Financial News Review - Fed Interest Rates and Falling China
Today the IMF will publish its next six-month Global Outlook - The world needs innovation, not war. Although sometimes wars were precisely the cause of innovation.
Retail sales in the United States showed rapid growth. The economy remains strong.
Retail sales in the US increased by 0.7% m/m over the month. Economists had expected sales to increase by 0.4%. And data on retail sales in February was revised upward to 0.9% from the previous figure of 0.6%.
This was the second consecutive monthly increase in retail sales, suggesting that January's 1.1% decline was an aberration rather than a trend.
Fed and Rates
Markets are pricing August as the most likely date for policy easing to begin, with a 49 basis point cut expected this year.
On the other hand, the Federal Reserve will likely be in no rush to start an easing cycle after retail sales were stronger than expected in March, the latest evidence of the strength of the US economy.
Markets are currently forecasting fewer than two rate cuts this year, compared to six (yes, you read that right) rate cuts expected in early 2024. The starting point for the easing cycle is now September, moved up from June, which was moved up from March.
Fed officials' comments also caused traders to lower their expectations, with San Francisco Federal Reserve Bank President Mary Daly suggesting the Fed was in no hurry to cut rates.
“The worst thing you can do is act with urgency when there is no urgency,” Daly said.
New York Fed President John Williams said the Fed's rate cuts will likely begin this year,
adding that he expects the US economy to continue to expand despite the Fed's tight monetary policy.
UBS: Fed rate hike to 6.5% is a “real risk”
Fears of this move are primarily pushing bond prices down.
Investors don't trust China
Economic data from China for the 1st quarter was “indicatively” good.
China's GDP in the 1st quarter accelerated from growth by 5.2% to 5.3% y/y (analysts expected a slowdown in growth to 4.8%).
However, nominal GDP grew by only 4.2%, the same as in the 4th quarter of last year. That is, the acceleration of growth occurred due to deflation.
Industrial production:
• Increased by 6.1% y/y.
• Investment in industry grew by 9.9% y/y, and the value of exports (in yuan) increased by 10%.
• New energy vehicles and semiconductors saw rapid growth of 33.5% and 28.4%.
• China's steel production fell 7.8% year-on-year to 88.3 million tonnes.
• Cement production fell 22%, the biggest monthly decline on record.
• Furniture sales rose just 0.2% in March.
• In March, producer prices in the country fell by 2.8% y/y, indicating weak industry.
Investment in real estate extended the decline to 9.5%, while funds raised by developers fell by 26%.
Consumption remains weak:
• Retail sales grew by 4.7% y/y.
• The disposable income of urban residents increased by 5.3%, while for rural residents, wage growth was 7.7%.
It seems that the Chinese authorities are redirecting the economy from domestic consumption to the production of EVs (including for export) and semiconductors with aggressive fiscal incentives. Which clashes with the trade interests of the US and EU. Europe accounts for about a third of China's total electric vehicle exports.
The stock market reaction to the data is clearly negative. Real estate stocks fell 4%. And the broad market is down almost 2%.
Investors with their money vote better than the victorious reports of officials say. The Chinese economic elephant is staggering and, with its movements to pump up exports with the help of government subsidies, is trying to survive at the expense of trading partners.
