🎙️ Too Much Stuff

Now that tax day, the solar eclipse, and the New York-area earthquake are behind us, let’s take a deep breath and review the financial landscape.

Such as:

• Fed chair Jerome Powell dialed back expectations on rate cuts today, citing firm inflation weakening the case for pre-emptive reductions.

• Top U.S. banks are posting better-than-expected quarterly results, buoyed by a resilient economy, strong consumer spending, and a flurry of Wall Street activity.

😅 If you continue to be confused by all the mixed signals out there, rest assured that you’re not alone.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• China’s economy grows 5.3%, but there’s trouble beneath the surface

• U.S. Dollar on best run in year, but IMF warns over spending

This, and more, in just 5 minutes to read.

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In The News

📈 China’s Economy Is Booming…Or Is It?

At the surface, China’s economy is humming along — new Q1 GDP showed that the country grew at an impressive 5.3% annual rate, well above most forecasts.

Yet, the mini-boom may already be fading. Most of that bounce came in January and February before a dropoff in March, when consumers bought less and manufacturing output fell off, too.

• As the chief China economist at Credit Agricole put it, “Markets may find it hard to be convinced by the strong GDP growth print and difficult to reconcile with the mixed March data.”

Worse: China watchers warn that its outlook will decline further if the strong Q1 data report gives policymakers a false sense of confidence, delaying efforts to address chronic issues underlying China’s economy.

• As the world’s manufacturing hub, China is still cranking out goods, supporting GDP calculations. But prices for these goods have declined for more than a year, inflicting a painful deflation on the country’s factories.

Too much stuff: Bloomberg called Chinese consumers’ demand for the country’s excess manufactured goods “anemic,” pushing more goods onto international markets. Flooding the world with manufactured goods, though, isn’t a winning long-term strategy, particularly if China’s population doesn’t feel confident enough or able to spend more.

• Bloomberg Economics adds that this picture “raises serious doubts about sustainability. The pickup was almost entirely driven by public (government) investment…Under-performance in production and private demand suggest the recovery is on thin ice.”
  

• Meanwhile, U.S. Treasury Secretary Janet Yellen and German Chancellor Olaf Scholz both traveled to China this month to “scold officials” for the cascade of cheap exports.

Why it matters:

At the heart of China’s problems and lack of faith in the strong Q1 GDP is the country’s slowly deflating property bubble. In March, cement production collapsed 22% — the largest ever recorded monthly drop — highlighting the ongoing housing slump’s impacts.

Restaurant spending and car sales also looked weak, showing that China’s consumers remain hesitant to open their pocketbooks after years of harsh Covid lockdowns and a property downturn that has eaten away at their wealth (up to 70% of Chinese families’ wealth is stored in real estate, compared to about 33% in the U.S.)

• As a result, China is experiencing its worst bout of deflation (the opposite of inflation) in 25 years.

Lasting optimism will remain elusive until China’s real estate spiral is under control. In March, prices for both new and used homes continued declining, blunting hopes of a rebound during the traditionally busy spring season.

• New-home prices in 70 cities were down 2.7% from last March, while existing-home prices fell 5.9%. Home sales volumes last quarter were almost 31% lower than a year prior.

Read more

More Headlines

🏦 Bank of America beats analysts’ earnings estimates

👉 Homicide rates plummet across major U.S. cities

✈️ The world’s busiest airports as international travel roars back

🤖 How the U.S. government is regulating artificial intelligence

🕵 FBI launches criminal probe into collapse of Baltimore bridge

💵 U.S. Dollar Runs Despite IMF’s Structural Concerns

The U.S. Dollar is on a heater, folks, marking its largest gain in over a year. Chalk up the surge to expectations that U.S. interest rates will remain high for an extended period, plus increased demand amid rising tensions in the Middle East. 

The dollar is strong: The Bloomberg Dollar Spot Index rose about 2% over the past five days. Some investors are concerned about the potential negative impact of a strong dollar on global financial systems.

• Federal Reserve Chair Jerome Powell's recent comments this week highlighting limited progress on inflation have led swaps traders to adjust their expectations for rate cuts. Now, traders anticipate the Fed will begin easing rates in September or November, compared to the previous expectation of July. 

The icing on the cake: Strong U.S. inflation data and the delayed expectation of rate cuts are weakening global currencies, with the dollar outperforming its Group-of-10 peers.

• “We are potentially breaking out at this point,” one global fixed-income portfolio manager said of the dollar. “If the data continues to hold up, that will feed back into the narrative of — again — higher for longer.”
  
  

• “It is one of our top worries that the dollar strength will persist or even worsen,” added one global chief investment officer. The Fed will “eventually need to join the party; otherwise, the dollar dynamic will be much more detrimental to the broader economy — in the U.S. and globally.” Another strategist added, “The increase in geopolitical uncertainty has been the icing on the cake.”

Why it matters:

The dollar’s strength comes amid a new International Monetary Fund (IMF) report that revised its global economic growth forecasts upward due to U.S. strength. But the IMF warns of ongoing inflation and geopolitical risks. 

China's yuan devaluation and geopolitical tensions between Israel and Iran have boosted the dollar. 

• The IMF sees the global economy shifting from rapid growth to a slower, steadier state. Growth is projected at 3.2% for this year and next, similar to 2023. U.S. growth is expected to be 2.7% this year, higher than previously anticipated. Inflation is easing, somewhat, with advanced economies expected to have 2.6% inflation this year, down from 2023. 

Not the Roaring Twenties? Meanwhile, the global economy's growth pace is historically low partly because of geopolitical tensions and weak productivity growth. Middle- and lower-income countries face slowing momentum toward higher living standards.

 IMF managing director Kristalina Georgieva warns of a lackluster outlook, referring to this decade as the "Tepid Twenties.”. Yet, there's hope for a transformation towards climate change and AI-driven digitization, potentially leading to the "Transformational Twenties” instead. 

The question is, which will it be?

Read more

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Quick Poll

Yesterday, we asked: How's your workload looking for this week?

— This reader said they have a heavy workload: “Busy season for my business, so the next few weeks will be hectic but well worth the extra time to generate the revenue associated with keeping equipment running 100% and giving customers the best experience possible.”

— While another said things weren’t too bad, “Slightly lower gigs than last week.”

See you next time!

That's it for today on We Study Markets!

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