Investors Expect More Than Fed Might Deliver; Barkin Says Inflation Remains a Challenge

Investors Expect More Than Fed Might Deliver; Barkin Says Inflation Remains a Challenge By James Christie

Good day. Investors are looking forward to the Federal Reserve starting to cut interest rates in March, fueling a rally in stocks and bonds. After their policy meeting last week, Fed officials released projections of at least three rate cuts next year. Now, they are facing investors expecting even faster and deeper cuts. Richmond Fed President Thomas Barkin tried on Tuesday to tamp down expectations, saying officials remain concerned about price pressures. "We're not yet done with inflation," he said.

Now on to today's news and analysis.

Top News Powell's Pivot Sows Confusion Over When and How Fast Fed Will Cut

Federal Reserve Chair Jerome Powell is finally getting what he wanted: A meaningful decline in inflation. But that is creating a familiar headache by making it harder for Fed officials, who want to keep their options open, to dissuade investors that rate cuts are imminent.

After their policy meeting last week, Fed officials released projections of at least three rate cuts next year. They have since been flummoxed that investors expect even faster and deeper cuts. The result: Confusion over when and how quickly the Fed might cut as the central bank tries to bring inflation down without a painful recession.

Richmond Fed's Barkin Says It Is Too Early to Talk Rate Cuts

Federal Reserve Bank of Richmond President Thomas Barkin said Tuesday that the Fed is making "good progress" in slowing inflation, but he was unwilling to commit to a specific timetable for cutting interest rates. "I think you have to acknowledge that the data has come in pretty nicely, " Barkin said in a video interview with Yahoo Finance, referring to recent reports showing a softening economy and waning inflation. Yet Barkin stressed it was premature to begin plotting the Fed's first rate cut . He noted inflation was still running above the central bank's 2% target and has proven more stubborn than expected. "We're not yet done with inflation," he said. (MarketWatch)

Wall Street's Stock-Market Optimism Isn't Stopping

Growing optimism about the U.S. economy continued propelling the stock and bond markets Tuesday, pushing the Dow Jones Industrial Average to its fifth record in as many days . Investors fearful of missing out on late-year gains have piled into equities after the Federal Reserve last week suggested rate cuts will be on the table next year, helping to broaden the rally beyond this year's big winners in the tech sector.

U.S. Economy How the Housing Market Slowdown Is Rippling Through the Economy

Higher interest rates from the Federal Reserve caused the housing market to seize up this year, and that is now having spillover effects for hardware stores, furniture sellers and construction firms. Here in five charts is how the recent sluggish housing market has taken a toll on workers and businesses that rely on related spending.

U.S. housing starts climbed unexpectedly in November, driven by single-family construction, especially in the Northeast, as signs of slowing mortgage rates emerged. Housing starts jumped 14.8% in November to a seasonally adjusted annual rate of 1.56 million. Economists polled by The Wall Street Journal expected a 0.9% decrease on month to 1.36 million. Starts came in 9.3% above the same month a year earlier. (Dow Jones Newswires)

November Home Sales Likely Fell After Mortgage Rates Hit Two-Decade Highs

U.S. Population Growth Continues Slow Recovery From Pandemic

The U.S. population grew 0.5% this year as the pandemic's effects on births, deaths and immigration continued to fade. The new estimate shows the population at 334.9 million, up 1.6 million people in the past year.

Investor Appetite for Retail Real Estate Is Heating Up Again

Institutional buyers are snapping up grocery stores and other recession-resilient stores . Retail's strong performance in recent years has also increased the sector's appeal as remote work depresses demand for office buildings.

U.S. Closes Several Southwest Border Bridges to Limit Migrant Surge

U.S. immigration authorities have closed several bridges along the U.S. border with Mexico, an unusual measure to contain a surge in illegal migration that is overwhelming many border communities in Texas, Arizona and California.

Key Developments Around the World UK Inflation Fell by More Than Expected

The U.K.'s annual consumer-price inflation slowed to 3.9% in November from 4.6% in October, well below economists' consensus forecast of 4.4%, increasing speculation of earlier Bank of England interest-rate cuts.

Pound Weakens, U.K. Bonds and Stocks Gain After Inflation Slows China's Benchmark Lending Rates Held Steady

China's benchmark lending rates were kept unchanged as the market had expected, after the central bank held its key policy rates steady. The one-year loan prime rate was left at 3.45% and the five-year rate was held at 4.2%.

Red Sea Attacks Worry Shipping Firms, Even as U.S. Sends Warships

Attacks on merchant vessels by Houthi forces in Yemen have mostly taken place near the southern end of the Red Sea, a rising threat prompting many of the world's biggest shipping companies to find alternate routes .

That's Two for Two: The World's Other Big Canal Is in Trouble Rival China: Nippon Chief's Ambitions for U.S. Steel Deal

With its $14.1 billion acquisition of U.S. Steel, Nippon Steel will be at the top of global producers, " excluding China , in the free-competition world," Nippon President Eiji Hashimoto said Tuesday.

Congo Heads to Polls Amid World's Worst Hunger Crisis

Voters in the Democratic Republic of Congo-a vast nation that holds many of the minerals needed to build devices central to modern life-are casting their ballots Wednesday in an election clouded by war and a hunger crisis.

Financial Regulation Roundup Biden Vetoes Republican-Led Push to Jettison CFPB Rule

President Biden on Tuesday vetoed a GOP-led effort to overturn a Consumer Financial Protection Bureau rule that aims to collect more demographic details on the recipients of small-business loans. Republicans said the rule, finalized in March, is unduly intrusive and burdensome. It requires banks and other financial firms to collect and report more details on applicants for small-business loans, such as their race, ethnicity and gender. Supporters said it would help ensure small-business credit is equitably distributed.

Why UBS Wants to Be the No. 6 Investment Bank in the U.S.

More than a decade after throwing in the towel on its hopes of being a major player in the lucrative U.S. investment-banking market, Swiss financial giant UBS is making another, more measured push .

IRS Zaps Nearly $1 Billion in Penalties for Taxpayers

Americans who owe back taxes will be given an incentive to pay up after the Internal Revenue Service said it would waive nearly $1 billion in late-payment penalties. Roughly 4.6 million taxpayers will be eligible for the penalty relief.

Forward Guidance Wednesday (all times ET)

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

Thursday

8:30 a.m.: U.S. gross domestic product, third estimate for third quarter; U.S. weekly jobless claims; Philadelphia Fed Manufacturing Survey

11 a.m.: ECB's Lane in policy panel at Economics Winter Workshop of Central Bank of Ireland

Research Fed Expected to Resume Aggressive Tone on Inflation

The Federal Reserve may need to turn hawkish again soon, Torsten Slok, chief economist at Apollo, writes in a note. The Fed's dovish tone struck last week has fueled bets on deeper and faster interest rate cuts next year. Those bets, combined with declining volatility, tightening investment-grade spreads, and falling oil prices "will boost GDP growth by 1.5% over the coming quarters," Slok writes. He adds that the potential growth of the U.S. economy is estimated at 2%, "so a 1.5% boost to GDP is significant." That will boost demand and fuel inflation. As a result, Slok writes that "the pendulum will soon swing back from a dovish Fed to a more hawkish Fed."

-Paulo Trevisani

U.K. Inflation Dip Brings Forward Rate-Cut Expectations

Looking at Bank of England interest-rate expectations this morning, there's growing confidence cuts could begin as early as March, according to Danni Hewson, head of financial analysis at AJ Bell. Indeed, by this time next year the economic landscape could look very different, with more than one in 10 in the money markets betting rates could fall to below 4% by next December, she says in a note. Meaningful moves on core inflation and cooling inflation in the services sector, which had been something central bankers were watching nervously, suggest that stickiness is waning, she says. But there remains a long way to go to chip off the last 1.9% to reach the BOE's 2% target, and there could still be some impact from situation in the Red Sea to come, she adds.

-Edward Frankl

ECB Could Soon Look at Rate Cuts as Inflation Eases

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12-20-23 0716ET