No one anticipated that the foundation of the U.S. economy was still intact. Not only did the anticipated economic weakness fail to materialize, but the economic data was so hot that it far exceeded expectations!
However, the temporary overheating of the U.S. economy might be something the Federal Reserve is not keen on seeing, as an overheated economy would continue to push up the U.S. inflation rate, which is not conducive to the U.S. resolving its inflation problem once and for all.
The Federal Reserve may raise interest rates three times in the second half of the year.
Subsequently, we might witness a double whammy in the U.S. stock and bond markets, with the Federal Reserve continuing to raise interest rates. Two rate hikes are a minimum, and the probability of three rate hikes has significantly increased. The timeline for entering the next round of easing will also be postponed, which means that the economies of countries worldwide will continue to be influenced and suppressed by the Federal Reserve.
So today, let's discuss the impact of the U.S. economy's sizzling performance on the current economic trends.
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Non-farm data far exceeded expectations; is the U.S. economy not in recession?
According to the U.S. non-farm employment report on July 6th, the number of private sector jobs in the U.S. for June reached 497,000, while previous data forecasts were only at 225,000. The employment figure, which is more than double, indicates that the U.S. job market is exceptionally hot.
The U.S. added 497,000 jobs, far exceeding market expectations.
And with better employment, it implies that the U.S. economy is performing hot in the short term, with no expectation of recession. The script may be leaning towards the "soft landing" that Americans would like to see.
However, it is important to note that the Federal Reserve does not want to see this situation occur, because although the hot labor force data means that the pace of economic slowdown is not slower, which is beneficial to economic development, the big headache of inflation has not been resolved.It is essential to understand that the severity of inflation far exceeds the impact of economic recession, as recessions are actually short-lived and temporary. The United States experienced a nearly decade-long "stagflation" cycle in the 1980s, which significantly weakened the nation's comprehensive strength and even put it at a disadvantage against the Soviet Union during the Cold War.
Therefore, Federal Reserve Chairman Jerome Powell has repeatedly emphasized in public that the Fed's goal is to reduce the U.S. inflation rate to around 2%.
Powell has stated on multiple occasions that the aim is to keep inflation under control at below 2%.
Thus, the best scenario would be for the U.S. to resolve its inflation issues and then, on the basis of controlling inflation, regain economic growth. This is the script that best aligns with the long-term healthy development of a nation's economy.
The current U.S. economy is actually a hangover from the massive monetary easing during the Trump era in 2020. The U.S. has relied purely on the "super flood" of printing $4 trillion in a short period to drive its economic development.
Furthermore, the U.S. has exploited the dollar's hegemony to export the inflation caused by the $4 trillion flood through international trade and financial markets, leading to a global inflation crisis and currency devaluation in various countries around the world.
A stronger dollar leads to the depreciation of the Chinese yuan.
Therefore, for countries around the world, the current economic boom in the U.S. does not necessarily mean good news. On the contrary, it implies that the U.S. will continue to raise interest rates, the dollar will continue to flow back to the U.S., and exchange rates, including the Chinese yuan, will be under long-term pressure, continuously depreciating.
As the Fed continues to raise interest rates, countries around the world will still have to endure hard times.
After the release of the explosive non-farm data, there was a brutal double whammy in stocks and bonds, with the U.S. three major valuations falling. The 2-year U.S. Treasury yield, which is most sensitive to interest rates, rose to around 5%. The 10-year U.S. Treasury, known as the global asset pricing anchor, has seen its yield rise to 4%. The probability of the U.S. raising interest rates by 25 basis points this month has already exceeded 90%.All of these are indicative that the United States' interest rate hikes are ongoing, and the American sickle harvesting the world has not yet been put back into the arsenal. We cannot be too premature in our celebrations.
The 30-year mortgage interest rate in the United States has already reached as high as 7.22%.
Taking China as an example, the Chinese Yuan has been depreciating recently, and the most direct and primary external factor is the Federal Reserve's continuously escalating interest rate hike expectations. The United States' continuous interest rate hikes mean that the domestic interest rate levels in the U.S. are getting higher, and now the interest rates for Americans buying houses have already exceeded 7%!
Conversely, the interest rates for buying houses domestically have been falling, currently around 4%. This means that there is a significant interest rate difference between China and the U.S., and it also implies that there is a possibility for capital to sell the Chinese Yuan and buy U.S. dollars to earn the interest rate difference. In professional terms, this is known as capital outflow, capital flight, or funds going offshore, unwilling to settle foreign exchange, and seeking arbitrage opportunities abroad, etc.
The interest rate difference between China and the U.S. can lead to enterprises being unwilling to settle foreign exchange, and funds going to the U.S. to earn interest.
This series of actions will lead to the continuous depreciation of the Chinese Yuan, and even rapid depreciation, thereby affecting the normal operation of the real economy. After all, although a significant short-term depreciation can stimulate exports, it is not favorable for imports.
Let us not forget that China is the world's factory, and many resources rely on imports. A relatively reasonable and stable exchange rate is the most suitable for China.
Additionally, there is the issue of economic cycles. Simply put, there are two types of economic cycles in the world: one is the interest rate hike cycle, and the other is the interest rate cut cycle, or the easing cycle.
From 2020 to 2022 was the easing cycle, during which the whole world was lowering interest rates and continuously injecting liquidity. The purpose of doing this was to stimulate the economy through money printing, to support the national economy, and to get through certain crises and difficulties (such as the 2008 financial crisis, the 2020 pandemic, etc.).
Starting in 2020, the U.S. injected liquidity directly into a "currency war," and the global market was in an easing cycle.During the easing cycle, doing business tends to be easier on one side, as loans are readily available, the cost of capital is very low, and buying a house is also cost-effective, due to mortgage discounts and similar situations.
The interest rate hiking cycle has been from March 2022 to the present. During this period, due to the Federal Reserve's interest rate hikes, dollars are being repatriated from countries around the world, leading to a rare shortage of dollars in the capital markets, a lack of funds, which in turn suppresses economic development.
Over the past year or so, why have institutions such as the World Bank, the Federal Reserve, China, and the IMF been discussing the issue of economic recession? It is because the Federal Reserve's interest rate hikes can affect the global economy. The U.S. monetary policy is the main culprit behind the world economic recession.
The International Monetary Fund warns that the risk of a global economic recession is increasing.
In general, the current strength of the U.S. economy is something none of us would like to see. The root cause lies in the U.S. economy not receding fast enough. The short-term strength of the U.S. economy can be seen as a stubborn resistance to U.S. inflation, which also implies more interest rate hike policies.
And more interest rate hike policies may lead to a more severe recession in the U.S. economy in the future, thereby dragging all countries into a deep pit. Therefore, whether it is interest rate hikes, raising interest rates, or the strengthening of the U.S. dollar, and the devaluation of foreign currencies of other countries, these actions are all to pay the bill for the United States' indiscriminate issuance of U.S. Treasury bonds.
What impact will China's economy face in the future?
So, what kind of impact will China's economy face in the future?
Firstly, the Federal Reserve's continued interest rate hikes mean that the renminbi will be suppressed by the U.S. dollar and depreciate over the next six months or so.
The renminbi exchange rate has been depreciating continuously this year.Secondly, the current interest rate differential between China and the United States is quite significant. The U.S. is continuously raising interest rates to curb inflation, while China is lowering rates to stimulate the economy. The more the Federal Reserve raises rates, the greater the pressure on China to lower its rates, so we estimate that at most, we will raise rates once more in the second half of the year and then we cannot continue to do so. There is no room left for further increases.
Thirdly, China's economic growth, apart from domestic demand stimulation, largely depends on the demand for Chinese goods from countries around the world. In other words, the stronger the purchasing power of various countries, the more foreign trade orders they place with China. U.S. interest rate hikes mean a continuous weakening of the purchasing power of countries, which negatively affects China's foreign trade exports and ultimately feeds back into the Chinese economy.
Therefore, we had expected that by the end of this year, the Federal Reserve's rate hikes would end, and starting in 2024, a period of easing would begin. At that time, China's foreign trade would improve, and the domestic economy would perform better.
However, unexpectedly, the U.S. has created a complication, and the global interest rate hiking cycle will continue. Our tough times will have to be postponed by several months.
From the events and analysis above, it is also evident that as the world's leading superpower, the U.S. indeed has the ability to influence the global economy using the dollar hegemony, and the ebb and flow of the dollar tide have a significant impact on the development and stability of China's economy, as has been the case in recent decades.
But is it right just because it has always been this way?
The dollar hegemony should not exist in the world.
There should not be a dollar hegemony that repeatedly harvests developing countries. This is also one of the reasons why China is promoting the internationalization of the renminbi, weakening the dollar hegemony, and promoting the "Asian Infrastructure Investment Bank" in Asia.
Finally, opposing the dollar hegemony is not something that can be achieved overnight. It is essential to first address domestic economic issues, stimulate domestic demand, and then use monetary easing and fiscal measures to distribute money to the people, reduce the cost of living, and lower interest rates. Only in this way can we continue to develop, expand the total volume and influence of China's economy, and ultimately defeat the dollar hegemony!