Rebuilding confidence
The authorities in Beijing have so far resisted the kind of large-scale fiscal and monetary support that they relied on in the wake of the financial crisis. But with China’s economy stalling as the expected rebound from Covid falters, the government’s hand is being forced.
Last week, the latest in a series of small-scale interventions saw the focus shift to the stock market, which has been a notable underperformer since the spring. The reduction in a government share dealing levy is designed to encourage investment to get the Shanghai and Shenzhen markets back on track.
Shares in China rose on Monday and Tuesday (28-29 August, 2023) by more than 1% each day, and at one point on Monday stood more than 5% up on the day. But that has only taken the edge off a significant underperformance by the CSI 300 index since March. Over the past six months, Chinese shares have fallen by nearly 10% while the US market has risen by roughly the same margin.
The Chinese economy is dependent on a healthy property sector and growing consumer spending. On both fronts it is struggling today, with falling house prices and financial problems at the country’s biggest property developers hitting broader confidence.
That has fed through into commodity prices, which are driven in large part by Chinese demand. The oil price fell by a quarter from last October’s level of US$100 a barrel, although it has recovered a bit to today’s US$85 a barrel. Meanwhile copper, a key metal for many industries, including construction, has fallen from over US$11,000 a tonne in 2021 to just over US$8,000 a tonne today.
All eyes on Jackson Hole
In the absence of much real economic data in the US and Europe last week, attention was firmly focused on Friday’s speech by US Federal Reserve (Fed) chairman Jay Powell at the annual Jackson Hole economic symposium. As expected, he shone some useful light on the future direction of interest rates.
In a notably hawkish address, Powell said that inflation remained ‘too high’ despite real progress in bringing the pace of price rises down from a peak of 9.1% to just 3.2% in July. The Fed faces a dilemma because while it has engaged in one of the most aggressive rate-hiking cycles ever over the past 18 months, there is little evidence so far that higher borrowing costs have really affected the US economy. The jobs market, in particular, remains hot.
Powell said that he was prepared to raise rates further if the data suggest that is appropriate. Although the Fed is expected to pause at its next meeting in September, it is possible that rates have a bit further to go from their current level of between 5.25 and 5.5%. Bond yields responded to that hint by pushing higher to 5.07% for the rate-sensitive two-year bond and 4.25% for the more inflation and growth-focused 10-year bond.
What economic data there is this week focuses on US growth and inflation. By the end of this week we will have seen US GDP numbers, labour market data and the Fed’s preferred prices measure, the Personal Consumption Expenditures index.
