Time for Fed to Start Thinking About Rate Cuts, Daly Says; Hope for Rate Cuts Fuels Market Momentum; BOJ Sticks to Negative Rates for Now By James Christie

Good day. Federal Reserve Bank of San Francisco President Mary Daly said Monday that if inflation continues its steady decline of recent months, the Fed's benchmark interest rate "will still be quite restrictive even if we [cut rates] three times next year." But Daly also said it was too soon to speculate at which meetings the Fed might change its policy stance. Investors, meanwhile, are dialing up bets on rate cuts next year, pushing stocks higher. The S&P 500's weekly winning streak is its longest since 2017, underscoring the depth of investor optimism. Elsewhere, the Bank of Japan on Tuesday kept its policy targets unchanged amid expectations among analysts that the central bank is likely to end its negative-interest-rate policy in the first half of next year. But BOJ Gov. Kazuo Ueda refrained from giving any clues on the timing of policy normalization.

Now on to today's news and analysis.

Top News Daly Says Rate Cuts Could Be Needed to Prevent Overtightening

A Federal Reserve official said it is appropriate for the central bank to begin looking ahead to lowering interest rates in 2024 because of how inflation has improved this year.

San Francisco Fed President Mary Daly said her outlook for interest rates and inflation was "very close" to the median of projections from 19 Fed officials last week. Most of them penciled in at least three rate cuts next year amid a faster decline in inflation than they anticipated.

"We're acknowledging progress when progress is there," Daly said in an interview Monday .

Stocks Continue Rally on Hopes of Interest-Rate Cuts

Investors dreaming of interest-rate cuts continued to push stocks higher on Monday. Coming off its seventh straight week of gains, the S&P 500 rose 0.5%. The tech-heavy Nasdaq Composite advanced 0.6%, while the Dow Jones Industrial Average was effectively unchanged, rising roughly one point to just eke out its fourth straight record close.

Why Central Banks Should Keep Market Flooded With Money

The fact that central bank officials announce a target range or benchmark can obscure the reality that there are many ways of steering the rate at which financial firms lend to each other, Jon Sindreu writes.

U.S. Economy America Is Having a Confidence Recession Despite a Strong Economy

Stock prices are booming, the job market is strong and inflation is falling in the U.S. But consumer confidence remains historically low . The Wall Street Journal's Dion Rabouin explains why Americans might not be feeling all that confident.

The Office Market Had It Hard in 2023. Next Year Looks Worse.

Office building owners are losing hope that occupancy rates will rebound soon, so many more landlords will be compelled to pay off their mortgages, sell their properties at a steep discount or hand their offices over to creditors.

Nippon Steel to Acquire U.S. Steel for $14.1 Billion

A takeover of U.S. Steel would make Nippon Steel one of the top suppliers to the American auto industry, and give the Tokyo-based company access in the U.S. to specialized steel used in electric vehicles.

America Doesn't Have Enough Air-Traffic Controllers

Nearly every U.S. air-traffic facility needs more fully trained controllers to help orchestrate thousands of takeoffs and landings of commercial and private aircraft each day, Federal Aviation Administration data show.

Key Developments Around the World BOJ Chief, Bucking Expectations, Avoids Talk of Rate Increase

Bank of Japan Gov. Kazuo Ueda refrained from giving any hint of an imminent rate increase, saying that he wants to see more evidence showing the strength of wages and prices. The bank kept short-term interest rates unchanged.

Hungary's Orban Sets Sights on Overhauling the EU

Hungarian Prime Minister Viktor Orban, a nationalist-conservative firebrand and thorn in the side of the European Union, is now trying to upend its plans, using his veto in an effort to pry loose money and tilt EU policy.

U.S. Vows Naval Forces to Protect Ships Passing Through Suez Canal

The Pentagon said it was establishing a security operation to protect seaborne traffic from ballistic missiles and drone attacks launched by Houthi rebels. The effort will include the U.K., Bahrain, France, Norway and other countries.

U.S. Had 'Quiet Quitting.' In China, Young People Are 'Letting It Rot.'

Demoralized by a weak economy, unfulfilling jobs and a paternalistic state, young Chinese are looking for pathways out of the carefully scripted lives their elders want for them, putting themselves at odds with the country's priorities .

There's a Hot New Market in China: The Elderly Forward Guidance Tuesday (all times ET)

8:30 a.m: U.S. housing starts for November; Canada consumer-price index for November

9:30 a.m.: Richmond Fed's Barkin in interview on Yahoo Finance


2 a.m.: U.K. consumer-price and producer-price indexes for November

9 a.m.: ECB's Lane speaks at "The euro area outlook" event of the Economic and Social Research Institute

10 a.m.: EU FCCI flash consumer confidence indicator for December; U.S. existing home sales for November; The Conference Board Consumer Confidence Survey for December

10:30 a.m.: Dallas Fed Energy Survey

1:30 p.m.: Bank of Canada summary of monetary policy deliberations

Research Bank of Canada Rate Cuts Expected in Second Quarter

BMO Capital Markets anticipates the Bank of Canada will begin cutting interest rates in the second quarter of 2024 and will lower its policy rate by a full percentage point by this time next year, to 4%. BMO had previously said rate cuts would begin in the second half of 2024. Economists at BMO say its outlook is less aggressive than what traders have priced in, noting that, "Unless the economy completely falls out of bed, inflation will be the trigger for the first rate cut." BMO says rate cuts are set to begin once headline inflation reaches the mid-2% level-2.5% to 2.8%-which it expects to happen in the spring.

-Paul Vieira

Germany's Fiscal Impasse Weighed on Business Sentiment

Recent fiscal woes prompted by a constitutional court ruling are weighing on German business sentiment, as seen in the latest Ifo index reading, Carsten Brzeski, global head of macro research at ING, writes in a note. The index also ends the year at a significantly lower level than in December 2022, after a turbulent 12 months when the economy seems to have been in permanent crisis mode, Brzeski writes. "This is why some take comfort in the fact that the economy is 'only' stuck in stagnation and has avoided a more severe recession," he writes. But the impact of the European Central Bank's monetary policy tightening, the potential slowing of the U.S. economy, and new uncertainty stemming from recent fiscal issues could drag the economy further, he adds.

-Ed Frankl

Commentary Gaza Is Making Oil and Gas Markets Twitchier

The war in Ukraine made traffic on the Suez Canal busier. If conflict in Gaza bottles it up, energy cargoes will be forced to take an expensive, inflationary diversion , Carol Ryan writes.

How the Fintech Rally Could Fizzle in 2024

Fintechs bearing scar tissue from surviving a surge in interest rates will in many ways emerge as stronger companies, but making the case for hypergrowth may still be harder now than before, Telis Demos writes.

Basis Points Confidence among U.S. home builders rose in December for the first time in five months as mortgage rates fell roughly 50 basis points over the past month, lifting the National Association of Home Builders' confidence index 3 points from November to a reading of 37. (MarketWatch) New-house prices in Canada slipped again in November, with Statistics Canada's new-house price index down 0.2% from the month before after edging down 0.2% in October. (Dow Jones Newswires) Investment in Canada in building construction rose 2.7% in October to about C$19.4 billion, driven by a 3.9% increase on-month in the residential sector as most provinces saw gains, Statistics Canada said. (DJN) Australian consumer confidence continued to rise as the end of the year approaches, supported by ongoing gains in house prices and a sense that the Reserve Bank of Australia won't raise interest rates any further. Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

12-19-23 0715ET