Japanification
December 07
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2024
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Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
China’s government has set an official economic growth target of “around 5%” for 2024, echoing last year’s aim. But, as experts were quick to point out, the goal will be harder to hit this time around. Back in 2023, growth – which came in at 5.2% – was helped by a low “base effect”, or starting point, because of stifling pandemic restrictions the year before. And after a surprisingly strong performance at the start of 2024, the world's second-biggest economy has started to decelerate. New data this week showed Chinese GDP expanded by 4.7% in the second quarter from the same period a year earlier – missing economist forecasts of 5.1% and marking the slowest pace of growth in five quarters.
The slowdown was mainly driven by an ongoing slump in the property sector and weak domestic demand – despite government efforts to boost consumption. The country’s real estate crisis deepened in June, with separate data showing new home prices falling for the 13th straight month and at the fastest pace in nine years. That, in turn, is hurting consumer confidence considering that property accounts for about 70% of household wealth. Case in point: retail sales increased by just 2% in the second quarter, missing economist forecasts of 3.4% and marking the slowest rate of growth since December 2022.
Now, to counter weak consumption and a property slump, Chinese authorities have encouraged more output from the manufacturing sector, which has led to a big bounce in exports. In fact, China’s trade surplus – the difference between the value of its exports and imports – hit a record high of $99 billion in June. But that growing imbalance has stirred some hard feelings from the country’s trading partners, who are accusing it of overproduction and dumping, and are slapping hefty tariffs on certain Chinese goods in response. Making matters worse, former US president Donald Trump is considering levying a flat 60% tariff on Chinese imports if re-elected. Should that happen, it would cut 2.5 percentage points from China’s economic growth in the year that follows, according to a report from UBS this week.
Over in the UK, new data this week showed the pace of consumer price gains holding steady across the board last month. Britain’s annual inflation rate remained unchanged at 2% in June, defying economist expectations for a slight drop to 1.9%. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, also held steady, at 3.5%. Even services inflation – a measure closely watched by the Bank of England for signs of domestic price pressures – remained unchanged, at 5.7%, which was slightly above the 5.6% economists were hoping for. The worse-than-expected report prompted traders to slash bets that the BoE will cut interest rates from their current 16-year high next month.
Finally, in a move widely expected by traders, the European Central Bank kept its main interest rate steady at 3.75% this week. And despite the decision coming after last month’s landmark cut, the bank did not provide clear guidance on future rate reductions. Instead, it reiterated that borrowing costs will remain “sufficiently restrictive for as long as necessary” to ensure that inflation returns to its 2% target. Traders currently anticipate that the next rate cut will arrive in September, followed by another in December.
One thing that the ECB is still concerned about is elevated inflation in the labor-intensive services sector, driven by increasing wage demands from workers across the bloc. In fact, the International Monetary Fund warned this week that inflation in many major economies is falling more slowly than expected, mainly due to sticky services prices. That, in turn, is raising the prospect of “higher-for-even-longer” interest rates, according to the IMF.
After remaining virtually flat for the year, the small-cap Russell 2000 index gained almost 12% in the week through Tuesday – its best five-day streak since 2020, and trouncing the S&P 500’s less than 2% gain over that time. The move, which sent the index to its highest level in over two years, was driven by traders pulling forward their expectations for interest rate cuts after June’s better-than-forecast US inflation report. See, most of smaller companies’ borrowing is either short-term or at a floating rate, so they get hit harder when interest rates rise, but see a bigger benefit when they fall.
The cooler-than-expected inflation report sparked the rally, but the groundwork had been laid well beforehand. After all, small-caps have been underperforming their large-cap counterparts in the US since as far back as 2014. That’s left them undervalued – not just compared to large caps, but also compared to their own history. As a result, they became prime targets for bargain-hunting traders adopting a risk-on tone. And those bets could pay off later this year: along with benefiting from lower interest rates, these firms are poised to deliver faster profit growth than large caps for the first time in a while. More specifically, analysts expect small-cap firms to post earnings growth of 27% and 67% in the third and fourth quarters respectively – significantly outpacing the expected growth rates of 8% and 17% for large-cap companies.
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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