Is Inflation Licked?; Fed Operating Losses Pile Up; Bank of Canada Holds Steady as Inflation Cools By James Christie

Good day. Confident that the Federal Reserve is now cruising to its goal of 2% inflation, investors have dialed up bets that the central bank will start cutting interest rates by spring to prevent a recession. Still, the Fed's preferred inflation gauge remains elevated at around 3%. And some investors are concerned it could be hard to get all the way back to 2%, leaving stocks and bonds vulnerable to a pullback. In today's Pro Take, Bob Fernandez looks at how the Fed is paying out more in interest than it is getting on securities it holds, while the central bank's portfolio shows a $1.3 trillion loss on paper. And the Bank of Canada kept its policy interest rate on hold and said it now believes neither the labor market nor the economy are overheated.

Now on to today's news and analysis.

Top News The Most Important Debate on Wall Street: Is Inflation Licked?

Most of Wall Street thinks inflation has been conquered. There is a lot at stake if they are wrong. Encouraging inflation data recently propelled a big rally across markets, with a traditional portfolio of stocks and bonds last month delivering one of its best returns of the past 30 years. Here is a deeper look at the arguments for and against inflation optimism.

Bank of Canada Keeps Rates Unchanged, Cites Cooling Inflation

The Bank of Canada left its policy interest rate unchanged at 5%, saying there is evidence that higher rates are working to slow price increases across the economy. Economists said the central bank toned down its language on forward-looking guidance, suggesting officials are slowly setting the stage for interest-rate cuts later in 2024.

Pro Take: Fed Operating Losses Are Piling Up Amid Higher Interest Rates By Bob Fernandez

The Federal Reserve has a problem: its own rate hikes.

Fed money managers bought trillions of dollars of Treasurys and mortgage-backed securities to stabilize financial markets during the pandemic and its aftermath, helping the U.S. economy but also exposing the central bank to potential losses if interest rates rose. And they did. Read more.

U.S. Economy New Jersey Struggles to Fill Jobs Even as Unemployment Rises

New Jersey's unemployment rate is rising faster than any other state's as more people are seeking work, but not enough are able and willing to fill the jobs available .

IRS Turns Down 20,000 Refund Claims for Covid Tax Credit

The IRS is rejecting more than 20,000 requests for pandemic-era tax refunds from employers that didn't exist or didn't have employees during the required period, as it cracks down on a program rife with problems .

A Hidden Risk in the Municipal Bond Market: Hackers

Local governments are spending big to mop up after hacks and prevent new ones. That means peril-and opportunity-for the investors who buy their bonds.

Key Developments Around the World How Is China's Economy Doing? Not Nearly as Well as China Says It Is

It's hard to remember now, but at the start of 2023, China's prospects couldn't have been brighter. Six months later, everybody was scrambling to understand why their predictions had gone awry .

Wall Street Puts a 'Sell' on Its China Holdings China's Exports Snap Half-Year Slide RBA Appoints Sarah Hunter as New Chief Economist

The critical task of shaping the Reserve Bank of Australia's economic forecasts will now fall to economist Sarah Hunter, who has been appointed the central bank's assistant governor as chief economist.

Australian Government's Strong Spending Blunting RBA Rate Hikes, S&P Says India Likely to Keep Policy Rate Unchanged, WSJ Poll Shows

India's central bank is likely to maintain its benchmark rate on Friday, analysts say, at a time when volatile food prices are posing a risk to recently softer inflation. All 10 analysts surveyed by The Wall Street Journal expect the Reserve Bank of India to stand pat on its policy repo rate at 6.5% at the conclusion of its monetary policy meeting, holding for a fifth consecutive meeting after last raising rates in February. (Dow Jones Newswires)

Europe's Gas Prices Could Fall Further Next Year

European natural-gas prices are expected to decline further next year amid lackluster demand and above-average inventories despite a cold start to the winter across the continent, according to some analysts.

Financial Regulation Roundup Bitcoin Mining Used More Water Than New York City Last Year

Bitcoin-mining operations use billions of gallons of water globally each year. Estimates vary, but the annual footprint is projected to surpass 591 billion gallons of water this year, according to an article in the journal Cell Reports Sustainability.

Texas Bank Overdraws Its Own Accounts After Messy Tech Update

Regulators are probing Comerica after a botched technology upgrade that led to widespread errors on transactions for trust clients left the Texas-based bank's wealth-management unit short millions of dollars.

Forward Guidance Thursday (all times ET)

8:30 a.m.: U.S. weekly jobless claims

10 a.m.: U.S. wholesale trade for October

12:50 p.m.: Bank of Canada's Gravelle speaks to Windsor-Essex Regional Chamber of Commerce

3 p.m.: U.S. consumer credit for October


4 a.m.: Bank of England/Ipsos Inflation Attitudes Survey for November

8:30 a.m.: U.S. jobs report for November

10 a.m.: University of Michigan consumer survey, preliminary for December

Research ECB to Cut Rates Earlier and Faster

The European Central Bank will cut interest rates by 150 basis points in 2024, Deutsche Bank economists now say. The German bank last week raised the volume of ECB cuts to 100 basis points from 75 basis points previously, but it says that was too timid given the latest inflation data and the tone of official commentary. A first cut is penciled in for April, with a 50 basis point cut in both that month and June, and even risk of a cut earlier, in March, the economists say. "Growth and inflation trends will continue to surprise the ECB to the downside and open the door to cuts," they add.

-Ed Frankl

Norges Bank Seen Staying on Hold Next Week

The Norges Bank will likely keep its policy rate unchanged at 4.25% at its meeting next week, though it is a close call, UBS economist Sonali Punhani writes in a note. Norway's central bank kept rates unchanged at its last meeting in November and said that if it becomes more assured that underlying inflation is on the decline, the policy rate may be kept on hold this month. UBS thinks weaker inflation, growth and wage expectations along with lower oil prices and other central banks keeping rates on hold will allow the Norges Bank to keep rates unchanged next week. "Having said that, a hold is a close call and the November inflation print out on 11 December could be key."

-Dominic Chopping

Basis Points U.S. businesses added 103,000 new jobs in November, paycheck company ADP said, in another sign of slower hiring and a softer U.S. labor market. Economists Polled by The Wall Street Journal had forecast a gain of 128,000 jobs. ( MarketWatch ) The productivity of American workers rose by a revised 5.2% annual rate in the third quarter, compared with a 4.7% rate first reported. ( MarketWatch ) The U.S. trade deficit rose 5% in October to a three-month high of $64.3 billion largely on a decline in exports of cars and Covid-related drugs. ( MarketWatch ) Canada's goods-trade surplus with the rest of the world widened in October to the largest since the middle of last year as exports ticked up and imports were in part dragged down by supply disruptions with U.S. auto strikes. The country posted a merchandise-trade surplus of 2.97 billion Canadian dollars, the equivalent of about $2.18 billion. (Dow Jones Newswires) Germany's industrial production fell unexpectedly in October, and for a fifth-straight month, a further sign of the deteriorating environment in the key manufacturing base of Europe's largest economy. China's foreign-exchange reserves rose more than expected in November as capital outflow pressure eased amid a strengthening yuan. The country's foreign-exchange reserves rose $70.58 billion from a month earlier to $3.172 trillion in November, according to data released by the People's Bank of China. (DJN) 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

12-07-23 0715ET