Five Things You Need to Know to Start Your Day
The narrow path to avoid a global recession, downshifting Fed rate hikes, lingering fallout from Brexit and a money-making machine. Here’s what people are talking about.
The Fed is on track to downshift to smaller interest-rate increases following a further cooling in US inflation, though it’s likely to keep hiking until price pressures show more definitive signs of slowing. Philadelphia Fed President Patrick Harker, speaking after the Labor Department’s release of consumer price data, said rate hikes of a quarter-percentage point “will be appropriate going forward,” following bigger increases throughout most of 2022. Harker’s comments echoed remarks a day earlier from Susan Collins, his counterpart at the Boston Fed.
Brexit Clash
The European Union and the UK are preparing to enter an intense phase of negotiations starting next week aimed at overcoming the dispute over the post-Brexit trading relationship well ahead of the anniversary of Northern Ireland’s peace agreement in April, according to people familiar with the matter. The aim is to move into a negotiating “tunnel” after UK foreign minister James Cleverly and European Commission Vice-President Maros Sefcovic take stock of talks on Jan. 16, said the people, who spoke on condition of anonymity to discuss private talks.
Money Machine
One of the most lucrative money-making machines in the world of finance is all clogged up, threatening a year of pain for Wall Street banks and private-equity barons as a decade-long deal boom goes bust. After driving a flurry of mega buyouts that contributed to a $1 trillion profit haul in the good times, some of the world’s largest banks have been forced to take big writedowns on debt-fueled mergers and acquisitions underwritten late in the cheap-money era. Elon Musk’s chaotic takeover of Twitter Inc. is proving especially painful, saddling a Morgan Stanley-led cohort with around $4 billion in estimated paper losses, according to industry experts and Bloomberg calculations.
European stocks are set to take a breather following a rally spurred by moderating US inflation. The first round of voting starts in the Czech Republic's presidential elections. Economic data include GDP from the UK and Germany, UK industrial production, as well as CPI for France and Spain. Bank earnings kick off in the US with JPMorgan, Bank of America, Citigroup and Wells Fargo set to report.
Understandably, all the focus Thursday was on the US inflation prints. However, with that data mostly in-line with expectations, perhaps more attention should have been given to the simultaneous release of the weekly claims data. Historically, this has been the best real-time indicator for the labor market. In the 40 years pre-pandemic, initial claims were well above 300k and rising for the start of recessions in that period, despite the US having a smaller population. The pandemic is the unique exception which proves the rule, as the hit to the economy was so sudden that claims had not pre-empted the damage. However, in that incident, they were above 6,000k by April, an increase of around 30-fold in just two months. That's not a typo -- it was so dramatic that it ruins a long-term chart, so I've capped my Y-axis below at around one-eighth of that peak. We've not had a print above 270k for more than a year, with Thursday's reading coming in at 205k versus 215k forecast. This suggests a labor market which remains far too hot for the Fed to relax in its inflation fight.
