Weekly Digest: Fed Eyes More Rate Hikes, China’s Economic Struggles


10 minutes read

Aug 18, 2023

Federal reserve building

19/08/2023: The Fed is considering more rate hikes due to inflation worries, gold sees a modest recovery, China's economic data falls short of expectations, Fitch Ratings warns of possible U.S. bank downgrades. And more.

💡Quote of the week

“China sneezes, but will the world catch a cold? The security blanket that Chinese expansion gave to the global economy for the past two decades is being pulled away.” - John Authers, senior editor for markets

Investment news

Fed chair Jerome Powell

🇺🇸 🏦 Fed eyes more rate hikes amid inflation worries. Federal Reserve officials are grappling with the possibility of additional rate hikes due to concerns over persistent inflation, according to recently released meeting minutes. The discussion surrounding the July session's quarter-point rate increase emphasized the need for vigilance in addressing rising prices, with most members acknowledging the potential need for further tightening. (CNBC)

While acknowledging the necessity of tackling the "unacceptably high" inflation, the minutes revealed a degree of uncertainty regarding the cumulative effects of prior monetary policy tightening. The meeting participants generally supported the rate increase, but some voiced reservations, suggesting the committee could withhold a hike to evaluate the repercussions of earlier increases on the economy.

A slight rebound. Gold saw a marginal recovery from its five-month lows as the dollar and bond yields pulled back, though it remained on track for a weekly decline. The precious metal edged up by 0.2% to reach $1,892.30 per ounce on Friday, having touched its lowest point since mid-March just the day before.

Meanwhile, spot silver rose 0.4% to $22.78. Platinum also edged up by 0.6%, reaching $894.72, and palladium gained 0.4%, reaching $1,221.48. However, both platinum and palladium are poised for weekly declines.

🇨🇳 China’s economic uncertainty. China's latest economic data release for July fell short of expectations, prompting concerns over inflation as key indicators underperformed. Notably absent was the unemployment figure for young people, a group that has experienced record-high joblessness in recent months. The statistics also shed light on challenges in the real estate sector and a shift in policy emphasis, as the nation strives to balance economic growth with potential risks. (CNBC)

While retail sales grew by 2.5%, falling short of the projected 4.5% increase, industrial production rose by 3.7%, lower than the anticipated 4.4% growth. Similarly, fixed asset investment, increasing by 3.4% in the first seven months of the year, fell below the Reuters poll forecast of 3.8%.

But it's the lack of youth unemployment data that truly stood out. The age group of 16 to 24 witnessed unemployment levels far exceeding the overall jobless rate, culminating in a staggering 21.3% in June.

📉 Outlook downturn. Nomura Holdings Inc. has revised its growth forecast for China, predicting a 4.6% expansion this year due to persistently lackluster economic performance and ongoing challenges. The bank's outlook, down from its previous estimate of 5.1%, reflects concerns over weaker-than-anticipated data in July and a sustained "downward spiral" in the nation's economy. (Bloomberg)

In a similar vein, other financial giants have also adjusted their outlooks for China's growth trajectory. Morgan Stanley recently revised its 2023 growth projection to 4.7%, while JPMorgan Chase & Co. lowered its forecast to 4.8%.

🌏 Global markets falter amid China worries. Markets around the world faced a wave of sell-offs due to heightened concerns about China's economic conditions and the surge in global interest rates. This downturn has affected various risk assets, spanning European equities, Asian stocks, and cryptocurrencies. (Bloomberg)

The benchmark Stoxx 600 declined by 0.4%, marking its third consecutive weekly decline—its most extended losing streak in nearly a year. Meanwhile, Asia's shares were also under pressure, with equity benchmarks in Japan, China, and South Korea all posting losses.

🇬🇧 UK inflation concerns deepen despite a drop in headline rate. The annual consumer price inflation rate receded to 6.8% in July, down from June's 7.9%, a decrease attributed to lower energy prices. (Reuters)

This drop aligns with the expectations of both the central bank and economists polled by Reuters. Nevertheless, core measures of inflation, which exclude energy and food prices, remained elevated, with core inflation maintaining a rate of 6.9%, unchanged from June.

🇷🇺 🏦 On collision course. Russia's central bank has taken urgent action to address the devaluation of the ruble and surging inflation, hiking interest rates by 350 basis points to 12%. The ruble experienced a sharp decline, nearing 102 to the dollar, prompting concerns about its value and inflation. (CNBC)

The Bank said its emergency rate hike on Tuesday was aimed at “limiting price stability risks” as “inflationary pressure is building up,” with current price growth over the last three months averaging 7.6% annually when adjusted for the season, and core inflation for the same period rising to 7.1%.

🤒Banking crisis. Fitch Ratings has warned about the potential for sweeping rating downgrades for dozens of U.S. banks, including major players like JPMorgan Chase. While Fitch had previously cut its assessment of the industry's health in June, this didn't trigger immediate downgrades. However, another downgrade of the industry's score, from A+ to A-, would prompt Fitch to reevaluate the ratings of over 70 US banks. (CNBC)

Such a move could lead to negative rating actions and impact banks' borrowing costs and contracts. The uncertainty surrounding interest rates and potential defaults are key factors influencing this decision.

📸 Image of the week

A meme mocking the Fed’s endless rate hikes


Yuanxuan Taoist Temple in Guangzhou, China
Yuanxuan Taoist Temple in Guangzhou, China

🤔 “As the second-largest economy in the world, the question remains: Can the rest of the globe expand if China is struggling?” The short answer is: in the long term, not so much. (Bloomberg Opinion)

“The alarm from officials in the west is growing deafening. US Treasury Secretary Janet Yellen said the slowdown was a ‘risk factor’ for the American economy, while President Joe Biden evoked a ‘ticking time bomb.’ … Bloomberg Economics suggests that fears are overstated, and that a cushioned decline in China’s growth would have only a “limited impact on the US economy,” John Authers writes.

What else is happening

US president Joe Biden, Japan's prime minister Fumio Kishida and South Korea's president Yoon Suk Yeol greet each other.
U.S. president Joe Biden, Japan's prime minister Fumio Kishida and South Korea's president Yoon Suk Yeol greet each other. Photograph: Brendan Smialowski/AFP/Getty Images

🤝 Historic U.S.- Japan - South Korea summit. Amid escalating regional tensions, President Joe Biden welcomes Japanese Prime Minister Fumio Kishida and South Korean President Yoon Suk Yeol to Camp David for a tri-lateral summit. It marks a transformative shift in relationships, particularly between South Korea and Japan, which have historically been marred by tensions stemming from Japan's past actions on the Korean peninsula. (Bloomberg)

The summit is emblematic of the growing alignment between the U.S., Japan, and South Korea in response to China's military assertiveness and economic strategies. Despite shared concerns, differences persist in how each ally is prepared to confront China. The summit is expected to yield agreements on bolstered communication, joint military exercises, and defense measures.

🇦🇷 Argentine primary election shakeup. In a surprising twist during Argentina's primary election, voters have delivered a resounding blow to the country's established political forces. A rock-singing libertarian economist, Javier Milei, emerged as the unexpected frontrunner with 30.5% of the vote, upending predictions and overtaking both the conservative opposition bloc and the ruling Peronist coalition. (Reuters)

As preliminary results from approximately 90% of the ballots were tallied, Milei's unexpected lead took center stage. The main conservative opposition bloc trailed with 28% of the vote, while the ruling Peronist coalition secured third place with 27%.

This seismic shift in the political landscape signals widespread dissatisfaction with soaring inflation and economic turmoil, as Milei's bold outsider platform resonates particularly with the youth.

🇿🇦 BRICS Summit. South Africa prepares to host a pivotal summit of the BRICS group of nations, spotlighting the quest to counter Western dominance while navigating internal divisions. This high-profile meeting will feature at least 40 heads of state and government, including Cyril Ramaphosa, Xi Jinping, Narendra Modi, and Luiz Inacio Lula da Silva. Vladimir Putin will attend virtually to avoid possible arrest for alleged war crimes if he entered the country. (Bloomberg)

With global financial changes in mind, the summit will talk about using the U.S. dollar less for international payments. Recent events like higher U.S. interest rates and geopolitical shifts have led to discussions about using national currencies for trade and setting up a shared payment system.

The New Development Bank (NDB) is becoming a key player in boosting economic collaboration among BRICS nations. With bilateral trade increasing by 56% in five years, the NDB aims to make transactions and lending easier in local currencies.

And finally…

Skull of Homo erectus
Skull of Homo erectus

🧊 A frozen chapter of our human history. Researchers have unearthed evidence of a massive North Atlantic cooling event that occurred around 1.1 million years ago, lasting about 4,000 years. This frigid era, akin to recent ice ages, proved fatal for the early human settlers in Europe, believed to be Homo erectus, who vanished due to food scarcity and extreme cold. (Reuters)

Anthropologist Chris Stringer, co-author of the study published in Science, stated, "There was probably a complete interruption in the early human occupation of Europe, possibly for a considerable time, with an entirely new population eventually coming back."

Although the exact toll of this regional extinction event remains uncertain, estimates suggest that the population of early humans in Europe during that time was relatively small, likely in the tens of thousands.


See you next week!


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