Advertisement
Macroscope | Why US economic strength and China commodity demand bode ill for recession bets
- Robust US jobs and average hourly earnings data suggest the Federal Reserve has ample room and every reason to keep raising interest rates
- Meanwhile, China’s infrastructure focus in its stimulus package is expected to give strong support to commodity prices and market sentiment
Reading Time:3 minutes
Why you can trust SCMP
3
The US Federal Reserve is definitely going to continue to tighten its monetary policy. Beijing is definitely going to do everything it can to keep the Chinese economy on track. If markets accept those two propositions, there are profound implications across asset classes that are not yet properly reflected in pricing.
Advertisement
First, recent comments from Fed policymakers have only underpinned the notion that, in the US central bank’s attempts to curb elevated consumer price inflation, it will continue to raise interest rates and do so at pace. A further 0.75 per cent rise on July 27 is very possible, with further increases to follow once the Fed reconvenes in September.
When the Fed seeks to flag the likelihood of such rate increases in advance so as not to surprise markets, as is arguably the case now, the accepted logic is that such pre-warning informs market pricing.
In the current context, last week saw part of the US government bond market become inverted, with the nominal yield on the two-year US Treasury above that of the benchmark 10-year bond. This development is consistent with the idea the market fears that the pace of Fed tightening will tip the US economy into recession.
Such concerns also surely help explain why industrial metal prices – including copper, which is often seen as an economic bellwether – have recently been under pronounced downward pressure.
Advertisement
Markets appear to have concluded that the US monetary policy tightening, currently underpinning US dollar strength in general, will also result in the destruction of real economic demand, which justifies a substantive marking down of the prices of such commodities.
Advertisement