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US Labor Market Shows Signs of Cooling, Prompting Discussion of Fed Rate Hikes.
China & Russia's Economic Bounce Back
Here is what we will be getting into today:
Fed Rate Hike Decision.
China & Russia Bounce Back.
Global Economic Outlook.
Let's Dive In!
US Labor Market Cools, But Fed Rate Hikes Still Likely
The University of Michigan's bi-monthly sentiment survey showed that households expect inflation to accelerate significantly in the year ahead, with the survey's one-year inflation expectation rising by a full percentage point in April to 4.6%. The Federal Reserve will need to keep a close eye for any abrupt shifts in lending standards that may reflect banks cracking down on credit beyond what policymakers feel is necessary to slow inflation.
Fed governor Waller has expressed support for another rate hike at the Federal Reserve's next policy meeting, despite uncertainty over the fallout from recent banking stress. Waller stated that the failure of several mid-sized US lenders had not led to US borrowing conditions significantly tightening, and with inflation still well above the Fed's 2% target and the labor market remaining strong and tight, further monetary policy tightening is necessary.
While recent data suggests that the US labor market is cooling, economists warn that further action is still needed from the Federal Reserve to fully contain price pressures. Although US jobs growth in March remained strong and the unemployment rate fell to a multi-decade low, the latest figures show a deceleration in hiring and easing wage growth. Companies are also pulling back on workers' hours as well as their use of temporary employees, and US manufacturing activity in March slumped to the lowest level in nearly three years. For the first time in two years, the number of job openings fell below 10 million.
Additionally, Saudi Arabia and its allies, including the UAE, Iraq, and Kuwait, have announced cuts totaling over 1 million barrels a day, or about 1% of global demand, causing oil prices to rise above $85 a barrel. The move has raised concerns about the impact on the global economy, especially as central banks continue their efforts to tame inflation. The cuts come amid tensions between Saudi Arabia and the US administration of Joe Biden, who entered office pledging to make Saudi Arabia a pariah, highlighting the depth of Riyadh's partnership with Moscow.
Economic Challenges & Outlook for China and Russia
In 2022, authoritarian powers such as China and Russia experienced setbacks in their economic and foreign policies. While they are working to correct their mistakes and build international support for their vision of the global future. Cold War 2.0 will not be an ideological battle like its predecessor, but a contest of national power and interests.
Russia's economy ministry has lowered its GDP growth forecast for 2024 to 2% and the country's economy shrank by 2.1% in 2022. The ministry has also lowered its forecasts for Russia's current account surplus, while environmental damage caused by Russia's war in Ukraine is estimated to cost over $51 billion to restore. The EU's Carbon Border Adjustment Mechanism (CBAM) could be used to force Russia to pay for these losses by imposing a fee on carbon emissions embedded in certain products imported into the EU. The money raised would be directed to three funds boosting green projects, including the Social Climate Fund (SCF), which supports de-carbonisation in third-party states and could be part of a compensation mechanism in Ukraine. Russia has warned that it may block Ukraine's shipments of grain to international markets unless the West removes obstacles to Russia's own exports. The EU is pushing heavily for an extension of a deal negotiated by Turkey and the UN, which allows Ukraine to continue exporting its vital grain supplies, to sustain Ukraine's economy during the conflict.
China's geopolitical and military power rests on its economic power, which gives it the ability to bribe key actors, threaten critics, and overwhelm poor countries with waves of investment. China will recover from its economic missteps by leaning hard on its existing strength as a manufacturing cluster, preventing decoupling from becoming a stampede, restoring modest growth, and winning various allies within the Western business community.
Global Economic Outlook - Key Events and Releases to Watch Next Week
Next week is poised to be a significant one for the global economy, with several key events and releases expected. In China, all eyes are on the release of first-quarter data on GDP. Analysts predict a 3.9% rise compared to last year, driven by the recent increase in Chinese exports. Additionally, higher-than-expected readings on China's industrial production and retail sales are anticipated, adding to the positive sentiment.
In the UK, economists expect inflation to slow down significantly in March after a surprising acceleration to 10.4% in February. The Bank of England's Monetary Policy Committee will focus on labor market data, which suggests a slight increase in the unemployment rate and slowing wage growth.
Meanwhile, Italian banker Corrado Passera warns that the recent banking crises at Silicon Valley Bank and Credit Suisse could impact small and medium-sized businesses, which make up over 75% of Italian businesses. Passera suggests that governments should be ready to support businesses as credit conditions tighten, with high interest rates, bank branch closures, and uncertainty around banks' equity posing challenges for smaller companies.
In the US, there are discussions about the number of banks and their impact on small businesses. Small banks lend more to small businesses, and in many counties across the US, there is no nearby alternative to smaller banks. The first-quarter earnings season will reveal the fallout from the March turmoil for the banking industry and financial system more broadly. US banks with significant consumer businesses, like Bank of America, are expected to show a wave of deposits coming in after the failure of Silicon Valley Bank and Signature led fearful customers to pull out of smaller institutions. This trend is unlikely to offset the millions in outflows in the first weeks of the year, as customers switched to higher yielding alternatives such as money market funds. Companies with significant money market businesses, like Goldman Sachs, are expected to benefit from the surge.
For more analysis on these topics, check out these articles:
Fed Rate Hikes
China and Russia’s Economic Outlook
Global Economic Outlook
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