Bank of Canada Hits Pause Button; White House Considers Brainard for Chief of National Economic Council

Bank of Canada Hits Pause Button; White House Considers Brainard for Chief of National Economic Council By James Christie

Good day. The Bank of Canada raised interest rates on Wednesday by a quarter point, and said it would now pause its rate hikes to take stock of their effects, making it one of the first among major developed-world economies to do so. Canada's consumer-price index cooled from a peak of 8.1% in June to a 6.3% reading in December. In addition, the central bank's most recent quarterly survey of companies indicated business confidence fell to its lowest level in over two years, and about a third of Canadian firms expected sales to decline over the next 12 months. In the U.S., Federal Reserve Vice Chair Lael Brainard is on President Biden's list of candidates to head the National Economic Council, according to White House officials. Some of them think moving her to the White House is worth the risk of another high-profile Fed confirmation fight because a strong NEC chief will be needed heading into a critical year for the U.S. economy.

Now on to today's news and analysis.

Top News Bank of Canada Raises Rates, Declares Pause to Assess Impact

The Bank of Canada increased its target for the overnight rate to 4.50% from 4.25%, or the highest level in over 15 years, and said it would now pause to assess the economic impact of sharply higher borrowing costs.

More important, the central bank is one of the first among major developed-world economies to declare that it is done for now raising interest rates in the quest to bring inflation down from historically high levels. Central banks are trying to balance the risk between raising rates too aggressively and triggering a deep recession, and raising rates at too tepid a pace and allowing inflation expectations to remain elevated.

White House Looking at Fed Vice Chair for Top Economic Adviser

President Biden is considering Fed Vice Chair Lael Brainard to become the next head of the National Economic Council at a crucial period for the U.S. economy, amid recession concerns and as the president prepares to seek re-election.

U.S. Economy Fourth-Quarter GDP Report to Show Pace of U.S. Growth in Late 2022

The U.S. fourth-quarter gross domestic product report will offer a snapshot of the economy at the end of a year in which consumers and businesses faced the highest inflation in four decades and a fast rise in interest rates.

Hiring by Small Business Complicates Fed's Effort to Cool Economy

Investors are closely tracking the surge in small-business hiring because as long as the job market is strong, the Federal Reserve will have a hard time slowing the economy and curbing inflation, and will continue raising interest rates .

West Coast Port Labor Contract Talks Remain in Limbo

Long-stalled West Coast port labor talks are showing no signs of progress , according to people familiar with the negotiations, extending uncertainty for U.S. retailers who rely on the coast to import goods from Asia.

Banks Told to Watch for Russian Oligarchs Investing in U.S. Property

Banks should be on alert for wealthy Russians with ties to the Kremlin attempting to circumvent U.S. sanctions by investing in commercial real estate, a U.S. Treasury Department watchdog said.

Key Developments Around the World Germany Sees Economy Growing This Year Despite the Ukraine War

Europe's largest economy is likely to expand by 0.2% this year, the German Economy Ministry said Wednesday in its annual economic report, revising up an autumn forecast for a 0.4% contraction.

Gold Prices Rally to Start the Year

Gold is starting the year with gains after rising interest rates dragged them to a lukewarm 2022. Signs of cooling price increases and weakening growth are lifting investors' hopes of a respite from the Fed's aggressive rate increases.

Financial Regulation Roundup SEC Weighs Ban on Wall Street Activities Linked to Financial Crisis

The Securities and Exchange Commission voted 5-0 Wednesday to re-propose a long-delayed rule that would prohibit conflicts of interest by entities that create asset-backed securities, such as mortgage bonds.

National Sales-Tax Plan Gains Attention in House GOP

A decades-old proposal to replace federal income, estate and payroll taxes with a national sales tax has gained support and attention in the new House GOP majority, but House Speaker Kevin McCarthy said he doesn't favor the policy.

Libor Is Still Due to Die, but Companies May Use Extensions

The U.K. Financial Conduct Authority, the regulator in charge of overseeing Libor, is considering requiring the rate's publisher to issue a synthetic version of U.S. Libor that companies could use for 15 months.

Forward Guidance Thursday (all times ET)

8:30 a.m.: U.S. gross domestic product, advance estimate for fourth quarter; U.S. durable goods new orders for December; U.S. weekly jobless claims

10 a.m.: U.S. new-home sales for December

Friday

5:30 a.m.: ECB's Lagarde speaks at unveiling of memorial plaque on International Holocaust Remembrance Day

8:30 a.m.: U.S. PCE price index for December; U.S. personal income and spending for December

10 a.m.: U.S. pending-home sales for December; University of Michigan final consumer survey for January

Research Federal Reserve's Tightening Expected to End Below 5%

Interest rates in the U.S. are likely to "peak just below 5%, with cuts starting later this year," Paul Ashworth, chief North America economist at Capital Economics, writes in a report ahead of next week's Federal Reserve meeting. "We expect the Fed to downshift to a 25bp rate hike at the upcoming FOMC meeting, taking the fed funds rate to between 4.50% and 4.75%, but there could be one last hawkish sting in the tail," he writes. Mr. Ashworth also calls for "only one additional 25 bp rate hike in March," while expecting inflation to fall faster than anticipated. "The markets are no longer buying what the Fed is selling," he writes.

-Paulo Trevisani

Bank of Canada's Next Move Likely to Be a Cut

A cut in Canadian interest rates could come before the year is out, helping spur an economic rebound in 2024, Desjardins senior director of Canadian economics Randall Bartlett writes in a report. The quarter-point rise in the Bank of Canada's policy rate on Wednesday wasn't a surprise, Mr. Bartlett said, and he expects the central bank to remain on hold for the foreseeable future now that forward guidance is "back in vogue." He anticipates developments in the Canadian economy will be weaker than the BOC expects, suggesting the central bank's next move will be a cut as inflation falls through the year on the back of an anticipated recession starting in the first half.

-Robb Stewart

Markets, Central Banks Seen at Odds Over Monetary Policy Outlook

Markets and central banks are again at odds over the outlook for monetary policy, with markets pricing in interest-rate cuts in 2023, although the Federal Reserve's forecasts assume that rates will rise and stay high for longer, Eugen Keller and Sebastian Sachs, analysts at Metzler, say in a note. "The discrepancy appears to be due to the fact that many investors expect inflation in the U.S. to decline faster than the Fed currently forecasts," the analysts say. The lack of credibility of Fed forward guidance is reminiscent of 2021, when the Fed denied the risk of persistent inflation overshooting and adamantly fought the market's rate rise expectations, they say.

-Emese Bartha

Basis Points Canadian factory sales fell in December, led by a drop in shipments of petroleum, coal products and wood, and by primary metal industries. An early estimate of sales in the manufacturing sector indicates a decline of 1.8% for the final month of last year, Statistics Canada said. (Dow Jones Newswires) South Korea's gross domestic product shrank 0.4% in the fourth quarter of last year after a 0.3% expansion in the third quarter, marking the first quarter-on-quarter contraction since the second quarter of 2020, preliminary Bank of Korea data showed. (DJN) China's tourism sector has recovered to prepandemic levels with travelers venturing out during the Lunar New Year holidays after stringent Covid-19 restrictions were removed, industry data showed. (DJN) The Philippine economy grew 7.2% from a year earlier, following a 7.6% expansion in the July-September period, thanks to growth in the industry and services sectors, data from the Philippine Statistics Authority showed. It exceeded the median forecast of a 6.8% expansion expected in a poll of economists by The Wall Street Journal. (DJN) The number of unemployed people in France fell in the fourth quarter in a sign the country's labor market remained resilient despite slowing economic activity. A total of 2.834 million people were registered as job seekers in metropolitan France from October to December, down by 3.8% from the third quarter and by 9.4% from a year earlier, according to the Pole emploi agency. (DJN) Confidence among Belgian businesses was broadly steady in January as an uptick in sentiment among manufacturing and services firms was offset by declines in trade and construction. The business confidence index stood at minus 13.5, compared with minus 13.6 in December, data from the National Bank of Belgium showed. Sentiment remains subdued compared with levels recorded in spring 2022. (DJN) U.K. car manufacturing fell 9.8% in 2022, an industry body said, citing global chip shortages, supply-chain issues due to Covid-19 related lockdowns in China as well as the loss of two manufacturing sites. (DJN) Spain's unemployment rate increased slightly in the fourth quarter, in a sign job market gains could be petering out as the economy slows. The unemployment rate increased to 12.87% from October to December compared with 12.66% in the previous quarter, data from the country's statistics office INE showed. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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01-26-23 0719ET