AI’s Record 2024
January 11
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Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
Deflationary fears are resurfacing in China again after new data this week showed consumer prices increasing by less than expected last month, while producer prices continued to decline. Consumer prices rose by 0.6% in August from a year ago – less than the 0.7% gain forecast by economists. More concerning, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, came in at just 0.3% – the lowest reading in over three years and the 18th month in a row below 1%. Finally, producer prices, which reflect what factories charge wholesalers for products, fell for the 23rd consecutive month, dropping by a bigger-than-expected 1.8% in August.
Taken altogether, the figures provide further evidence of weak consumer demand in the world’s second-biggest economy, prompting calls for additional measures to prevent a negative cycle of falling prices and declining economic activity. See, anticipating further price drops, consumers might delay purchases, dampening already weak consumption. Businesses, in turn, might lower production and investment because of uncertain demand. What’s more, falling prices lead to lower corporate revenues, potentially hitting wages and profits. Finally, during times of deflation, prices and wages fall, but the value of debt doesn’t, which adds to the burden of repayments and raises the risk of defaults.
That’s why economists at investment banks believe the Chinese government needs to spend up to $1.4 trillion over two years to reflate its economy and return it to sustainable growth. The stimulus, which would be up to 2.5 times the “bazooka” package the country unleashed after the global financial crisis in 2008, should directly target households rather than pump money into the industrial sector, according to the economists. That’s because the latter would just increase the supply of goods at a time of low demand, further worsening deflation.
The UK economy unexpectedly stagnated for the second consecutive month, dealing an early blow to the newly-elected Labour government that has put growth at the heart of its agenda. British GDP was unchanged in July after flatlining the month before, disappointing economists who had forecast a 0.2% increase. This also means that the economy has posted no growth in three of the past four months. July's weakness resulted from heavy declines in manufacturing and construction, which were offset by a modest 0.1% expansion in the key services sector.
After falling into a technical recession at the end of 2023, the British economy outpaced all of its G7 peers in the first half of the year, with an expansion of 1.3%. But its performance in the second half is expected to be significantly weaker, with the Bank of England and private-sector economists forecasting growth of just 0.3% on average in the third and fourth quarters. That’ll make it more difficult for the new government to meet its pledge of delivering the fastest sustained growth among G7 economies. But the weakness might be welcomed by the BoE, which had warned that the robust recovery in the first half of the year threatened to keep inflationary pressures high after it cut rates for the first time in over four years last month.
The latest inflation report out of the US was a bit of a mixed bag. On the one hand, consumer prices increased by 2.5% in August from a year ago, marginally below the 2.6% forecasted by economists and a nice step down from July’s 2.9% pace. It also marked the lowest annual inflation rate since February 2021. On the other hand, core inflation, which strips out volatile food and energy prices, unexpectedly accelerated to 0.3% on a month-over-month basis, driven by higher housing-related costs. Economists generally see the core measure as a better indicator of underlying price pressures.
Still, with headline inflation edging closer to the Fed’s 2% target, the central bank is increasingly shifting its focus to the labor market, which is starting to show signs of weakness. The latest jobs report, for example, showed the pace of hiring in the US over the past three months slowed to its lowest level since the onset of the pandemic in 2020. That’s why the Fed is widely expected to lower interest rates by 0.25 percentage points next week, marking its first rate cut in over four years. However, the key question is whether that will be enough to keep the economy going, with some traders betting that a bigger, half-point cut may be necessary. But the unexpected pickup in monthly core inflation could dampen those hopes…
As widely anticipated, the European Central Bank cut interest rates for the second time this year on Thursday, lowering its key deposit rate by a quarter of a percentage point to 3.5%. The move comes as the bank shifts its focus from fighting inflation – which is within touching distance of its 2% target – to supporting the economy. See, the eurozone is losing steam, with households not spending enough to sustain the recovery that started earlier this year, and manufacturers still struggling due to weak demand from outside the region. That slowdown led the ECB to slash its growth forecasts by 0.1 percentage points for 2024, 2025, and 2026, while keeping the inflation outlook broadly unchanged. Finally, although the bank was wary of saying too much about its next steps, traders are betting on another quarter-point cut later this year and see a roughly 50% chance of a second.
US bitcoin ETFs have experienced their longest streak of daily net outflows since their inception at the beginning of the year, reflecting a broader retreat from riskier assets amid growing concerns over the global economy. During the first week of September, investors withdrew nearly $1.2 billion from the 12 ETFs tracking the world’s biggest cryptocurrency, according to Bloomberg. Bitcoin posted a loss of approximately 7% over the same period.
Stocks also sank during the first week of September. In fact, bitcoin and other major cryptocurrencies have been tracking global equities very closely in recent weeks. The 30-day correlation coefficient between a gauge of the biggest 100 digital assets and MSCI’s index of world shares is near 0.60 – one of the highest levels in the past two years. (A reading of 1 indicates assets are moving in tandem, while minus 1 denotes an inverse relationship.)
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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