The markets have a massive news flow to cope with this week, much of it negative. Chinese debt: delays to stimulus and the role of Bitcoin, the US Fed meeting: we highlight the key indictors to watch, Bank of England: how will they deal with higher inflation and lower growth?
There’s a debt crisis in China and the stock market there is struggling as the economy weakens. In past cycles, the authorities in Beijing would have announced policy stimulus by now and the Chinese stock market would have bounced. We discuss why there’s a delay and explain why Bitcoin is involved.
US and UK central banks meet this week
The US Federal Reserve meets this week. They will tell us that they plan to start tapering bond purchases before year end but that’s old news; the market’s attention has already switched to guessing when they will pull the trigger on raising interest rates. We highlight the key indicators that they are watching – and so should you. The US also has Boris in its capital this week, but more importantly has a big legislative agenda with the tax and infrastructure bills before Congress. We have discussed before that analysts have not fully factored in the hikes in corporate taxes, especially of foreign income, into their earnings’ estimates; that process is underway.
The Bank of England also meet: they are set to stop their bond purchases without tapering in November. Nobody outside of the gilt market really cares about that. Of more interest is what they have to say about UK inflation, which has moved higher, and UK economic growth, which has moved lower.
And of course, we have the global energy crisis focused on natural gas. Like oil price hikes of old, this means lower growth and higher inflation.
Chinese debt crisis: defaults, contagion and bitcoin
What matters isn’t whether Evergrande, the Chinese property company hitting the headlines, defaults this week; what matters is the degree of contagion to other markets.
So far it’s been limited and, in a strange way, welcome to the authorities in Beijing. They want to clamp down on excessive property speculation and punish companies who circumvent their rules on prudent financial practice. But the weaker economic data in China is not welcome and justifies a policy response. The problem is that there are already huge pressures on energy prices, and they want to avoid stoking up demand any further. One obvious area for action is Bitcoin ‘mining’, which uses masses of electricity for no obvious economic value. When the Chinese authorities do take action, the results can be dramatic as we can see for iron prices, which have halved in recent weeks. I do expect a policy response in China that goes beyond liquidity injections before year end. The stock market should then rally but I’d see that as a selling opportunity given the structural changes in China, which, though welcome from a wider social perspective, are probably bearish for equities.
First wave bottleneck pressures ease, but wages could be the worrying second wave
What happens in Beijing is clearly important for global markets. What happens in Washington is even more important. The interest rate setting members of the Fed have a huge challenge when they meet this week and give their ‘dots’, which set out where they think the Fed funds rate will go over the next few years. Having said that rising inflation in the US would be temporary, they will have been relieved to see lower numbers in the CPI release last week. But as the first wave of bottleneck pressures, such as used car prices, begin to ease there are signs of a more worrying second wave.
Measuring wages isn’t easy. The US lost 20 million jobs last year, many low paid, so average wages went up even as many were getting pay cuts. As they’ve been rehired, the average has gone down even as shortages in many areas have meant pay rises. The Atlanta Fed has a wage tracker that gets round this problem by surveying the same group of people year-on-year. That has shown a sharp rise in recent months. I think it’s the best monthly measure of US wage inflation. More importantly so do many in the Fed. It’s now over 4%, and if it goes up again, I expect the Fed to think seriously about hiking rates early in 2022.
Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.