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Real Time Economics: China’s Currency Slides | U.S. Guards Tech | Americans Slower to Upgrade Cell Phones

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

Good morning. Today we look at pressure on the yuan, slower growth in Europe, the U.S.-China battle for tech supremacy, why the U.S. Treasury is issuing more than $1 trillion in debt, inflation’s steady path, and how rising prices and changing plans are driving Americans to hang on to old cell phones.

MAGNIFICENT 7

China guided the yuan to its weakest official level in a decade on Tuesday, a move that could fuel expectations of a further, self-reinforcing slide. The yuan’s depreciation puts pressure on Chinese policy makers, who want to give investors a bigger say in determining the currency’s value but appear uncomfortable with letting the yuan fall beyond a symbolic seven to the dollar, Saumya Vaishampayan and Mike Bird report.

The yuan has been hit this year by an economic slowdown, which could be worsened by U.S. tariffs on hundreds of billions of dollars of Chinese goods, as well as the diverging outlook for monetary policy in the two economies. The latest depreciation may exacerbate trade tensions with the U.S.—while the decline appears largely economic, the Trump administration has complained a weak yuan poses “major challenges to achieving fairer and more balance trade, and we will continue to monitor and review China’s currency practices.”

Comments or suggestions? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest news. (Responses may be quoted in this newsletter.)

WHAT TO WATCH TODAY

German consumer prices are out at 9 a.m. ET.

The S&P/Case-Shiller home price index for August is out at 9 a.m. ET.

The Conference Board’s consumer confidence index for October, out at 10 a.m. ET, is expected to fall to 136 from 138.4 a month earlier. The September reading marked an 18-year high.

China’s official gauge of the country’s factory activity for October is out at 9 p.m. ET. Economists expect the purchasing managers index to edge down to about 50.6 in October from September’s 50.8, which was a seven-month low.

TOP STORIES

MIND THE GAP

The eurozone economy had its weakest quarter since it returned to growth in mid-2013. Gross domestic product rose at an annualized rate of 0.6% in the three months through September, a slowdown from the 1.8% recorded in the second quarter and well below the 3.5% registered in the U.S. during the same period. GDP was held back by a decline in automobile production that was likely temporary, and slowing demand for exports that was likely not, Paul Hannon reports. With China’s economy also slowing, the global economy seems set to cool this year, even as the U.S. enjoys a spurt of activity driven by robust consumer and government spending.

U.S. TARGETS CHINA’S TECH INDUSTRY

The U.S. has raised the stakes in a battle with Beijing over intellectual property by restricting American firms from doing business with a state-owned Chinese chip maker. Citing national and economic security concerns, the Commerce Department said it will begin restricting American companies from selling software and technology goods to Fujian Jinhua Integrated Circuit, a semiconductor startup into which the Chinese government has been pouring money as part of an effort to build its own chip industry. The decision has the potential to cause significant damage to the new chip maker, which still relies on U.S. technology to produce its own chips, Kate O’Keeffe reports.

R&D RACE

American companies maintain a major advantage over their Chinese rivals in a critical area: spending on research and development. U.S. firms invested more than $5 in R&D for every $1 spent by Chinese companies, according to a new report from PricewaterhouseCoopers. The disparity reflects an approach toward innovation by Chinese firms over the past decade in which they excel at “applications of existing technology, rather than original research,” said Edward Tse, chief executive of Gao Feng Advisory Company, which advises Chinese and foreign firms.

But wait, there’s more…PwC’s figures don’t include private companies, which leaves out China’s state-owned monoliths and closely held Huawei Technologies, the world’s largest maker of telecommunications equipment. Huawei said it spent more than $13 billion on R&D last year, Timothy W. Martin reports.

SKILLS TO PAY THE BILLS

The U.S. Treasury Department estimates it will issue more than $1 trillion in debt this year as higher government spending and sluggish tax revenues push the deficit higher. The Treasury said total debt issuance in 2018 would add up to $1.338 trillion, compared with $546 billion in 2017. That would be the highest annual debt issuance since 2010, when the U.S. economy was still crawling out of a recession, Kate Davidson reports.

Rising federal budget deficits are boosting the Treasury’s borrowing and could restrain economic growth as the cost of credit also rises. Many factors affect rates, however, including Federal Reserve decisions, the inflation outlook and shifting investor appetite.

LOCKED IN

If the Federal Reserve is looking for signs that inflation is heating up, it’s sure hard to find them in the data. In fact, the central bank’s preferred gauge cooled slightly in September. The personal-consumption expenditures price index was up 2% from a year earlier, compared with 2.3% as recently as July. Core inflation, which excludes food and energy, has been locked in at 2% for five straight months. The Fed’s target is 2%.

For policy makers weighing how much more to raise interest rates, the data underscore an evolving view that the lowest unemployment rate in nearly five decades might not be creating excessive inflationary pressures. If inflation stays under control, it could bolster the case for suspending rate rises at some point in the months to come, Paul Kiernan and Sarah Chaney write.

HANGING ON THE TELEPHONE

Americans are holding on to their smartphones for longer than ever. Pricier devices, fewer subsidies from carriers and the demise of the two-year cellphone contract have led consumers to wait an average of 2.83 years to upgrade their smartphones, according to data for the third quarter from HYLA Mobile, a mobile-device trade-in company that works with carriers and big-box stores.

QUOTE OF THE DAY

Of the things that worry me about [artificial intelligence], job displacement is really high up. We need to make sure that wealth we create [through AI] is distributed in a fair and equitable way. –Andrew Ng, co-founder of Google Brain and former chief scientist of Baidu

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Employees who trust their managers give their company better financial performance, labor productivity and service quality. How can managers breach that trust? “Our findings suggest that restricting paid overtime and access to training potentially erode employee trust. In addition, we find that job or work reorganization experienced at either the employee or organization level is associated with lower employee trust,” Sarah Brown, Daniel Gray, Jolian McHardy and Karl Taylor write in the Journal of Economic Behavior and Organization.

Getting stuck on a team with less experienced colleagues isn’t necessarily that bad. “The measured human capital function is non-linear:  Workers catch-up to more knowledgeable coworkers, but are not dragged-down by less knowledgeable ones,” Kyle Herkenhoff, Jeremy Lise, Guido Menzio and Gordon Phillips write in a National Bureau of Economic Research working paper.

UP NEXT: WEDNESDAY

The Bank of Japan is due to release a policy decision.

Eurozone consumer prices for October are due out at 6 a.m. ET.

The ADP jobs report for October, out at 8:15 a.m. ET, is expected to show a net gain of 180,000 for private-sector payrolls.

The U.S. employment cost index for the third quarter, out at 8:30 a.m. ET, is expected to post a 0.8% increase, a pickup from the prior quarter’s 0.6% rise.

Read more: blogs.wsj.com

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