ECB Lifts Key Rate; Markets Think Fed Is Bluffing; Fed Names New Manager for Asset Portfolio By James Christie

Good day. The European Central Bank on Thursday raised its key interest rate by 0.5 percentage point to 2.5% and signaled another half-point rate increase next month. At a news conference, President Christine Lagarde said the ECB would "stay the course" and stressed that its job was "not done," suggesting the bank will raise rates more aggressively than the Federal Reserve and Bank of England over the coming months. Meanwhile, jumps in stock and bond prices this year show investors think the Fed will not keep rates high for long, betting last year's rate increases will sharply slow the U.S. economy and lead policy makers to cut rates as joblessness climbs. Finally, the New York Fed named Roberto Perli, head of global policy research at investment bank Piper Sandler Cos., manager of the central bank's $8.47 trillion asset portfolio.

Now on to today's news and analysis.

Top News ECB Raises Interest Rate by Half Percentage Point

Europe's major central banks raised their key interest rates by 0.5 percentage point but diverged from the Federal Reserve and each other on their likely next moves, reflecting economic uncertainty amid uneven growth and inflation in the region and the rapid reopening of China's economy.

The European Central Bank on Thursday raised its key rate to 2.5%, its fifth large increase in a row, and signaled it would enact another half-point rate increase in March. That leaves the ECB some way behind the Fed, which raised rates to 4.5% to 4.75% on Wednesday, and the Bank of England, which increased rates by a half percentage point to 4% earlier Thursday.

Markets Bet the Fed Is Bluffing on Interest Rates

The market's big comeback in January shows investors don't believe the Fed will keep interest rates high for long. "The markets are calling their bluff," said Johan Grahn, head of exchange-traded funds at Allianz Investment Management.

New York Fed Names Economist to Top Markets Post

The Federal Reserve Bank of New York said Roberto Perli , an economist who previously served on the Fed's staff in Washington, would become the manager of the system's asset portfolio, a key staff position at the central bank.

U.S. Economy Jobs Report to Show Whether Labor Market Cooling Continued

January's employment report will offer clues about the state of the labor market and overall economy at the start of 2023. Economists surveyed by The Wall Street Journal estimated that employers added 187,000 jobs in January.

U.S. Jobless Claims Edged Down Last Week

U.S. applications for unemployment benefits declined slightly last week to their lowest level since April 2022, showing the labor market broadly remains tight even as several companies announce job cuts.

Bosses Are Back in Charge

Many executives say that they are no longer scrambling to retain workers, and are seizing on this moment to streamline operations or cut projects, shedding staff that until recently they couldn't afford to lose.

Social Security, Medicare Cuts Sidelined in Debt-Ceiling Talks

Republicans are backing away from proposals to cut spending on Social Security and Medicare as they enter talks with Democrats over raising the nation's borrowing limit, sidelining for now a fight over popular benefit programs .

The Market Tanked, but Americans Kept Piling Money Into 401(k)s

About 90% of investors in the 401(k)-style retirement plans administered by Vanguard Group maintained or increased their savings rate in 2022, even as the market declined and inflation soared.

Key Developments Around the World Europe Cuts Addiction to Russian Energy, Yet Fuel Scramble Goes On

On Sunday, the European Union and the U.K. will bar imports of Russian fuels such as diesel and gasoline, ending a decadeslong power imbalance and leaving the continent racing to squirrel away fuels and find alternative supplies.

Bitcoin Prices Rally as Larger Traders Take Charge

Larger investors appear to be powering a recovery in bitcoin prices, as the sway of smaller traders over crypto markets wanes. Based on end-of-day trading prices, bitcoin has rallied about 51% from a nadir hit in November.

Financial Regulation Roundup Global Minimum Tax Deal Advances

The U.S. prodded other major countries to agree to a coordinated global corporate tax increase. Now, international officials are moving ahead with tax increases while giving U.S. companies a temporary break from some tax hikes.

Tether Ownership and Company Weaknesses Revealed in Documents

Four men have controlled 86% of Tether Holdings, according to documents reviewed by The Wall Street Journal. The documents date back several years, but provide a clear picture of the people behind the biggest stablecoin .

Forward Guidance Friday (all times ET)

8:30 a.m.: U.S. employment report for January

10 a.m.: ISM Report on Business Services PMI for U.S. for January

2:30 p.m.: Fox Business interviews San Francisco Fed's Daly

Saturday

12:15 p.m.: St. Louis Fed's Bullard speaks at Academic Workshop in Computational & Experimental Economics in Vancouver

Research ECB Policy Conundrum Likely to Return After March

The European Central Bank raised interest rates by 50 basis points as expected and flagged another 50 basis point rise to come in March, "but beyond that, the policy conundrum is likely to return," Elliot Hentov, head of policy research at State Street Global Advisors says in a note. No more than another 100 basis points of interest rate rises in total remain possible before the monetary policy becomes seen as a constraint on the economic recovery, he says. "In addition, the ECB is also shrinking its balance sheet, which transmits disproportionately more to European credit conditions than in the U.S.," he says. "So policy will come to a standstill in the spring...but that is still far from anticipating a course reversal anytime soon."

-Emese Bartha

BOE's Tightening Cycle Appears Near End

The Bank of England's messaging suggests the central bank is laying the groundwork for the end of its current cycle of interest-rate increases, ING developed markets economist James Smith and senior rates strategist Antoine Bouvet say in a note. Lower inflation forecasts, muted language about future interest-rate increases and warnings about economic growth suggest the peak level of the deposit rate is close, they say. Still, Thursday's interest rate increase by the BOE isn't likely to be the last amid still-high wage growth, they add. "We think the BOE will be less rapid to turn to rate cuts than the Federal Reserve, given core inflation is likely to prove stickier," they say. "That suggests policy easing is unlikely for at least a year."

-Xavier Fontdegloria

Small Businesses in U.S. Still Facing Labor Shortage

Small-business owners in the U.S. continue to grapple with labor shortages, the National Federation of Independent Business says in its January jobs report. The NFIB says 57% of small-business owners reported trying to hire during the month, with 91% reporting they had few or no qualified applicants. On a seasonally adjusted basis, 45% of all owners reported job openings they couldn't fill in January, up four points from December, the NFIB says. Also, on a seasonally adjusted basis, 46% of owners reported raising compensation, which is four points below a 49-year average record set in January 2022. "The labor shortage continues to be a major concern for small businesses in the new year as nearly all owners trying to hire are reporting no or few qualified applicants," NFIB Chief Economist Bill Dunkelberg says.

-Stephen Nakrosis

Commentary The Best Investment Idea Is Also the Most Obvious

Investing is all about risk and reward, but at the moment it's mostly about risk and not much reward . Some risks aren't just badly rewarded, but are more expensive than holding the safest forms of money, James Mackintosh writes.

Basis Points Brian Deese, director of the White House's National Economic Council, plans to leave his post after two years at the end of February, the White House said Thursday. President Biden hasn't made a final decision on a replacement, but administration officials and others familiar with the matter have said Federal Reserve Vice Chair Lael Brainard is a top contender for the job. U.S. productivity rose at a 3% annual clip in the fourth quarter, the fastest pace for the year, the government said. Economists surveyed by The Wall Street Journal expected a 2.5% increase. For all of 2022, productivity declined at a 1.3% rate, the lowest annual rate since 1974. (MarketWatch) New orders for U.S. manufactured goods increased 1.8% on month in December, boosted by aircraft orders and rebounding from a revised 1.9% drop in November, the Commerce Department said. The rise broadly matches the 2% increase expected by economists in a poll by The Wall Street Journal. (DJN) Canadian building permits dropped 7.3% in December from November to a seasonally adjusted 10.29 billion Canadian dollars, the equivalent of $7.74 billion, Statistics Canada said. Market expectations were for a decline of 2.3%, according to economists at TD Securities. On a year-over-year basis, the overall value of permits issued in December fell 9.3%. (DJN) A private gauge of China's service-sector activity bounced back in January to expansionary territory, signaling a quick economic recovery following Beijing's removal of its stringent Covid-19 containment regime in December. The Caixin China Services purchasing managers index rose to 52.9 in January from 48.0 in December, said Caixin Media Co. and S&P Global. (DJN) Singapore's manufacturing activity improved slightly in January, mainly owing to a slower drop in new orders, new exports, factory output and inventory. The city-state's purchasing managers index rose to 49.8 in January from 49.7 in December, the Singapore Institute of Purchasing and Materials Management said. The reading was the fifth straight month of contraction. (DJN) French industrial production increased more than

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02-03-23 0715ET