Ranasinghe: "If the U.S. Federal Reserve killed off forward guidance in June, the European Central Bank may have just hammered the final nail in the coffin of a tool officials had long used to provide monetary policy signals to financial markets. … The switch to what the ECB itself described as 'a meeting-by-meeting approach' is the latest warning to investors and traders who have watched policymakers from Australia to Switzerland to Sweden execute startling U-turns on policy signals they had sent only weeks earlier." HOUSING MARKET CHILLS — AP's Ken Sweet, Michael Casey and Alex Veiga: "The Federal Reserve has aggressively raised short-term interest rates to fight inflation, which in turn helps push rates higher for credit cards, auto loans and mortgages. Rising mortgage rates have combined with already high home prices to discourage would-be buyers. Mortgage applications have declined sharply. Sales of previously occupied homes have fallen for five straight months, during what is generally the busiest time of year in real estate. "The rate on a 30-year mortgage averaged around 5.54 percent this week, according to mortgage buyer Freddie Mac; a year ago it was close to 2.78 percent. The increase in rates is leaving buyers with some unwelcome options: pay hundreds of dollars more for a mortgage, buy a smaller home or choose to live in a less desirable neighborhood, or drop out of the market, at least until rates come down." JOBLESS CLAIMS RISE TO NEW HIGH FOR THE YEAR — WSJ's Rina Torchinsky: "New applications for unemployment benefits climbed again last week, reaching their highest point since late last year in a sign the tight labor market is slowly loosening. Initial jobless claims, a proxy for layoffs, rose to a seasonally adjusted 251,000 in the week ended July 16 from 244,000 the week before, the Labor Department said Thursday. Last week's claims were above the 2019 prepandemic weekly average of 218,000, when the labor market was also strong, and at their highest since last November."
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