By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) -The European Central Bank raised interest rates for the ninth consecutive time on Thursday, but raised the possibility of a pause in September as inflation pressures show tentative signs of easing and recession worries mount.

Fighting off a historic surge in prices, the ECB has now lifted borrowing costs by a combined 425 basis points since last July, worried that price growth could be perpetuated by both rising costs and wages in an exceptionally tight jobs market.

With Thursday's 25-basis-point move, the ECB's deposit rate stands at 3.75%, its highest level since 2000 - before euro notes and coins were even in circulation. The main refinancing rate was set at 4.25%.

ECB President Christine Lagarde ditched her practice of guiding markets for the next decision and said what would come next was in the balance, even if the central bank was determined to "break the back" of inflation.

She had responded to most of the questions at a press conference by saying all options remained on the table but sent the euro tumbling with a dovish flourish near the end.

"Do we have more ground to cover? At this point in time I wouldn't say so," Lagarde said, almost unprompted, while stressing that the ECB's decisions would depend on the data.

"There is the possibility of a hike (next time). There is the possibility of a pause. It's a decisive maybe." Lagarde said, adding that policymakers were "open-minded" and unified.

Ryan Djajasaputra at Investec said that Lagarde's tone hinted at a pause. "Our main takeaway from today's press conference was that it strengthened our existing view that this is the peak in rates".

Two sources with direct knowledge of the discussion also described a shift in the mood on the Governing Council, with more policymakers than before now worried about a softening of the economy after a year in which concerns about inflation dominated.

Some policymakers currently favour a pause in September, expecting the euro zone to be heading into a recession, while others would prefer to raise borrowing costs again.

An ECB spokesperson declined to comment.

The ECB's earlier policy statement said rates would be set at "sufficiently restrictive levels for as long as necessary," but dropped a reference to the rates having to be "brought" to a level that would cut inflation quickly enough to its 2% target.

Lagarde explained the tweak was "not random or irrelevant".

INFLATION, RECESSION?

The problem is that inflation is coming down slowly and could take until 2025 to fall back to 2%, as a price surge initially driven by energy has seeped into the broader economy via large mark-ups and is fuelling the cost of services.

While overall inflation has halved from October, underlying price growth is hovering near historic highs and may have even accelerated this month.

Lagarde said the risks of so-called "second-round" effects had not worsened since last month.

But record-low unemployment has raised fears that wages will jump as workers seek to recoup real incomes lost to inflation, which is why many investors and analysts had been expecting the ECB to hike again in September pending autumn wage data.

"Because we expect a significant decline in inflation and a recession in the second half of the year, we continue to not forecast a rate hike in September. On the other hand, we doubt the market's view that the ECB will cut rates as early as 2024," said Joerg Kraemer, chief economist at Commerzbank (ETR:CBKG).

The euro tumbled as Lagarde spoke and briefly dipped under $1.10, having risen 0.5% to touch $1.1149 beforehand.

Markets had fully priced in another rate hike just a few weeks ago, but few now see a move in September and markets only are pricing 17 basis points of hikes over the rest of the year.

"The bar for another hike in September is now dependent on upward surprises to inflation numbers, at a time when strong disinflationary forces are in play – so the default position is to keep rates constant for a sustained period," said Neil Mehta, portfolio manager at RBC BlueBay Asset Management.

More tightening would, however, be consistent with comments from policymakers including ECB board member Isabel Schnabel that raising rates too far would be less costly than not enough.

On Wednesday, the U.S. Federal Reserve raised borrowing costs and kept the door open to more rate hikes, though Fed Chair Jerome Powell gave few hints about the September meeting.

Indicators of business, investor and consumer sentiment and bank lending surveys point to a continued deterioration after the euro zone skirted a recession last winter.

And with manufacturing in a deep recession and the previously resilient services sector showing signs of softening despite what is likely to be a superb summer holiday season, it is hard to see where any rebound would come from.

Such weakness, exacerbated by a loss of purchasing power after inflation eroded real incomes, could push inflation down faster than some expect, leaving less work for the ECB.

"We know we are getting closer," Lagarde said, referring the end of the ECB's rate-hike run.

(Additional writing by Marc Jones in London; Editing by Catherine Evans and Paul Simao)

By Jorgelina do Rosario and Rodrigo Campos

LONDON/NEW YORK (Reuters) -Time is running out for Argentina to secure the next tranche of a $44 billion loan with the International Monetary Fund, which it could use to repay the fund older debt due in coming days.

With both sides saying an agreement on policy steps required to release $4 billion from the IMF loan was close, but not quite there yet, and no liquid currency reserves to tap, Buenos Aires may need to use a swap line with Beijing, again, to make a $3.4 billion payment.

THE REVIEW

Under the terms of the $44 billion program agreed in 2022, the funds are released in tranches based on regular reviews of steps Argentina takes to shore up its economy.

Argentina's efforts to shore up its reserves and reduce fiscal deficit are the focus of the current fifth review. The IMF welcomed steps Buenos Aires announced on Monday, which included import taxes and a new set of trade-related and weaker exchange rates to build up reserves in what Goldman Sachs (NYSE:GS) called an "implicit devaluation."

However, potential inflationary impact of such steps means Economy Minister Sergio Massa, who is the ruling coalition's candidate for October presidential elections, will be in no rush to implement any painful measures.

"The government has no appetite to do anything comprehensive in terms of having a full stabilization and adjustment program before the election because obviously that's politically very costly," said Gordian Kemen, head of emerging markets sovereign strategy (West) at Standard Chartered (OTC:SCBFF) Bank. "I think that's the reality that the IMF understands," said Kemen, who is overweight in Argentina's sovereign bonds.

"Our base case has always been they want to get them through the election."

CRUNCH TIME

To access the IMF funds, Argentina first needs to reach a staff level agreement with the Fund on the fifth review, which then has to get signed off by the IMF's executive board.

That is where it gets extremely tight.

Repayment of $2.6 billion is due on July 31 and almost $800 million due on Aug. 1 on a loan from 2018. It is not clear whether the executive board will be able to convene before the summer recess during the first half of August.

The IMF did not respond to a request for comment on the likelihood of a board meeting soon to discuss the Argentina program.

Board members normally have about two weeks to read the documents linked to any staff level agreement before they vote on a review or a new loan.

EMPTY COFFERS

Timing is critical for Argentina, which is almost out of options, given its central bank reserves have been draining for years under strict foreign exchange controls from the government. The dollar shortage got even worse this year because Argentina, a major grains exporter, was hit by the worst drought in six decades.

Gross reserves stand at $25 billion, but the cash-strapped economy's net reserves, discounting liabilities, are over $6 billion in the red.

Argentina made the last IMF payment due end-June partially with its holdings of IMF special-drawing rights (SDRs), but analysts calculated that this has wiped out the country's $1.65 billion in IMF reserve assets.

THE CHINESE OPTION

That leaves a yuan swap line with Beijing, which Latin America's third biggest economy could use to avoid going into arrears with the IMF.

Argentina used $1.1 billion in yuan from a recently extended and expanded swap line with China to complete the June payment to the IMF. According to Buenos Aires-based consultancy Empiria the country has so far used about $3.5 billion out of the nearly $10 billion of freely accessible swap, so will have more than enough to cover its upcoming payments.

FALLING INTO ARREARS

Missing payments would automatically put Argentina in default with the IMF because there is no grace period with the multilateral lender.

Any payment delays of up to 180 days are considered a short-term arrears, according to an IMF working paper. Those can be cleared by simply paying the amount due, but a delay could make financial markets nervous, putting Buenos Aires under more pressure.

By Jihoon Lee

SEOUL (Reuters) - South Korea's export decline likely accelerated in July amid persistently weak demand from China, a Reuters survey showed on Thursday, signalling a bumpy road towards recovery.

Outbound shipments were expected to extend their run of year-on-year losses to a 10th straight month with a 14.5% fall in July from the year before, according to the median estimate of 12 economists in the survey conducted during July 21-26.

That would be more than double the 6.0% loss in June, which was the slowest decline in eight months and had raised hopes for a turnaround in the months to follow.

Most economists cited a weak Chinese economy as the biggest factor weighing on South Korea's exports, along with a slowdown in other major economies, while some also attributed the faster decline to a high base the previous year.

"Exports are still remaining sluggish due to a weaker recovery in the Chinese economy," said Oh Chang-sob, economist at Hyundai Motor Securities.

"While China-bound exports continue to be weak, U.S.-bound shipments are also expected to fall this month," said economist Park Sang-hyun at HI Investment Securities.

In the first 20 days this month, South Korea exported goods worth 15.2% less than the year before, customs agency data showed. Shipments to China and the United States dropped 21.2% and 7.3%, respectively.

South Korea - a bellwether for global trade - is the first major exporting economy to report monthly trade figures, providing clues on the health of world demand.

The survey also showed imports in July likely dropped 24.6% from a year earlier, much faster than 11.7% in June and the worst since September 2009.

Altogether, the country's trade balance is expected to post a second straight monthly surplus. The median forecast was for a $3.11 billion surplus, wider than the $1.13 billion the previous month, when it snapped a 15-month streak of deficits.

South Korea is scheduled to report its full monthly trade figures for July on Tuesday, Aug. 1, at 9 a.m. (0000 GMT).

By Pete Schroeder

WASHINGTON (Reuters) - U.S. regulators are set to propose a rule that could significantly raise capital requirements for larger banks, forcing them to cut costs and retain earnings in an effort to cushion against potential losses that could harm customers and investors.

The proposal, to be unveiled later on Thursday and voted on by the Federal Deposit Insurance Corporation and the Federal Reserve, marks the first in an extensive effort to tighten bank oversight, particularly in the wake of spring turmoil that saw three large financial firms fail.

The rule, which would implement a 2017 agreement by global regulators, aims to overhaul how banks gauge their riskiness, and in turn how much money they must keep on hand.

Industry opponents have already begun to criticize the plan as banks seek to soften, delay, or otherwise derail the government's long-planned effort. They argue the increases are unjustified and economically harmful.

"The banking industry probably didn’t influence the upcoming proposal as much as it wanted. But it’s determined to fight on what it sees as major issues in the months between Thursday and whenever a final rule is approved," Ian Katz, managing director at Washington-based Capital Alpha Partners, said in a research note.

Top officials at banks like JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) have warned stricter rules could force them to pull back from services or increase fees. Analysts say it could take years of retained earnings to comply, pinching their ability to boost dividends or buy back shares.

In what is expected to be a lengthy and technical proposal, bank regulators want to strengthen how firms measure their risk on lending, trading and internal operations. The proposal would see U.S. regulators implement a previous global agreement via the Basel Committee on Banking Supervision.

Fed Vice Chair for Supervision Michael Barr, who is leading the effort, said he will also seek stricter rules for firms with more than $100 billion in assets, which could include banks such as Citizens Financial (NYSE:CFG) Group, Fifth Third, Huntington and Regions.

Barr, a Democrat picked by President Joe Biden, has argued banks need bigger reserves to guard against unforeseen risks -- such as when several banks faltered earlier this year under heavy unrealized losses as interest rates climbed, forcing government regulators to step in to protect depositors.

"Bank capital is critical," said Dennis Kelleher, president and CEO of Better Markets, which advocates for tougher financial rules. "However, maximizing Wall Street’s bonuses depends on minimizing capital and that’s why Wall Street fights to prevent regulators from requiring them to have enough capital."

By David Morgan and Katharine Jackson

WASHINGTON (Reuters) - The Republican-controlled U.S. House of Representatives began debating the first of 12 fiscal 2024 spending bills on Wednesday, as lawmakers edged toward a looming showdown with the Democratic-led Senate that could trigger a government shutdown this autumn.

The House voted 217-206, roughly along party lines, to adopt a measure that opened debate on a military construction and veterans affairs appropriations bill, amid signs that Republican leaders were near an agreement with hardline conservatives who have demanded cuts that would leave next year's overall spending at a fiscal 2022 level of $1.47 trillion.

Hardline conservatives, including members of the House Freedom Caucus, warned Republican leaders this week that they would not support appropriations bills without assurances on spending.

Freedom Caucus member Andy Ogles told Reuters that the two sides were trying to finalize such a deal.

"It's a work in progress. Nothing's finalized. But I'm cautiously optimistic," Ogles said without providing details.

"Part of that process is how do you get assurances that will actually achieve that number," the Republican added.

McCarthy's office was not immediately available for comment.

The House is expected to vote on passage of the military construction bill later this week and could turn as early as Thursday to a second appropriations bill, which would fund agriculture programs, rural development initiatives and the Food and Drug Administration.

The agriculture bill could face resistance from more moderate Republican lawmakers, including some who oppose its restrictions on abortion services.

Representative Don Bacon said the legislation could also lose support from the center if last-minute changes led to further cuts in spending. "If these guys keep pushing for more cuts, it may be in jeopardy," the Republican said.

House Speaker Kevin McCarthy and other Republican leaders hope this week's votes will give them the upper hand against the Democratic-led Senate. Each chamber is expected to pass its own spending legislation and then try to hammer out compromise bills that can be sent to Democratic President Joe Biden.

Lawmakers have until the current fiscal year expires on Sept. 30 to fund the government or risk a partial government shutdown.

But with hardliners pushing for lower spending, the House and Senate are at least $120 billion apart, with Senate appropriators aiming at the $1.59 trillion in fiscal 2024 discretionary spending agreed by McCarthy and Biden in June.

House Majority Leader Steve Scalise said negotiations between the two chambers could begin during the annual August recess in an effort to move them toward agreement in September.

Biden on Monday vowed to veto the House Republican spending bills if they make it to his desk, saying they backed away from the deal.

The military and veterans bill would provide $155.7 billion in discretionary spending for military construction and veterans affairs. The health and agriculture bill would provide $25.3 billion, but that includes about $7.5 billion moved from Democratic programs.

Democrats rejected the military construction bill, saying it would slash important programs and impose "a kitchen sink of culture wars" on the military and veterans.

"It would prohibit training that helps people from different backgrounds work together, that addresses the inequalities that still exist in our military. It would allow homophobia to run rampant," said Democratic Representative Teresa Leger Fernandez.

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank will raise interest rates for the ninth time in a row on Thursday and keep the door open to further moves as persistent inflation and growing evidence of an economic downturn pull policymakers in opposing directions.

Fighting off a historic surge in prices, the ECB has lifted borrowing costs by 4 percentage points since last July and essentially promised another quarter-point increase this month, making Thursday's decision the easiest all year.

But the central bank for the 20 countries that use the euro is likely to ditch its practice of signalling its next move, promising a "data-dependent" approach instead. That will leave investors guessing whether another rate hike is coming in September or if July marks the end of the ECB's fastest-ever tightening spree.

One thing is clear, however: the end of rate increases is fast approaching and the debate appears to be about just one more small move before rate hikes are halted for what some policymakers think will be a long time.

The ECB's problem is that inflation is coming down too slowly and could take until 2025 to fall back to 2%, as a price surge initially driven by energy has seeped into the broader economy via large mark-ups and is fuelling the cost of services.

While overall inflation is now just half its October peak, harder-to-break underlying price growth is hovering near historic highs and may have even accelerated this month.

The labour market is also exceptionally tight, with record-low unemployment raising the risk that wages will rise quickly in the years ahead as unions use their increased bargaining power to recoup real incomes lost to inflation.

That is why many investors and analysts are looking for the ECB to pull the trigger again in September and stop only if autumn wage data delivers relief.

"Some timely indicators as the Indeed Wage Tracker, which tracks listed wages on job postings, has shown some softening during 2023, but the labour market impulse to inflation still appears way too strong on most broad wage measures," Danske Bank economist Piet Haines Christiansen said.

More tightening would be consistent with comments from a host of policymakers, including ECB board member Isabel Schnabel, that raising rates too far would still be less costly than not doing enough.

Fuelling the ECB's bias for more hikes, the U.S. Federal Reserve also raised borrowing costs on Wednesday and kept the door open to further tightening, hinting that price pressures could still prove more stubborn than some expect.

"We see little room for an easing of the hawkish bias just yet," Societe Generale (OTC:SCGLY)'s Anatoli Annenkov said. "We still see mainly upside risks to inflation and expect a final 25 basis point hike in September before the focus shifts to the balance sheet at the end of the year."

RECESSION?

But rapidly fading economic prospects should temper any hawkishness and ECB President Christine Lagarde is likely to take a cautious tone after a string of data in recent days suggested that higher rates are already weighing on growth.

Indicators of business, investor and consumer sentiment and bank lending surveys point to a continued deterioration after the euro zone skirted a recession last winter.

And with manufacturing in a deep recession and a previously resilient services sector showing signs of softening despite what is likely to be a superb summer holiday season, it is hard to see where any rebound would come from.

Such weakness, exacerbated by a loss of purchasing power after inflation eroded real incomes, could push down price pressures faster than some expect, leaving less work for the central bank.

"A pause after July would likely require further falls in realised core inflation, downward revisions in staff inflation forecasts and more signs of monetary policy transmission in the real economy," Nordea's Jan von Gerich said, adding that his baseline is for July to be the ECB's last move.

By Nell Mackenzie and Carolina Mandl

LONDON/NEW YORK (Reuters) - Property markets knocked by high interest rates and the end of cheap financing have caught the eye of hedge funds.

U.S. and European commercial property markets face lingering office vacancies, diminished retail activity and higher refinancing costs, while investors are wary of highly indebted Chinese property.

Five hedge funds shared five trading ideas on global property markets, adding that they cannot reveal trading positions for regulatory reasons.

1/ VARADERO CAPITAL

* New-York based credit hedge fund

* Size: $2.8 billion

* Founded in 2009

* Key trade: buy commercial mortgage-backed securities issued 2012-2016

Jonathan Mizrachi, co-head of commercial real estate, believes there are bargains to be found in commercial mortgage backed securities (CMBS), or bonds which hold mortgages grouped together by their credit risk.

"Investors are generalizing CMBSs, everything is commercial mortgage backed and everything commercial mortgage backed is bad," he said, adding that some are trading at attractive prices.

Mizrachi mainly focuses on the mezzanine, or intermediate tranches of CMBSs, issued between 2012 and 2016. These now trade at a discount and contain fewer loans with lots of historical data, so are easier to analyze, he said.

2/ BALCHUG CAPITAL

* Size: $2 billion

* Founded: 2010

* Key trade: buy Russia commercial real estate

CEO of Armenian hedge fund Balchug Capital, David Amaryan, recently purchased one of Moscow's biggest malls, and is looking to buy more properties from investors leaving Russia.

Russia's invasion of Ukraine and the sanctions that followed meant many Western firms have left Russia-based operations.

Investors from countries such as Armenia are acceptable to both Russian and international authorities, said Amaryan.

"They are not getting what the assets were worth before the conflict but the discounted price is a reasonable one given that Balchug is taking the risk," he said.

3/ BEACH POINT CAPITAL MANAGEMENT

* U.S. based fund specialising in credit related investments

* Size: $14.8 billion

* Founded: 2009

* Key trade: shorting commercial real estate investment trust stocks

Ben Hunsaker, portfolio manager and head of structured credit at Beach Point Capital Management said a good shorting opportunity was to invest in sell options, or buy puts, on commercial mortgage real estate investment trust stocks (CM-REITs).

CM REITs are companies that own mortgages of multi-family residential homes as well as commercial real estate loans. The stocks of these companies, or REITs, trade without a discount. They are also packed with other kinds of debt, he added.

This debt might include collateralised loan obligations, reverse repurchase agreements and unsecured high yield corporate debt.

"Certain pockets of U.S. multi-family lending has parallels to subprime and CDOs back during the financial crisis," Hunsaker added.

Given the speed at which some of the underlying loans were issued at just after COVID-19, Hunsaker believes the values of these loans will soon fall, bringing down the prices of the publicly traded common stocks of the CM-REITs which contain them.

4/ Land & Buildings

* Activist hedge fund

* $500 million

* Founded 2008

* Key trade: short life and sciences real estate investment trusts

Jonathan Litt, founder and chief investment manager of Land & Buildings, suggests a short position on life and science real estate investment trusts (REITs) -- which own and invest in office and laboratory space to foster the research and developments of new drugs.

A short position is a bet that an asset's price will weaken.

Cell phone data Litt bought to research a REIT run by Alexandria Real Estate Equities, showed that buildings which that were supposed to be almost fully occupied were only half full.

Alexandria Real Estate responded pointing to public filings which said that it was the advancement of science and related intellectual property in Alexandria’s Labspace buildings, and not employee foot traffic that drove its demand for space.

But Litt believes that the shift away from office working will also hurt life and sciences real estate, generally.

"This is going to be a problem and people haven't seen it yet," said Litt.

5/ ANSON FUNDS

* Multi-strategy hedge fund

* Size: $1.6 billion

* Founded in 2003

* Key trade: long British homebuilder Vistry Group

Anson CIO Moez Kassam reckons Vistry shares are likely to rise further following a recent $1.4 bln acquisition of rival Countryside that could bolster its affordable housing business.

"Vistry leveraged its strong balance sheet to snap up a key competitor, capitalizing on depressed valuations and dislocation in the sector," he said.

Vistry last week flagged an intensifying housing slowdown, but retained its annual profit forecast citing resilient demand in its affordable homes business.

Its shares are up 28% this year and Kassam sees potential for further gains, with affordable housing companies tending to be more resilient than traditional homebuilders during downturns.

Vistry declined to comment on the hedge fund's views.

BANGKOK (Reuters) - Thailand's finance ministry has lowered its 2023 economic growth outlook to 3.5% from 3.6% projected earlier, as tourism gathers strength but tepid global demand crimps exports, officials said on Wednesday.

Exports, a key driver of the Thai economy, are forecast to contract 0.8% this year, compared with a previous forecast for a 0.5% drop, Pornchai Thiraveja, head of the ministry's fiscal policy office, told a briefing.

Southeast Asia's second-largest economy has been supported by increased domestic consumption and a recovery in the tourism sector, officials have said.

The economy expanded by a more-than-expected 2.7% in the first quarter from a year earlier. Last year's economic growth was 2.6%.

The ministry maintained a forecast of tourism arrivals of 29.5 million foreign tourist arrivals this year, Pornchai said.

Pre-pandemic 2019 saw a record of nearly 40 million foreign tourists, who spent 1.91 trillion baht ($55.43 billion). Tourism accounted for about 12% of gross domestic product (GDP).

The ministry predicted average headline inflation at 1.7%this year, compared with 2.6% projected earlier, and against a 24-year high of 6.08% last year.

It forecast the baht level of 34.01 baht per dollar this year.

($1 = 34.46 baht)

By Kevin Buckland

TOKYO (Reuters) - The dollar hovered close to a two-week high versus the euro on Wednesday, while the yen consolidated near the middle of its range this month as traders awaited crucial policy decisions from the nations' central banks this week. The Australian dollar slid after benign inflation data suggested the Reserve Bank of Australia would forgo a rate hike next week.

The U.S. dollar index - which measures the currency against six major peers, but is heavily weighted toward the euro - edged 0.06% higher to 101.37 in the Asian morning, after pushing as high as 101.65 overnight for the first time since July 11.

The euro slipped 0.16% to $1.1042, bringing it close to the previous session's low of $1.1036, a level last seen on July 12.

Continued signs of a resilient U.S. economy in the face of the Federal Open Market Committee's (FOMC) steep series of interest rate increases has helped buoy the dollar index from a 15-month trough of 99.549 reached a week ago.

In the latest data, U.S. consumer confidence increased to a two-year high in July amid a persistently tight labor market and receding inflation.

Money market traders see a quarter point hike from the U.S. Federal Reserve on Wednesday as a near certainty, but are split on the odds of another later in the year, putting it at more or less a coin toss.

Meanwhile, the European Central Bank sets policy on Thursday. Again, a quarter point hike is widely expected, but building evidence of an economic slowdown has called into question the chances of another by year end.

"Given the deceleration in underlying inflation, we think the risk is (Fed Chair Jerome) Powell cools on another hike by describing the FOMC as 'data dependent,'" which would pressure the dollar, said Joseph Capurso, a strategist at Commonwealth Bank of Australia (OTC:CMWAY).

"If the ECB retain their hawkish bias, by no means guaranteed but more likely than the FOMC, EUR is likely to track higher this week."

The Bank of Japan sets policy on Friday, and speculation for a hawkish tweak to the yield curve control (YCC), which had soared earlier in the month, has steadily receded over recent days.

The dollar added 0.12% to 141.15 yen on Wednesday, following a rebound from a multi-week low of 137.245 mid-month.

The Australian dollar slid 0.63% to $0.67505 after inflation slowed more than expected in the June, suggesting less pressure for another hike in interest rates for the central bank on Aug. 1.

That unwound most of the Aussie's 0.79% gain of the previous day, after Beijing announced stimulus, lifting the economic outlook for Australia's key trading partner.

"Just when it looked safe to get back in the water with Aussie longs on the China sentiment rebound, the downside surprise on inflation casts fresh doubt on the extent of further RBA tightening needed," said Sean Callow, a strategist at Westpac, predicting the currency would drop below $0.67 near term.

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer confidence increased to a two-year high in July amid a persistently tight labor market and receding inflation, bolstering the economy's prospects in the near term.

But the economy is not out of the woods, with the survey from the Conference Board on Tuesday offering mixed signals. Consumers remain fearful of a recession over the next year following hefty interest rate hikes from the Federal Reserve.

While more consumers planned to buy a motor vehicle or house in the next six months, fewer anticipated purchasing major household appliances like refrigerators and washing machines.

Consumers also continued to report that they intended to spend less on discretionary services, including travel, recreation and gambling. They, however, expected to increase spending on healthcare, as well as streaming services from home.

That supports economists' views that consumer spending was flattening out after rising at its fastest pace in two years in the first quarter. Still, the survey joined data on inflation, the housing market and retail sales in raising optimism that the economy could skirt a recession this year.

"We seem to be in an unusual eddy in this expansion, with consumer confidence up but consumer spending clearly leveled off," said Robert Frick, corporate economist with Navy Federal Credit Union in Vienna, Virginia. "Lower inflation is why confidence has surged, but Americans have become cautious, trimming spending and increasing savings."

The Conference Board's consumer confidence index increased to 117 this month, the highest reading since July 2021, from 110.1 in June. Economists polled by Reuters had expected the index to increase to 111.8.

The improvement in confidence was across all age groups, with the largest increase among consumers aged 35 and below. Confidence was higher among consumers with annual incomes below $50,000 as well as those making more than $100,000.

Consumers' perceptions of the likelihood of a recession over the next year rose, but stayed below the recent peak earlier in the year. About 70.6% of consumers this month said a recession was "somewhat" or "very likely," up from 69.9% in June.

The share expecting better business conditions over the next six months was the highest since January.

The survey was published as Fed officials started a two-day policy meeting. The U.S. central bank is expected to raise interest rates by 25 basis points on Wednesday after keeping borrowing costs steady in June. The Fed has raised its policy rate by 500 basis points since March 2022.

Stocks on Wall Street were trading higher. The dollar was little changed against a basket of currencies. U.S. Treasury prices fell.

TIGHT LABOR MARKET

"This likely reveals consumers' belief that labor market conditions will remain favorable," said Dana Peterson, the Conference Board's chief economist.

The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, widened to 37.2 this month from 32.8 in June, a sign labor market conditions remain tight despite job growth slowing. This measure correlates to the unemployment rate in the Labor Department's closely followed employment report.

Consumers' 12-month inflation expectations slipped to 5.7%, the lowest reading since November 2020, from 5.8% last month.

The improvement in inflation expectations was, however, not enough to convince more consumers to make big-ticket purchases over the next six months. And while more households planned to buy houses, they could run into affordability challenges.

House prices have resumed their upward trend because of tight supply after earlier slowdowns and outright declines in some regions as higher mortgage rates depressed demand. With the labor market still resilient, demand for housing is rising again. But many homeowners have mortgage loans with rates below 5%, reducing the incentive to put their houses on the market.

A separate report from the Federal Housing Finance Agency on Tuesday showed monthly house prices rising 0.7% in May after increasing by the same margin in April. Prices climbed 2.8% in the 12 months through May after advancing 3.1% in April.

"Low inventory and surprisingly resilient housing demand have kept home prices stable or rising in many markets," said Lisa Sturtevant, chief economist at Bright MLS in Alexandria, Virginia.

"But we are going to hit an affordability ceiling in many places which will happen just as more inventory begins to come on line later this year. As a result, it's possible that the 'bottoming out' of home prices is just the first half of a 'W-shaped' pattern in the market."