U.S. Consumer Spending Starts to Sputter; Labor Report to Give Fed Look at Whether Rate Increases Are Cooling Rapid Wage Growth By James Christie

Good day. U.S. consumers are starting to cut spending, a turnaround from the second half of 2020, when they lifted the economy out of a pandemic downturn, helping the U.S. avoid what many economists worried would be a prolonged slump. Moreover, the forces that helped keep spending high through last year are unwinding, while inflation remains elevated, and the rapid pace of interest-rate increases by the Fed has pushed the cost of all types of debt higher. Those costs are likely to rise more with Fed officials signaling they plan an additional quarter-percentage point increase to the central bank's benchmark rate this week. That would bring the rate to between 4.5% and 4.75%, from near zero at the start of last year. Data on worker pay and benefits will be released today and will shed light on whether the Fed is successfully cooling fast wage growth. Compensation growth is an important factor in the inflation puzzle because it represents a cost employers factor in when setting prices and reflects workers' ability to pay for more expensive goods and services. Fed Vice Chair Lael Brainard said in January that she hoped Tuesday's report would "show the deceleration from the third quarter continuing into the fourth quarter."

Now on to today's news and analysis.

Top News The U.S. Consumer Is Starting to Freak Out

The engine of the U.S. economy-consumer spending- is starting to sputter .

Retail purchases have fallen in three of the past four months. Spending on services, including rent, haircuts and the bulk of bills, was flat in December, after adjusting for inflation, the worst monthly reading in nearly a year. Sales of existing homes in the U.S. fell last year to their lowest level since 2014 as mortgage rates rose. The auto industry posted its worst sales year in more than a decade.

Labor Report to Give Fed Look at Wage Inflation

The Labor Department is set to release worker-pay and benefits data on Tuesday. While some measures of inflation have shown moderation in recent months, Fed officials are eager for more evidence that wage growth is cooling.

Pro Take: Construction Sector Strength Could Undermine Fed's Effort to Cool Inflation

By Bob Fernandez

The Federal Reserve has started to see some progress in its nearly yearlong campaign to cool inflation, but there is one area that could prove problematic: construction.

While the single-family housing market has slowed as mortgage rates have surged, particularly pinching first-time buyers, other segments of the construction industry are still fueling inflation. This suggests that the Fed may need to raise rates more than it now thinks will be necessary this year. Read More .

Key Developments Around the World Eurozone's Economy Outpaced China and U.S. in 2022

The eurozone economy grew faster than China and the U.S. last year, at an annualized rate of 0.5%, underlining how the fading Covid-19 pandemic continues to scramble traditional patterns of global growth.

EU Readies Plan to Compete With U.S. Green Subsidy Push

IMF Upgrades Outlook for Global Economy

Resilient demand, easing inflation and China's reopening should allow the global economy to grow a bit faster than previously expected, the IMF said. It sees global economic growth at 2.9% this year, up from its October projection of 2.7%.

Russia Boosts China Trade to Counter Western Sanctions

Trade between China and Russia boomed last year, providing a lifeline to Russia's beleaguered economy and showing the limits of Western sanctions, according to a new report by the Free Russia Foundation.

Zelensky Urges Faster Weapons Deliveries Amid Russian Push

China's Consumers Drive Rebound in Economic Activity

Economic activity in China shook off a monthslong slump in January following the lifting of Beijing's zero-Covid policy, a positive sign for a global economy that faces a litany of challenges this year.

China's Services, Manufacturing Activity Rebounded Sharply in January

French Workers Mount New Strike Against Macron's Pension Overhaul

French workers are taking to the streets for the second time in two weeks, piling more pressure on President Emmanuel Macron's plans to raise France's retirement age and threatening further walkouts.

Peru Protests Hit Mining Sector and Impede Exports

After nearly two months and dozens of deaths, antigovernment protests in Peru show little sign of easing , battering industries that once powered one of Latin America's fastest-growing economies.

Financial Regulation Roundup Bankman-Fried Sought Leniency From Foreign Regulators, U.S. Says

FTX founder Sam Bankman-Fried attempted to stall bankruptcy proceedings in the U.S. in November in order to transfer assets from his crypto exchange to foreign regulators, the Justice Department alleged in a filing Monday.

Investors Pay Price for Bet on Bitcoin Fund in Retirement Accounts

For years, individual investors used the Grayscale Bitcoin Trust to bet on bitcoin in their retirement accounts. Now they are paying the price. On Thursday, it traded at a 42% discount to bitcoin's price of around $23,000.

Celebrities Who Endorsed Crypto, NFTs Land in Legal Crosshairs

Celebrities are facing lawsuits from investors who suffered losses on virtual assets, as well as scrutiny by regulators for allegedly duping the investing public, prompting some agents to caution clients against financial endorsements.

Forward Guidance Tuesday (all times ET)

8:30 a.m.: U.S. employment cost index for fourth quarter; Canada GDP for November

9 a.m.: S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index for November

9:45 a.m.: Chicago Business Barometer - ISM Chicago Business Survey for January

10 a.m.: The Conference Board Consumer Confidence Index for U.S. for January

Wednesday

4 a.m.: Eurozone Manufacturing PMI for January

4:30 a.m.: S&P Global / CIPS UK Manufacturing PMI for January

5 a.m.: Euro area inflation flash estimate for January

8:15 a.m.: ADP National Employment Report for U.S. for January

10 a.m.: ISM Report on Business Manufacturing PMI for January

2 p.m.: Federal Reserve interest rate decision

2:30 p.m.: Fed's Powell post-FOMC press conference

Research Fed Sentiment Is at Peak Hawkishness

Torsten Slok at Apollo Global Management writes in a note that running Federal Reserve minutes through a natural-language processing model shows the central bank's sentiment is at peak hawkish levels last seen in 2000, 2006 and 2019. "With inflation trending lower and growth slowing, we should expect the Fed to turn more dovish after their meeting on Wednesday," Apollo Global Management's chief economist writes. "And a Fed pause is good for credit and equities because then markets know that we are at the end of the rate hiking cycle."

-Jonathan Vuocolo

U.S. Debt Ceiling Seen as Unlikely to Move Monetary Policy

Investors shouldn't expect the Federal Reserve to cut interest rates in reaction to a possible spike on Treasury yields due to the debt ceiling debate in Washington, S&P Global Market Intelligence executive director Ken Matheny said during a webinar. He sees the central bank more focused on inflation and labor conditions, with the debt ceiling becoming a factor only in case of a prolonged impasse that tightens financial conditions for a long time. Mr. Matheny expects the fed-funds rate to reach a peak of 5% in March, with cuts starting only in the spring of 2024, when the Fed would be convinced inflation is moving toward its 2% target and labor costs are tamed.

-Paulo Trevisani

Brazil's Central Bank Waiting to See Fiscal Details

Brazil's central bank is waiting to see the details of the new government's fiscal framework while deciding what to do next on interest rates, said Barclays economist Roberto Secemski. The central bank holds its monetary policy meetings this week and is expected to leave its benchmark rate, the Selic, unchanged at 13.75% on Wednesday. A recent constitutional amendment loosening spending rules for this year is already leading economists to raise their inflation estimates for 2023 and coming years, as is uncertainty about the fiscal plans for 2024 and 2025, Mr. Secemski said. Barclays expects a rate cut in September of this year at the earliest.

-Jeffrey T. Lewis

Commentary Three-Way U.S. Chip Alliance Should Spook Beijing

The Biden administration's bringing Japan and the Netherlands on board with its chip-sector export restrictions to China is a victory for U.S. diplomacy, but sustaining the strategy will require serious work, Jacky Wong writes.

Basis Points Manufacturing activity in Texas in January posted its ninth contraction in as many months, highlighting increasing demand headwinds for regional factories, the Federal Reserve Bank of Dallas said. Its index for general business activity of the Texas Manufacturing Outlook Survey rose to minus 8.4 in January from a revised minus 20.0 in December. (Dow Jones Newswires) Brazilian retail and services company managers' confidence in the economy slipped in January from December, according to the monthly surveys by the Getulio Vargas Foundation. Its services index fell 2.7 points to 89.5 and the retail index fell 4.4 points to 82.8. Figures below 100 indicate pessimism. Both surveys found concerns about demand amid high borrowing costs, rapid inflation and the outlook for slowing economic activity. (DJN) Kenya's central bank on Monday retained its key interest rate at 8.75% to tame inflation pressures. "The Committee noted that the impact of the further tightening of monetary policy in November 2022 to anchor inflationary pressures was still transmitting in the economy," the bank said in its monetary policy committee statement. (DJN) The French economy grew a marginal 0.1% in the fourth quarter of 2022 compared with the previous three-month period following a 0.2% expansion in the third quarter, according to preliminary data from the country's statistics office Insee.

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01-31-23 0721ET