Weekly Financial Market Analysis: 10/06/2024 (U.S. May CPI and China’s economic outlook)
Weekly Financial Market Analysis: 10/06/2024 (U.S. May CPI and China’s economic outlook)
Writer: Klinsmann Lee
U.S. Consumer Price Index in May remained unchanged from the previous month. [1]
Background:
Consumer Price Index increased 3.3% on a year-on-year basis.
Current Fed’s benchmark overnight interest rate at: 5.25% - 5.5% (unchanged since July 2023)
Economists forecast 2 interest rate cuts for the year, starting in September 2024.
Source: See article.
Klinsmann’s Analysis:
Since March 2022, the U.S. Federal Reserve has adopted monetary policy tightening (raising interest rates) to counter the persistently higher inflation data.
The current interest rate of 5.25% - 5.5% is the highest in 23 years since 2001. [2]
We are currently at the peak of the interest rate cycle and it is consensus that inflation has peaked and will decline in the future.
The question to consider is “when” and for “how fast” will the Federal Reserve reduce interest rates in the future.
CEOs ‘cautiously optimistic’ about China’s economy. [3]
Background:
A survey conducted by The Conference Board recorded a CEO confidence level of 56 (cautiously optimistic) about China’s economic outlook.
The scale is between 0 to 100 with below 50 indicating more negative than positive outlook.
Interesting points from the survey include:
35% of the respondents indicate that current conditions are better than 6 months ago – this is still materially lower than the 88% in the first half of 2023.
55% of the respondents indicate that the U.S. and China relationship will continue to worsen in the coming years.
29% of the respondents indicate their companies are establishing second sources and production capabilities in other regions to diversify their investments.
Klinsmann’s Analysis:
As noted, multinational companies continue to face different challenges in China including:
Downgraded consumption
Tough competition from local firms
Regulatory disruption
Weak business confidence
Geopolitical uncertainty
Despite the above challenges to multinational companies, China’s overall economy is stabilising compared with a few months ago with different government policies aimed at supporting the economy and property market.
One point I agreed with the article is that there needs to be “strong alignment with headquarters on China strategy, planning and risk management” to achieve success in the Chinese market.
In summary, adapting to the market you are in is very important.
The process of deleveraging is painful and the tools to alleviate this process are limited. It will take time and patience for this process in China to complete.
References:
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