End Of An Era
18 Sep 2023
6 min read
Here are some of the biggest stories from last week:
- China emerged from deflation in August and credit grew by more than expected.
- The European Commission lowered its growth outlook for the bloc.
- The European Central Bank delivered its tenth consecutive rate hike.
- US inflation ticked up in August on the back of higher energy prices.
- Emerging market currencies have virtually erased all of their 2023 gains.
- The International Energy Agency signaled the beginning of the end of the fossil fuel era.
Dig deeper into these stories in this week’s review.
China watchers got some much-needed good news at the start of last week, with two data releases pointing to signs of stability in the world’s second-biggest economy. First, after extending the fewest monthly loans in July since 2009, Chinese banks dished out more credit than expected in August. That could be a sign that domestic demand is starting to rebound. The central bank helped matters by pushing lenders to boost loans and encouraging local governments to ramp up bond sales to lift spending on infrastructure projects. What’s more, cuts to mortgage rates and down-payment requirements helped increase borrowing demand for home purchases.
Second, China emerged from deflation in August, with consumer prices rising by 0.1% last month from a year earlier. The increase follows July’s drop of 0.3%, which marked the first decline in over two years and raised concerns about the depressing state of domestic demand in China. Still, investors shouldn’t get ahead of themselves. A slim 0.1% gain in consumer prices, which is well below the official target of around 3%, means the country could easily slip back into deflation in the coming months. What’s more, producer prices fell 3% last month. While that’s an improvement from July’s 4.4% drop, it means that factory-gate deflation in China has now persisted for almost a year.
Over in Europe, the European Commission lowered its growth outlook for the bloc, citing a contraction in Germany as a significant drag on the region. Updated forecasts from the commission last week indicate the eurozone economy will grow by just 0.8% this year, followed by 1.4% in 2024. That’s a marked downgrade from their May predictions of 1.1% growth this year and 1.6% in 2024. A major factor in this revision is Germany, the region's biggest economy, which was previously anticipated to grow in 2023 but is now projected to shrink by 0.4% on the back of a manufacturing slump.
The commission also noted that inflation is expected to drop to 5.6% this year, down from its earlier forecast of 5.8%. However, it warned that inflation would persist at 2.9% in 2024, a slight increase of 0.1 percentage points from its previous estimate and still above the European Central Bank’s 2% target. What’s more, elevated inflation is expected to dent consumer spending in the bloc, which was another factor behind the commissions’ economic growth downgrades.
Sticking with Europe, in what seemed like a knife-edge decision, the bloc’s central bank opted to increase interest rates by 0.25 percentage points last Thursday. That means the central bank has now raised borrowing costs at ten consecutive meetings in a bid to tame the biggest inflation surge in decades. As a result, its benchmark deposit rate has risen from an all-time low of minus 0.5% just over a year ago to a record 4%. Investors and economists were divided going into the decision, with many hoping that the central bank would pause its rate hikes to avoid inflicting additional pain on the stuttering economy.
To be fair to the ECB, it arguably was in a lose-lose position heading into the meeting: keeping rates on hold invites criticism that it’s giving up too early in its battle against inflation, which is still more than double the central bank’s 2% target and could creep higher on the back of rising energy prices. But hiking yet again risks making a looming economic downturn worse. This deteriorating economic outlook was reflected in the ECB’s cut to its growth forecast for this year, from 0.9% to 0.7%, and for 2024, from 1.5% to 1%. What’s more, it lifted its forecast for inflation this year, from 5.4% to 5.6%, and for 2024, from 3% to 3.2%.
Across the pond, the latest CPI report out of the US last week showed inflation ticking up in August. Consumer prices rose by 3.7% last month from a year ago – up from July’s 3.2% and slightly above economist forecasts of 3.6%. Mostly at blame were rising energy prices, with higher gasoline costs accounting for more than half of the advance in the inflation rate. That comes at a time when Saudi Arabia and Russia are renewing their efforts to push the price of oil towards $100 a barrel. Core consumer prices, which strip out volatile food and energy components, rose by 4.3% – in line with economist estimates and down from July’s 4.7%. On a month-on-month basis, headline and core inflation came in at 0.6% and 0.3% respectively.
Overall, it was an undramatic CPI report, which is probably what investors were hoping for. The Fed is expected to largely look through short-term energy spikes to focus on what’s really important, which is that core inflation is still coming down and just hit its lowest level in nearly two years. But a higher headline figure, if it persists, could weigh on consumer spending and impact expectations about future price rises, which would force the US central bank to resume rate hikes. The Fed is widely expected to keep interest rates steady at its meeting this week, having lifted them 11 times since March 2022 in a bid to bring inflation back towards its 2% target.
After sinking in the past few weeks, the MSCI Emerging Markets Currency Index is now barely up this year, meaning EM currencies have virtually erased all of their 2023 gains. That’s not good news for investors, who were betting on a continued rally in developing-market currencies to boost their returns in EM stocks and bonds.
There are a few factors driving the decline. First, traders are increasingly betting that interest rates in the US will remain elevated for a while. That’s increasing the appeal of the US dollar at the expense of other currencies, especially riskier EM ones. Second, China’s economic troubles have sent the yuan to a 16-year low against the dollar. That has an outsized impact on the MSCI EM currency index considering that the yuan, with its 30% weight, is the benchmark’s biggest component. What’s more, China’s economic downturn is reverberating throughout other EM Asian economies, exerting pressure on their currencies as well. Third, signs of stagflation are starting to emerge in Europe, leading investors to shy away from the region and subsequently depressing the currency values of its EM members.
The International Energy Agency has predicted for the first time ever that global demand for oil, natural gas, and coal will peak before 2030, signaling the beginning of the end of the fossil fuel era. This forecast is based only on today’s policy settings by governments worldwide, and doesn’t take into account any new climate policies. It marks the first time that a peak in demand is visible for each of the three fossil fuels this decade – earlier than many people anticipated. The historic turning point is attributed to the rapid expansion of renewable energy, increasing proliferation of EVs, effectiveness of climate policies, and structural shifts happening in China’s economy as it moves from heavy industry to less energy-intensive industries and services.
- Monday: Nothing major.
- Tuesday: US housing starts (August), Canada inflation (August).
- Wednesday: UK inflation (August), Fed interest rate announcement, Japan trade balance (August). Earnings: FedEx.
- Thursday: Bank of England interest rate announcement, US existing home sales (August), eurozone consumer confidence (September).
- Friday: Japan inflation (August), Bank of Japan interest rate announcement, UK retail sales (August), eurozone, UK, US, and Japan PMIs (September).
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.