Symax Fintech Daily Insights 01.09.23

US jobs data due today may add a chapter to the soft-landing narrative, as Yellow’s bankruptcy and the Hollywood writers’ strike created a drag on hiring. But Bloomberg Economics said those factors may have been blunted by a surge in demand for leisure and hospitality workers, driven partly by Taylor Swift’s concert tour. Unemployment may stay at 3.5%. BB

Bond investors remain braced for the possibility of more short-term pain even after key US data out Thursday showed cooler inflation. For one thing, the PCE measures also revealed a revival in consumer spending. That raises hopes for a soft landing, something that would hurt those who have piled in to longer-dated Treasuries on expectations of a recession. It is also likely to make the Federal Reserve more willing to lean toward further increases in interest rates to ensure that inflation comes down in a sustainable fashion. BB

The Fed’s preferred underlying inflation gauge posted the smallest back-to-back gain since late 2020, reinforcing expectations a recession can be avoided as tightening winds down. Core PCE rose 0.2% in July, as did the headline number. Inflation-adjusted consumer spending also climbed. Today’s US jobs data may add a chapter to the soft-landing narrative. BB

The ECB should hike again this month because inflation has been more persistent than anticipated, Robert Holzmann told China Global TV Network. He added that expectations of rate cuts next year would be optimistic, though he hopes to see reductions in 2025 at the latest. Luis de Guindos said inflation forecasts haven’t changed much over the summer and officials haven’t decided whether to pause in the coming meeting. BB

The Caixin manufacturing PMI unexpectedly rose to 51 in August, moving back into expansionary territory and marking the highest reading since February. That comes a day after the official manufacturing measure showed the contraction in activity easing as new orders and production improved. BB

China announced it would allow its largest cities to cut down payments for homebuyers and encouraged lenders to lower rates on existing mortgages in its latest attempt to halt a slide in the country’s residential property market. The nationwide minimum down payment will be uniformly set at 20% for first-time buyers and 30% for second-time purchasers. Mortgage-rate cuts will be negotiated between banks and customers. Both policies go into effect Sept. 25. Beijing is betting that lower mortgage rates and down payments will revive demand for homes. But not everyone is convinced enough is being done to revive the flagging economy. BB

Gold is typically one of the best performing assets in recessions. Its recent resilience in the face of rising real rates is another sign – along with deteriorating economic data – that recession risks are rising.

I’m always a bit skeptical of certain markets having a supposed sixth sense about what the future holds. Gold is often believed to have such clairvoyance when it comes to rising inflation or impending market dislocations. While no man, woman or metal has a crystal ball, it would nonetheless be remiss to dismiss out of hand what gold may be saying, especially if it is consistent with other data points.

Gold has had plenty of excuses to weaken in recent weeks as US real yields rose to global financial crisis highs, but instead it has been one of the strongest performing commodities over the last six months (silver even more so) and has also been rising over the last few weeks.

Looking at previous recessions, gold typically performs the best out of the major asset classes (stocks, bonds, corporate debt and commodities). BB

At 7.8% YoY, India’s GDP print for 2Q23 was precisely in line with the consensus expectation but nonetheless, singles out India as one of the few economies in the region where growth is actually firming, not declining. Total calendar-year growth of 7% or close is within reach.

The consensus forecast seems to have correctly decided to trust in some of the NowCasts circulating, which also pointed to a 7.8% growth rate. But although the number was correctly anticipated, this doesn’t reduce just what a good figure this is. 

Across the region, the combination of China’s faltering economy, along with the lingering impacts of the semiconductor downcycle, is keeping growth subdued, and in some cases, actually weakening. Not so in India, where growth remains very firm. Part of that is clearly due to the very limited direct exposure to trade with China – the legacy of decades of political tensions. India is also not as exposed to the semiconductor industry as some other economies in the region, though this is slowly changing as supply chains are shifted around the region. At least for now, that has provided some insulation for India against some of the headwinds being faced by other Asian economies. 

Despite what was a fairly generous Union Budget this year, with only a modest reduction in the deficit target to 5.9% of GDP in fiscal 2023/24 from 6.4% in fiscal 2022/23, government spending is doing none of the direct heavy lifting at the moment. That said, behind the scenes, government capex and infrastructure development is almost certainly helping to draw in private investment growth. Capital investment contributed 2.8 percentage points of the 7.8% GDP growth total – another solid contribution after the 3.1pp contribution in 1Q23. 

The other big contributor remained consumer spending. This too has been consistently strong, but has more than doubled its contribution this quarter to 3.5pp, up from 1.6pp in 1Q23. 

The only blot on the ledger was from net exports, which were a substantial drag on growth this quarter, though this has not shown up in terms of a large inventory build, which often happens, so that doesn’t necessarily imply any ominous unwinding of stock build-ups in the coming quarters. There was, however, also a fairly chunky swing in the “discrepancies” part of GDP, which is a residual term to account for GDP not picked up in the other main areas. This may well end up being reclassified into stocks at some point, so we aren’t ruling out a future stock correction just yet.      ING

The Biden administration asked Congress for a short-term funding package to avoid an Oct. 1 government shutdown. GOP hard-liners oppose any funding unless their demands for spending cuts and border policy changes are met, which could put Kevin McCarthy’s job at risk if he works with Democrats to pass a stopgap measure. BB

China

Today, I’ll tell you all you need to know about the slowdown in the world’s second-biggest economy.

If I had to use one word to describe the current situation, it would be fragile. The economic data we’ve gotten over the past few months have largely painted a gloomy picture. Chinese households are spending less than expected and saving more instead. Businesses are borrowing and investing at a reduced pace. And while the overall jobs situation has been stable, unemployment among the country’s youth has jumped so much that Beijing decided to stop releasing the data.

As downbeat as all that is, it is important to note the economy is not crashing. Economists are still expecting Chinese gross domestic product to grow 5.1% this year, 4.5% next year and 4.6% in 2025. By comparison, the US is forecast to grow 2% this year, 0.9% next year and 1.9% in 2025.

Let’s take the longer view. In the first 19 years of this century — up to right before the pandemic hit — the American economy grew on average about 2% each year. That means expected growth for the US is still where it’s been for the past two decades. 

China’s trajectory tells a different story. The economy expanded on average 9% a year from 2000 to 2019. Now China’s growth seems to be slowing to about half that pace. With a medley of challenges on the horizon ranging from enormous levels of debt to a rapidly aging population, that rate could drop off even more. 

A major slowdown in China raises a lot of questions for the global economy and would have consequences for everyone who benefits from Chinese consumer and manufacturing demand. Will Boeing need to make so many jets? Should French wineries plant so many acres? Do Australian miners need that much equipment?

There are also going to be implications on the geopolitical front. An economy that grows more slowly also produces more modest increases in tax revenue. That means President Xi Jinping’s government may have some tough choices when it comes to subsidizing technological development, spreading largesse around the developing world and buying weapons that shift the balance of power in the Pacific.

Things could change. Beijing could have the perfect policy response for the problems that ail China’s economy and stabilize growth at a relatively robust pace. Or the government could end up making some ill-advised decisions that make things worse.

To get the best sense of where China’s economy is headed, and what it might mean for the rest of the world, here are the five things you should be paying attention to and the stories that will help you understand them.

The biggest drag on China’s economy right now is the country’s depressed real estate market. Home prices are falling, developers are defaulting and people are angry. Beijing has been trying to steady the sector by cutting interest rates and making sure builders can get access to financing, but nothing has been able to turn the tide just yet.

Financial markets have been hoping Xi will pull out the policy “bazooka” to combat the slowdown. What they’ve gotten instead is a steady stream of incremental measures that have largely disappointed. That reticence may reflect a confidence among policymakers that the economy is strong enough to persist through the current headwinds. It might also betray a worry that today’s cure will sow the start of tomorrow’s disease.

In the aftermath of the Lehman Brothers collapse in 2008, China opened the stimulus floodgates to keep its economy afloat. It worked. Not only did China make it through the financial crisis relatively unscathed, it also became the main engine for global growth. But it came at a cost: Local governments that began borrowing during the crisis to build infrastructure kept doing so until they’d racked up some $9 trillion of off-balance-sheet debt. As slower economic growth and a miserable property market sap tax revenues now, it’s not clear how that money will be paid back.

• That $9 trillion debt problem is getting worse, insiders say
• Xi doesn’t have an easy fix to these multiplyingeconomic problems
• The big local debt messis about to get even messier 
• Another debt risk warning? China’s $400 billion pension

Every March in Beijing, China’s premier stands in front of the National People’s Congress and gives the government an annual target for economic growth. It’s as public a benchmark of official performance as you get in the country. The only time they missed the target by a substantial margin was last year, when Covid lockdowns dragged on growth. If we see a slip this year below the expansion target of about about 5%, there will be a lot of motivation for policymakers to do more.

• Economists are trimmingtheir forecasts and expecting more support
• Some good news: The factory slump may be bottoming out
• But there are other problems, like deflation:
• Is China in a “balance sheet recession” or not?
• The reluctance on stimulus will cap growththis year 

There is wide range of opinion on whether China’s economic ascendance has been positive or negative for the world. But just about everyone would agree that the world has been indelibly changed as a result. China is now a cornerstone of the global economy and one so big that its wobbles elicit concern in capitals around the globe.

• US President Joe Biden called China a “ticking time bomb”
• Apple’s iPhone supply chainsare splintering 
• The US, though, can still groweven with a China drag 
• But Brazil bet bigon China and that could be costly BB