After This Week, Major Central Banks to Take Different Paths; Investors Betting the Fed Can Avoid Hard Landing for U.S. Economy

After This Week, Major Central Banks to Take Different Paths; Investors Betting the Fed Can Avoid Hard Landing for U.S. Economy By James Christie

Good day. Investors expect that after this week the interest-rate paths of the Federal Reserve, the European Central Bank and the Bank of England are likely to diverge. Investors expect the Fed to increase rates by only 0.6 percentage point through December 2023, compared with 1.25 percentage points for the ECB and 1.5 points for the Bank of England, according to market data from Refinitiv. Meanwhile, Wall Street only a few months ago scoffed at the idea that the Fed would be able to pull off a soft landing for the U.S. economy. Now, mutual funds and hedge funds have been putting money into stocks that should eventually pay off if the U.S. can avoid a deep and prolonged downturn. Analysts and economists at a number of investment firms, including Goldman Sachs, BMO Wealth Management and Credit Suisse Group AG, are predicting the economy will be able to avoid a hard landing next year.

Now on to today's news and analysis.

Top News Interest-Rate Paths for U.S., Europe Set to Diverge

The Federal Reserve's aggressive campaign against high inflation dominated global financial markets this year. This week, the action shifts to Europe , where inflation could prove stickier and harder to tame. That shift is likely to reverse some of the key market dynamics of 2022, most significantly a superstrong dollar.

At monetary-policy meetings this week, the Federal Reserve's key rate is expected to rise by 0.5 percentage point, the European Central Bank's by 0.5 to 0.75 point, and the Bank of England's by 0.5 point.

Slowing Growth Edges Out Inflation as Top Concern Investors Grow More Confident Fed Will Pull Off a Soft Landing

Mutual funds and hedge funds managing roughly $4.8 trillion in assets have been putting money into stocks that stand to benefit from inflation cooling, interest rates going down and the U.S. economy avoiding a recession .

Fed Rate Increases Are Squeezing Consumer-Finance Companies

The financial squeeze that started about six months ago for companies that lend to ordinary Americans is getting worse . The main reason: These finance companies have lost access to easy money.

U.S. Economy U.S. Supplier Price Increases Moderated in November

The producer-price index rose 7.4% in November from a year earlier, down from October's revised 8.1% increase and well below the 11.7% rise in March, the fastest pace since PPI records began in 2010.

California Long Ruled U.S. Shipping. Importers Are Drifting East. WTO Rules Against U.S. Tariffs on Imported Steel, Aluminum

World Trade Organization dispute-settlement panels found the U.S. violated international trade rules with its tariffs on imported steel and aluminum, in a case that pit Washington against China as well as several friendly nations.

You're Hired! No Interview Required in Tight Labor Market

Some employers racing to snap up workers in the tight labor market are omitting a step once considered crucial to hiring: the job interview, as workers remain in high demand , particularly in blue-collar fields.

Hopes Fade for Year-End Tax Deal in Congress

With just a few weeks remaining before the new Congress starts Jan. 3, lawmakers are struggling to reach bipartisan agreement on a year-end tax deal, and businesses and antipoverty advocates both look unlikely to get what they want.

Congress Faces Deadline for Keeping Government Funded Key Developments Around the World China Props Up Belt-and-Road Borrowers Via Unusual Channel

Hungry for foreign currency to shore up their dwindling reserves, some troubled countries have turned to the People's Bank of China for swaps allowing overseas central banks to exchange domestic currencies for Chinese yuan.

Pakistan Curbs Imports, Struggles to Convince IMF of Economic Plans

Pakistan is restricting imports and trying to get an IMF bailout back on track, as its foreign-exchange reserves have dwindled to the lowest level in nearly four years, with only enough to cover about six weeks of imports.

Oil Market Takes Russian Price Cap in Stride

The harshest sanctions yet have hit Russia's energy industry, but the oil market's response was to shrug, an early win for U.S. officials who strove to water down European sanctions they feared would snarl up global crude trading.

How Washington Persuaded Europe to Put a Price Cap on Russian Oil Europe Cold Snap Tests Gas Reserves After Russian Supply Cut Ukraine Can Win the War. But the Cost May Be Too High for the West. Financial Regulation Roundup IRS Budget Fight Heats Up as Republicans Look to Curb Tax Agency

Internal Revenue Service funding has emerged as a point of tension in bipartisan negotiations over federal spending, as lawmakers seek a deal to keep the government funded for the full year ahead of a deadline this month.

U.K. Loosens Banking Regulation to Spur Financial Sector After Brexit

The British government said Friday it would ease regulatory rules on banks, insurers and investors to bolster London's status as a global financial hub after its allure was dented by Britain's departure from the European Union.

Binance Tries to Calm Investors, but Its Finances Remain a Mystery

Binance recently made a commitment to transparency, but it has a long way to go before it discloses enough meaningful information to give investors confidence in its future, accounting and financial specialists say.

Alarms Rose Over Possible Destabilization of Tether Forward Guidance Monday (all times ET)

3:40 p.m.: Bank of Canada's Macklem in fireside chat with Business Council of British Columbia

Tuesday

2 a.m.: U.K. unemployment for November

8:30 a.m.: U.S. consumer price index for November

Research U.S. Core CPI Expected to Show Another 0.3% Monthly Gain

November's U.S. consumer-price index will likely increase by 0.2%, slowing from its 0.4% month-over-month pace in October, according to Bank of America economists. As a result, the year-over-year CPI will likely fall from 7.7% to 7.3%. The CPI report will be released Tuesday, the day before the Federal Reserve's decision on interest rates. While the BofA economists expect headline inflation to slow from October, they are looking for core CPI to increase by 0.3% for a second consecutive month. They also expect the core services CPI to remain elevated at 0.5% month on month, driven by broad-based increases in shelter and services excluding shelter, such as health insurance and medical care services. BofA's economists also expect core goods inflation to decline by 0.2% month on month, following a 0.4% month on month decrease in October.

-Patrick Sheridan

Commentary Higher-for-Longer Rates Are Hammering Bank Stocks

Investors might wonder if markets aren't appreciating the potential for banks' earnings when rates rise. But the way things are set up, banks may have more to fear than cheer when it comes to rising rates, Telis Demos writes.

The yield curve is flashing a recession signal, but the still-high level of long-term Treasury yields suggests the bond market itself doesn't quite believe it. That might be a reason to buy Treasurys , writes Justin Lahart.

Basis Points Congressional leaders are set to return to Washington on Monday under pressure to negotiate a spending bill that would fund the federal government's operations beyond Friday. Consumer sentiment in the U.S. increased in early December as a decline in gas prices and recent rises in financial markets offset persistent worries over inflation and the outlook for the economy. The University of Michigan said Friday its preliminary consumer sentiment index rose to 59.1 from 56.8 in November, recovering most of the losses registered the previous month. (Dow Jones Newswires) Canada's industrial capacity utilization rate slipped during the July-to-September period, the first decline in a year, as a drop in the manufacturing industry more than countered gains in other sectors. Overall, industries in Canada operated at 82.6% of their production capacity in the third quarter, a 0.2-percentage-point decline from the previous quarter, Statistics Canada said. (DJN) Consumer prices in Brazil rose less than expected in November, partly because of the effect of discounts for Black Friday sales, Barclays economist Roberto Secemski wrote in a research note. Brazil recorded an inflation rate of 0.41% in November, down from 0.6% in October. (DJN) Brazilian President-Elect Luiz Inácio Lula da Silva named former São Paulo Mayor Fernando Haddad as finance minister in his incoming government, raising concerns in financial markets about the new administration's plans to boost spending on social programs just as the country's debt level is poised to rise. (DJN) Chinese banks issued more new loans in November, but the amount was below market expectations, as Beijing pledged to do more to shore up economic growth. New yuan loans stood at 1.21 trillion yuan ($173.9 billion) in November, up from CNY615.2 billion in October, the People's Bank of China said Monday. The result, however, was below the CNY1.4 trillion expected by economists surveyed by The Wall Street Journal. (DJN) The U.K. economy swung to expansion in October as services activity was boosted by an additional working day after September's bank holiday, but activity is set to take a downturn in the months ahead. The economy grew by 0.5% in October on month after contracting 0.6% in September, according to data from the Office for National Statistics released Monday. (DJN) Turkey's current-account deficit narrowed on month in October, data released by the Turkish central bank showed Monday. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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12-12-22 0715ET