Good day. The Federal Reserve today will likely announce a quarter-point interest rate increase, a step down from its half-point rise in December, followed by a press conference at which Fed Chair Jerome Powell will have an opportunity to explain his colleagues’ thinking about inflation and how many more increases are likely. That will come on the heels of the Labor Department reporting on Tuesday that employers in the U.S. spent 1% more on wages and benefits in the fourth quarter versus the prior three months, slowing from a 1.2% increase in the third quarter. 

Now on to today’s news and analysis.

Worker pay gains cooled at the end of last year, with the new sign of moderating inflation leaving Federal Reserve officials on course to slow interest-rate increases again Wednesday while intensifying the debate over when to stop raising rates in the months ahead.

Employers spent 1% more on wages and benefits last quarter versus the prior three months, a slowdown from a 1.2% increase in the third quarter, the Labor Department said Tuesday. Compensation gains slowed in the second half of 2022, after touching the highest readings since the series began in 2001.

There was enough nastiness in Australia’s recent fourth-quarter inflation report to lock in the prospect of several interest-rate increases over the coming months, with the data confirming that the country continues to lag well behind other major economies in the race to tame prices.

Not even this week’s news that retail sales fell 3.9% on month in December seems like it will be enough to dissuade the Reserve Bank of Australia from raising interest rates again at its first policy meeting of the year next Tuesday. There is also unlikely to be much, if any, softening of the RBA’s guidance next week. A 50-basis-point increase will likely be discussed, though a 25-basis-point rise is a far more likely outcome. Read more.

8:15 a.m.: ADP National Employment Report for U.S. for January
10 a.m.: ISM Report on Business Manufacturing PMI for January
2 p.m.: Federal Reserve interest rate decision
2:30 p.m.: Fed’s Powell post-FOMC press conference

7 a.m.: Bank of England interest rate decision
8:15 a.m.: European Central Bank interest rate decision
8:30 a.m.: U.S. weekly jobless claims; U.S. productivity and costs, preliminary for fourth quarter
8:45 a.m.: European Central Bank press conference

Anything but a 25 basis point interest rate rise at the U.S. Federal Reserve's meeting would be a major surprise, and the focus will be on the guidance about the terminal rate level, Piet Haines Christiansen, chief analyst at Danske Bank, says in a note. "We expect the communication to be on the hawkish side," he says. Markets are pricing in a total of 58 basis points of interest rate rises by June, while Danske analysts look for three consecutive 25bp interest rate increases which would take the Fed Funds rate to 5.00%-5.25% by May, the analyst says.

—Emese Bartha

The European Central Bank should raise interest rates by 50 basis points on Thursday but the outlook for its next few meetings is less predictable, Karsten Junius, chief economist at private bank J. Safra Sarasin, says in a note. Economic data since the ECB’s December meeting don’t give a clear picture as headline inflation is probably falling faster than expected but economic growth is likely to be better, leaving a risk of higher core inflation, he says. J. Safra Sarasin forecasts the ECB’s terminal deposit rate, or the peak in rates, at 3.5% in the second quarter. “We…hope the ECB will focus again on one meeting at a time instead of trying to guide markets in one or the other direction by indicating what it might do next,” Mr. Junius says.

—Emese Bartha

The Bank of Canada, which raised its target for the overnight rate to 4.5% last week, is unlikely to increase rates again this year, according to credit rating agency Fitch Ratings. “We now expect the BOC to keep the policy rate at 4.5% throughout 2023, given that the BOC forecasts headline inflation to fall to 2.6% this year and its preferred inflation measures appear to have peaked,” Fitch says. However, a tight labor market, which is keeping wage growth strong, makes it unlikely there will be policy rate cuts this year, Fitch adds.

—Stephen Nakrosis

• The Conference Board’s consumer confidence index slipped from 109 in December to 107.1 in January, reflecting growing worries about a potential recession as rising interest rates and high inflation degrade the U.S. economy. Economists polled by The Wall Street Journal forecast the index to rise to 109.5. (Dow Jones Newswires)
• Business activity in the Chicago area contracted in January for a fifth straight month, according to data from a survey compiled by MNI Indicators. The Chicago Business Barometer decreased from a revised 45.1 in December to 44.3, missing the 45.3 consensus forecast from economists polled by The Wall Street Journal. The index suggests activity contracted in January as it came in below 50. (DJN)
• Canada’s economy posted modest growth in November and estimates suggest the economy flattened in the final month of the year, pointing to fourth-quarter growth slightly ahead of the Bank of Canada’s forecast but in keeping with its view that growth cooled into the end of the year. Gross domestic product edged up 0.1% in November from October to 2.077 trillion Canadian dollars, the equivalent of $1.552 trillion, Statistics Canada said. (DJN)
• Mexico's economy grew for a fifth consecutive quarter at the end of 2022, but output expanded at its slowest pace in more than a year. Gross domestic product, a measure of output in goods and services, increased 0.4% in seasonally adjusted terms from the previous quarter, the National Statistics Institute said. (DJN)
• Eurozone inflation eased more than expected in January, reaching an eight-month low, but price pressures persisted beyond energy as the European Central Bank gets ready for further interest-rate increases. The eurozone's annual rate of inflation fell to 8.5% in January from 9.2% in December, according to preliminary data from the European Union's statistics agency Eurostat. (DJN)
• Italian inflation eased in January for a third consecutive month due to moderating energy and fresh food prices, but remained at double digits. The annual rate of inflation fell to 10.1% in January from 11.6% in December, according to preliminary data from the country's statistics agency Istat.  Economists polled by The Wall Street Journal had expected inflation to decline to 10.5%. (DJN)
• New passenger-car registrations in France rose 8.8% on year in January, the country's automobile trade body said in a statement. (DJN)
• A private gauge of China's manufacturing activity improved in January but remained in contractionary territory for the sixth straight month. The purchasing managers index rose to 49.2 in January from 49.0 in December, according to data released by Caixin Media Co. and S&P Global. Compared with the competing official gauge, the Caixin PMI, which tracks more small and private manufacturers in China, showed less of an improvement in activity last month. (DJN)
• Hong Kong's economy contracted 4.2% in real terms in the October to December period from a year earlier, according to advance estimates released by the government. That compared with a revised 4.6% contraction in the third quarter. The fourth-quarter drop was partly owing to stronger growth in government consumption expenditure and slower contraction in gross domestic fixed capital formation. (DJN)
• New Zealand’s jobless rate came in above expectations in the fourth quarter, with the seasonally adjusted unemployment rate at 3.4%, Stats NZ said. Economists had forecast a rate of 3.3%. (DJN)
• South Korea’s exports fell for a fourth straight month in January on sluggish global demand. Exports fell 16.6% from a year earlier to $46.27 billion, following a revised 9.6% drop in December, according to preliminary data released by the country’s trade ministry. That missed a median market forecast for a 13% decline in January. (DJN)
• India's economy is likely to grow 7.0% in the year ending March, the country's Finance Minister Nirmala Sitharaman said while presenting the annual budget for the next fiscal year. The finance minister said the budget will focus on seven priority areas including infrastructure development, promotion of green growth and the financial sector. (DJN)
• Tanzania's oil-product import costs rose 71% in 2022 compared with the prior year, mainly due to higher prices amid disruption in the global supply chain, the country's central bank said. (DJN)

This newsletter is compiled by James Christie in San Francisco.

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