P2JW189000-6-A00200-1--------BP
A2 | Thursday, July 7, 2016
THE WALL STREET JOURNAL.
* * * * * *
U.S. NEWS
BY KATE DAVIDSON
AND JON HILSENRATH
Federal Reserve officials are
in a holding pattern heading
toward their July policy meeting, following the release of
mixed economic data and the
vote by the U.K. to exit the European Union.
Fed governor Daniel Tarullo
said Wednesday the central
bank should wait for more
convincing evidence that inflation is closer to—and would
remain near—the Fed’s 2% target before raising short-term
interest rates again. He also
warned that because rates are
still so close to zero, the Fed
has limited tools to respond if
the economy slows down, another factor that argues for a
wait-and-see approach.
“I look at this as an opportunity for greater maximum
employment, in a context ... in
which inflation is not at our
stated target, not near our
stated target, and hasn’t been
so in quite some time,” he said
in an interview. “This is not an
U.S.
News
ECONOMY
Service Sector
Activity Increases
U.S. service-sector activity
picked up in June, as the Institute for Supply Management’s
nonmanufacturing purchasing
managers index rose to 56.5 in
June from 52.9 in May. That was
the highest reading since November.
Economists surveyed by The
Wall Street Journal had expected
the index would rise to 53.6. A
economy that is running hot.”
Fed officials generally
agreed at their June 14-15
meeting that it was “prudent
to wait” for additional data before considering another rate
rise, according to minutes of
the session released Wednesday. They wanted more time to
see if the economy would keep
improving and that new
threats wouldn’t emerge after
the June 23 Brexit vote.
Divisions had emerged inside the bank in the weeks after a dismal May jobs report.
At the June meeting, officials
sparred over the health of the
labor market, the outlook for
growth, risks to the economy,
and whether underlying inflation is picking up. Those uncertainties were amplified by
“considerable
uncertainty”
ahead of the U.K. referendum.
The Fed raised its benchmark federal-funds rate in December from near zero to a
range between 0.25% and 0.5%.
Officials signaled in April and
May they were getting closer
to another increase. But inves-
reading above 50 indicates activity is expanding, while a reading
below 50 signals contraction.
Key components of the index
also gained ground. New orders
registered at 59.9, up from 54.2
in May. Employment grew to
52.7 from May’s 49.7.
The ISM nonmanufacturing
report comprises mainly comments from service-sector companies that make up the bulk of
the U.S. economy, but it also includes construction and public
administration.
—Jeffrey Sparshott
CALIFORNIA
Death of Navy SEAL
Ruled a Homicide
A Southern California medical
examiner ruled the death of a
U.S. Navy SEAL trainee a homi-
Foreign Buyers Pull Back
From U.S. Housing Market
BY LAURA KUSISTO
1966 FULL CALENDAR, STEEL CASE, 40 MM
Miami condo developers,
California real-estate agents
and others in the housing industry have hoped recent turmoil in the global economy
would boost foreign interest in
U.S. homes. New figures suggest the opposite is happening.
Purchases of U.S. residential
real estate by foreigners who
aren’t residents of the U.S. fell
by $10 billion in the year ending March to $44 billion, the
lowest level since 2013, according to a survey by the National Association of Realtors
released Wednesday.
A strong U.S. dollar and
weakening economies in Europe, South America and
China, as well as rising U.S.
home prices, have hurt foreign
buyers’ purchasing power.
Foreign buyers make up a
small part of the market overall, but luxury residential
builders in Miami, Manhattan
and parts of Southern California could take a hit.
The survey looks at two categories of foreign buyers: recent immigrants and nonresidents. Purchases by immigrant
foreigners actually rose to $59
billion from $49 billion, according to the trade group.
News Corp, owner of The
Wall Street Journal, also owns
Move Inc., which operates a
website and mobile products
for the National Association of
Realtors.
There is no mystery
about a Girard-Perregaux,
simply more than two centuries of craftsmanship
and a perpetual commitment to perfection.
MICHAEL NAGLE/BLOOMBERG NEWS
Fed Plays Waiting Game on Rates
Daniel Tarullo said more
evidence on inflation is needed.
tors now see little chance the
bank will raise rates at its
meeting July 26-27, especially
after the financial turmoil triggered by the Brexit vote.
Officials emerged from the
June gathering with a plan to
keep their options open and
preserve flexibility to move
rates higher if the economy
cide, saying his instructor repeatedly dunked him during a pool
exercise while the 21-year-old
was struggling, according to an
autopsy report released Wednesday.
Seaman James Derek Lovelace died of drowning May 6 in
Coronado, Calif., with a heart
problem as a contributing factor,
the autopsy found. The homicide
ruling doesn’t necessarily mean a
crime occurred, and the instructor hasn’t been charged.
In his first week of training,
Seaman Lovelace, of Crestview,
Fla., showed signs of having difficulty treading water in fatigues,
boots and a dive mask filled with
water. While struggling, he was
seen on surveillance video being
dunked at least twice by an instructor, the report said.
Instructors are supposed to
BONDS
Continued from Page One
market as central banks continue to vacuum up high-quality debt around the world and
nervous overseas investors
turn to Treasurys for relief.
A buying spree by central
banks is reducing the availability of government debt for
other buyers and intensifying
the bidding wars that break
out when investors get jittery,
driving prices higher and
yields lower. The yield on the
benchmark 10-year Treasury
note hit a record low Wednesday.
“The scarcity factor is there
but it really becomes palpable
during periods of stress when
yields immediately collapse,’’
he said. ”You may be shut out
of the bond market just when
you need it the most.’’
On Wednesday, the yield on
the 20-year Japanese government bond fell below zero for
the first time, joining a pool of
negative-yielding
bonds
around the world that has expanded rapidly over the past
year. In Switzerland, government bonds through the longest maturity, a bond due in
nearly half a century, are now
yielding below zero. In Germany, government debt with
maturities out as far as January 2031 is trading with negative yields.
The squeeze could get
worse if central banks in Japan
and Europe decide as expected
to step up their stimulus efforts following Britain’s vote to
leave the European Union.
"The world is running out
of positive-yielding safe-haven
bonds,’’ said Shyam Rajan,
head of U.S. rates strategy research at Bank of America
Merrill Lynch in New York.
The availability of high-
appears to be strengthening
and safe from new shocks.
“Most participants judged
that, in the absence of significant economic or financial
shocks, raising the target for
the federal-funds rate would be
appropriate if incoming information confirmed that economic growth had picked up,
that job gains were continuing
at a pace sufficient to sustain
progress toward the committee’s maximum-employment
objective and that inflation was
likely to rise to 2% over the medium term,” the minutes said.
They will have to reconcile
important disagreements before
then. In June, some officials emphasized that the Fed shouldn’t
wait too long to raise rates
again, while others warned that
delaying for too long could increase risks to financial stability
or raise the chance of overshooting the Fed’s employment
and inflation objectives, according to the minutes.
They also disagreed on the
outlook for jobs and growth,
with some believing the labor
market was near full health,
while others worried that a
cooling off in hiring and continued weak business investment could be a harbinger of a
broader economic slowdown.
Fed officials in recent days
have also said it could take
some time before they understand how the Brexit vote
might affect the U.S. outlook.
San Francisco Fed President
John Williams said Tuesday that the effects on the U.S.
economy are likely to be “relatively modest” and that Brexit
is a less grave threat than other
global financial and economic
developments in recent years.
Federal Reserve Bank of
New York President William Dudley voiced concern Wednesday about very
low yields on 10-year Treasury
notes, which could be a sign
that investor expectations for
growth and inflation are waning. He said low yields weren’t
“completely good news.”
create adverse conditions by
splashing, making waves and
yelling at the students, but they
are advised not to dunk or pull
students underwater, according
to the report.
The instructor accused of
dunking Seaman Lovelace has
been assigned to administrative
duties while the military investigates, Navy spokesman Lt.
Trevor Davids said. He declined
to identify the instructor.
—Associated Press
$28.1 million, a federal jury ruled.
The verdict against Gage
County and former county lawenforcement officials who carried
out the investigation of the
group came after four days of
deliberation. The jury decided in
a second trial—the first ended in
a mistrial last year—that investigators recklessly strove to close
the case despite contradictory
evidence, rather than seek justice.
James Dean, Kathleen Gonzalez, Debra Shelden, Ada JoAnn
Taylor, Thomas Winslow and Joseph White served a combined
77 years in prison in the death
of Helen Wilson, 68, before DNA
testing cleared them in 2008.
An attorney for Gage County
said Wednesday an appeal is
likely.
—Associated Press
NEBRASKA
Exonerated Inmates
Awarded $28 million
Six people, known as the Beatrice Six, who were wrongfully
convicted in the 1985 rape and
killing of a southeast Nebraska
woman, will receive a share of
Rally Fuel
Central banks’ bond buying has helped drive the rally in government
debt, a trend investors are betting will accelerate in the wake of the
U.K. referendum.
Central banks' holdings of government bonds as share
of outstanding debt
35%
Bank of
Japan
30
25
20
Federal
Reserve
15
10
European
Central Bank*
5
0
2008 ’09
’10
’11
’12
’13
’14
’15
’16†
*Holdings including government debt of Germany and other eurozone countries †As of March 31
Source: J.P. Morgan Chase
THE WALL STREET JOURNAL.
grade debt has been shrinking
since the financial crisis. The
Federal Reserve became the
first major central bank to
start a bond-purchase program. The Bank of England,
Bank of Japan and the European Central Bank followed.
The Fed’s data showed it
held more than $2.4 trillion of
U.S. Treasury debt at the end
of June, nearly one-fifth of the
total outstanding. The BOE
owns about one-quarter of U.K.
government debt, the BOJ has
gobbled up more than onethird of Japan’s government
debt, and the ECB owns
around 15% of Germany’s sovereign government debt, according to analysts.
Those programs are exacerbating the effects of budgettightening and a wave of
downgrades of European government debt in 2011. Data
from Bank of America Merrill
Lynch show the share of bonds
with the three highest credit
ratings has dropped to 51% of
CORRECTIONS  AMPLIFICATIONS
As many as 75,000 jobs
may leave London as a result
of “occupational leakage” in
the wake of Brexit and as
many as one-third of those
may end up in Dublin, according to Hemant Kotak of
Green Street Advisors. An
International Property article
Wednesday about Ireland’s
office market incorrectly said
Mr. Kotak believes that as
 Tarullo: Big banks may have
to make more changes........ C2
many as 75,000 jobs might
relocate to Dublin from London.
An Investing in Funds &
ETFs article cited in Wednesday’s Corrections & Amplifications appeared Tuesday. In
some editions Wednesday, the
correction for the article incorrectly said it had been
published Monday.
Readers can alert The Wall Street Journal to any errors in news articles by
emailing [email protected] or by calling 888-410-2667.
all debt tracked by the bank’s
world sovereign bond index in
2011 from 84%.
Barry Eichengreen, economics professor at the University
of California, Berkeley, calculated the drop in supply a different way: by looking at a
broad pool of high-grade assets, including outstanding
debt in the developed world,
as a percentage of global gross
domestic product. It came to
barely 30% in June, down from
nearly 60% a few years ago.
Among those feeling the
worst pinch are pension funds
and life insurance firms in
Japan, Europe and the U.S.
Those investors now face
tougher competition for the
high-grade, long-term bonds
they need to match their longterm liabilities.
Nigel Jenkins, money manager at Payden & Rygel in London, which has about $100 billion assets under management,
said he doesn’t expect bond
yields to rise sharply soon, be-
U.S. Trade
Deficit
Grew 10%
In May
BY ANNA LOUIE SUSSMAN
The U.S. trade deficit widened in May as exports edged
lower, reflecting soft overseas
demand for American goods
and services.
The trade gap increased
10.1% from April, the largest
rise since August, to a seasonally adjusted $41.14 billion,
the Commerce Department
said on Wednesday. Exports of
goods and services declined
0.2%, while imports advanced
1.6%.
Despite the widening gap,
most economists expect trade
to have a modest positive impact on second-quarter gross
domestic product, similar in
magnitude to its first-quarter
boost of roughly a 10th of a
percentage point. Several said
the trade figures should be
viewed alongside a survey of
manufacturers from the Institute for Supply Management,
whose index showed exports
at a 19-month high in June.
$41.14B
U.S. trade deficit in May, as
exports edged lower
Wednesday’s report highlighted how weak growth
overseas has diminished appetite for U.S.-made goods.
Several headwinds remain.
The dollar has again strengthened in recent weeks, both in
the lead-up to and the wake of
the U.K.’s vote to leave the European Union, renewing concerns among manufacturers
that exports will suffer again.
cause any uptick will likely
spur a wave of buying by pension funds.
“The lower the yields, the
bigger the pains for pension
funds,’’ said Mr. Jenkins. ”I
wouldn’t say that it is becoming a systemic issue, but something needs to be done.’’
Central banks themselves
are having trouble finding all
the bonds they need. The ECB,
for example, can’t buy bonds
with a yield lower than its deposit rate of minus-0.4%. As of
July 1, 58% of German bonds
eligible for ECB purchases
traded below that level, according to Frederik Ducrozet, a
senior economist at Pictet
Wealth Management.
“They will run out of bonds
to buy fairly soon,” if the central bank doesn’t loosen the
rules of its program and bond
yields remain low, said Peter
Schaffrik, chief European
macro strategist at Royal Bank
of Canada Capital Markets.
U.S., German, U.K. and Japanese government bonds play
an important role in shortterm “repo” markets, where
they are used by hedge funds
and banks as collateral for
loans lasting a day or more.
The volume of repo loans
with Treasury debt as collateral has fallen to $1.8 trillion
from $2.6 trillion at the end of
2007, according to Joseph
Abate, a money-market strategist at Barclays.
“There is simply much less
high-quality
collateral
around,’’ said Guy Haselmann,
managing director of product
solutions at bond trading platform OpenDoor Trading. ”The
plumbing in the system is
compromised.’’
Notice to Readers
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