Symax Fintech Daily Insights 28.08.23

Asian stocks look poised to follow US equities with modest gains after Jerome Powell said the Federal Reserve would “proceed carefully” on whether to raise interest rates again, while signaling policy will remain tighter for longer. Equity futures for Japan, Hong Kong and Australia all pointed to small gains of less than 1% following the S&P 500’s 0.7% advance Friday, when it capped its best week since July. While Treasuries were little changed during Powell’s long-awaited speech in Jackson Hole, yields pushed up after it concluded as the longer-for-higher rates message appeared to sink in. BB

The world’s top central bankers stressed the need to keep interest rates high until inflation is contained — and wrestled with deeper economic shifts that will make their jobs harder. At an annual Federal Reserve gathering in Jackson Hole, Wyoming, speeches from Fed Chair Jerome Powell and European Central Bank President Christine Lagarde laid out the challenges each is facing in deciding if they should extend historic strings of rate increases that began last year. But they offered investors few clues as to whether they would in fact do so in the coming months.  BB (I have been warning this would be the case all year.)

This week, Jerome Powell made no bones about the unwavering pursuit of his ultimate objective: 2%. The Federal Reserve chair reaffirmed yet again his singular focus on restoring price stability in the US. And if that means even higher interest rates to get back to that 2% target, then so be it. That was the takeaway on what Powell intended to convey with his eagerly anticipated remarks at the central bank’s annual conference in Jackson Hole, Wyoming. With US inflation much cooler than its pandemic highs, policymakers are signaling they may be close to declaring victory—even if rates must remain higher for longer just to make sure. In this new phase, risk-management is “critical,” Powell says. Still, record low unemployment, strong business investment and resilient American consumers continue to burnish the reputations of soft-landing prognosticators while singing those of Team Recession. BB

Germany’s most prominent leading indicator – which indicates firms’ projections for the next six months – has now dropped for the fourth consecutive month, coming in at 85.7 in August, from 87.3 in July, and is now back down at levels last seen in autumn last year.

The ongoing weakness in the Chinese economy, ongoing monetary policy tightening, and policy uncertainty regarding the energy transition and energy prices seem to be weighing on German company sentiment. The growing feeling that Germany is in for a longer period of subdued growth also seems to have reached German business. Both the current assessment and the expectations component fell. Expectations are now as low as at the end of last year, while the current assessment component is as low as in late 2020.  ING

China’s $18 trillion economy is decelerating. Consumers are downbeat, there’s a real estate crisis, exports are struggling, prices are falling and more than one in five young people are out of work. Many of those woes can be traced back to President Xi Jinping’s determination to shift away from the debt-fueled growth model of his predecessors. But if China’s economy is a “ticking time bomb,” as US President Biden called it, Xi’s aim is to defuse it.  BB

China’s economy was meant to drive a third of global economic growth this year, so its dramatic slowdown in recent months is sounding alarm bells across the world. Policymakers are bracing for a hit to their economies as China’s imports of everything from construction materials to electronics slide. Global investors have already pulled more than $10 billion from China’s stock markets. In response China has lowered the stamp duty on stock trades for the first time since 2008 and pledged to slow the pace of initial public offerings, among a slew of new measures to woo investors back to its flagging equities market. But it’s not all bad news. China’s slowdown will drag down global oil prices, and deflation means the prices of goods being shipped around the world are falling. BB

China’s latest revival plans. Beijing halved the stamp duty on stock trades and pledged to slow the pace of IPOs. The CSRC said restrictions will also be set on the frequency and size of refinancing for some firms, with property developers exempted from the rule. Meantime, Hong Kong plans a task force to boost liquidity. Chinese industrial profits weakened. BB

House hunters in the US are encountering the most-unaffordable market in almost four decades and, rubbing salt in the wound, mortgage rates have jumped to 7.23%, a 22-year high. That begs the question: Who is still buying? First-time purchasers desperate to own a home, according to a Zillow survey. The real estate company is trying to lure struggling homebuyers with a new program that offers mortgages with just 1% down. In the UK, there’s finally some slightly better news: record pay rises and the slide in property prices have caused the biggest improvement in housing affordability for more than a decade. BB

Former President Donald Trump recently offered an unsettling look at global commerce in the event he wins a second term, calling for setting a 10% basic tariff on foreign goods sold in the US.

His idea is to establish a “collar” around America that would protect domestic manufacturers. But the thing is, trade is increasingly made up not of goods, but services. And many of those are now digitally ordered and digitally consumed—think data storage in the cloud, movie streaming, or any kind of purchased smartphone app.

As Goldman Sachs Group Inc. economists put it in a note to clients this month, “digital trade is a new concept in international trade,” and one that those with old-school thinking about physical goods may not yet grasp. Countries that prioritize the free flow of data, and pursue agreements easing cross-border digital transactions, have the chance to jump ahead. Those with a protectionist or excessive national-security bent—cue Trump and China’s President Xi Jinping—may fall behind.

Among the nations that may benefit most from the rise of digital trade, according to those Goldman economists, are India and South Korea—key partners to the US in its rivalry with Beijing. Since Washington’s natural interest is to make digital trade a centerpiece of economic engagement in Asia, it would be logical for the US to join them—and gain a step on China in the process. BB

India has been quietly leading the way when it comes to digital trade. It long ago built a large IT outsourcing sector, thanks largely to a software industry that went largely unregulated in its early years. As a result, IT providers were able to expand without much government intervention, according to a study published by the Carnegie Endowment. Now, India’s IT industry and related sectors account for 13% of the nation’s GDP.

South Korea’s high level of digitalization offers it a competitive advantage as well. The country stands out as a non-financial center that nevertheless placed No. 8 in a global digital competitiveness ranking compiled by the International Institute for Management Development.

Digital trade tends to be less cyclical than trade in goods, offering a more stable source of growth, Goldman economists Goohoon Kwon, Irene Choi and Andrew Tilton wrote. Since 2010, exports of digital services have increased more than 100% as a share of GDP for Asia (excluding China), they calculated, reaching 4% by last year.

This sector could be an influential source of support for current accounts in India and South Korea. As India faces a high import bill for equipment to build out its manufacturing base, South Korea is seeing high-value added exports to China undermined by Beijing’s domestic replacement policy.

India in particular has benefited greatly from digital trade, with its surplus running at 4% of GDP last year, an amount sufficient to cover half of the country’s deficit in the trade of goods, according to Goldman. 

While cloud services wouldn’t appear to be a labor-intensive business, digital trade does provide the potential for employment gains, too. By making it easier to provide services across borders, digitalization allows small firms and even individuals opportunities that would be harder to come by in goods trade.

Jobs in “digitally-enabled trade” amount to almost 10% of total employment in South Korea, more than half of the figure for manufacturing payrolls, according to Goldman’s analysis. “Job and associated income effects could be broader and potentially larger than in international goods trade,” the team wrote.

So will the US follow its allies in Asia when it comes to digital trade, or will it stay on the sidelines with China?

Given the rapid growth of this area in Asian economies—economies that could otherwise align with Beijing—the Biden administration’s Indo-Pacific economic program offers a clear opportunity for US advantage.

Moreover, the reboot of NAFTA—the US-Mexico-Canada free-trade agreement that went into force in 2020—included a section on digital trade, which helps avoid onerous data storage and taxation requirements.

But first the Biden administration must be willing to expend political capital amid deep public skepticism when it comes to free trade. Not to mention a likely 2024 opponent who has already expressed his intent to throttle it. —Chris Anstey BB

Germany’s economic malaise worsened as business confidence took another hit in August, but there’s still optimism the country can dodge a major recession.

• A key Ifo sentiment gaugefell more than estimated after a separate report confirmed the economy stagnated in the three months through June, weighed down by trade.
• The data add to worries of protracted weakness in Europe’s largest economy after industry’s worst month in half a year in June. Germany’s the only G-7 economy forecast to shrink this year.
• But a deep recession isn’t on the cards as some expect, Ifo’s Klaus Wohlrabe said. Bundesbank President Joachim Nagel yesterday said he’s “pretty optimistic” about a soft landing and that Germany is definitely not the “sick man of Europe.” BB