Morning Bid US retail therapy amid worsening China economy

Morning Bid US retail therapy amid worsening China economy

A Look at the Day Ahead in U.S. and Global Markets

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As the world’s attention turns to the state of the U.S. consumer, China’s economy, markets, and currency seem to be sinking deeper into a funk. This has led to ripples across emerging markets, causing concern among investors and analysts alike.

China recently witnessed another disappointing reading for industrial production and retail sales. In response, the country’s central bank made the second cut in policy rates in three months, slashing 1-year lending rates by 15 basis points to 2.50%. Consequently, the Chinese yuan hit its lowest level against the dollar since 2023. China stocks tumbled further, and government bond yields reached a three-year low.

Of particular concern is the real estate market in China, which has been experiencing a bust. Property investment has now fallen for the 17th consecutive month, giving rise to fears of deflation. In an unexpected move, the Chinese government suspended the publication of spiraling youth unemployment rates. All these factors paint a bleak picture of China’s economy.

On the other hand, the situation in the United States appears to be diametrically opposite. A reassessment of the U.S. economy has led to increased optimism among fund managers worldwide. According to Bank of America’s latest investor poll, three out of four fund managers believe there will either be a soft landing or no landing at all for the U.S. economy in the next 12 months.

This optimism is reflected in the reduction of cash holdings and the increase in global bond allocations by asset managers in August. Surprisingly, despite the recent hit to bond prices, fund managers have become net 5% overweight in global bonds, which is significantly above long-term averages.

Furthermore, there has been a rise in long-term U.S. Treasury yields, even as stock prices rebounded on Monday. Ten-year Treasury yields reached their highest level of the year at 4.23%. Inflation expectations have remained subdued, resulting in 10-year inflation-adjusted Treasury yields hitting their highest in 14 years at 1.87%. Eyes are now trained on any long-term guidance from the Federal Reserve at its annual Jackson Hole conference later this month.

The combination of rising real U.S. yields, strong economic readings in the U.S., and increasing turbulence in China and many emerging economies has heightened the strength of the dollar in various markets. Despite news of accelerating growth in Japan during the second quarter, the yen plummeted to its lowest level in 10 months, mirroring the slide of the Chinese yuan.

The dollar’s dominance is also evident in other emerging economies, including the BRICS countries (Brazil, Russia, India, China, and South Africa). Russia, which has been economically and financially isolated from the West due to its invasion of Ukraine, rushed to prop up its plummeting ruble by implementing an emergency interest rate hike of 3.5 percentage points to 12%. However, its success has been limited so far.

Argentina, another BRICS candidate, experienced a devaluation of its peso after the surprise emergence of a far-right presidential candidate in the primary elections. This candidate advocates for dollarization of the hyperinflation-dogged economy. India’s rupee also showed signs of decline, reaching a 10-month low.

Meanwhile, in the United States, attention is directed towards the upcoming retail sales report and Home Depot’s earnings update, which will be the first of the big retailers to report this week. Additionally, housing market sentiment indicators are set to be released.

Tuesday’s events to watch:

  • U.S. corporate earnings: Home Depot, Agilent Technologies, Cardinal Health, Jack Henry
  • U.S. July retail sales, July import/export prices, NAHB August housing index, NY Fed August manufacturing, June TIC data on Treasury holdings, June business inventories
  • German August ZEW investor survey
  • Canada July inflation, home sales, and June manufacturing
  • Minneapolis Federal Reserve President Neel Kashkari speaks

The current state of global markets requires careful monitoring, as the contrasting fortunes of China and the United States continue to shape investor sentiment. The unpredictability of emerging economies, alongside the strength of the dollar, adds further complexity to the global economic landscape.

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