by Olga Bezrokov, Russell Investments
On the latest edition of Market Week in Review, Equity Portfolio Manager Olga Bezrokov and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the U.S. Federal Reserve (Fed) meeting minutes from June. They also reviewed the latest economic data from China and Europe, and discussed potential additional stimulus measures in China.
Fed meeting minutes show inflation concerns remain top-of-mind
Antal-Gilbert began the conversation by noting that the Fed recently released minutes from its June 14-15 meeting, which wrapped up with a 75-basis-point (bps) increase in the cash rate—the central bank’s largest rate increase since 1994. Bezrokov said the minutes showed that FOMC (Federal Open Market Committee) members remain firmly committed to reining in inflation, even if subsequent rate hikes lead to restrictive financial conditions—which would cause growth to slump for some time.
“The June minutes revealed that Fed officials were concerned about inflation becoming entrenched in the U.S. economy, and saw inflation risks as skewed to the upside,” she explained. Significantly, the minutes also showed that the topic of a recession wasn’t a focus for the FOMC, Bezrokov said, noting that recessionary risks have become a central issue for markets ever since the June meeting.
Overall, Bezrokov said that the meeting minutes solidify her view that the Fed is strongly committed to combating high inflation by aggressively raising rates—and that this commitment is likely to persist until there’s a considerable step-down in economic data. “In my opinion, this probably won’t happen for several more months,” she concluded.
Europe vs. China: Decelerating vs. accelerating growth?
Shifting the discussion to the latest economic data from Europe and China, Bezrokov noted that the S&P Global composite PMI (purchasing managers’ index) survey for the eurozone was revised slightly higher for June, from 51.9 to 52.0. A reading above 50 indicates expansionary conditions, and a reading below 50 indicates contractionary conditions. However, May’s reading was 54.8, she pointed out. “This report shows that economic growth in the eurozone is still slowing down—but not to the extent earlier thought,” Bezrokov explained. She added that month-over-month retail sales data was also modestly positive in the region, climbing 0.2% during May—compared to a 1.4% decline in April.
Meanwhile, the latest PMI survey from China showed a strong rebound in growth, Bezrokov said, with the Caixin composite PMI climbing to a level of 55.3 during June—the highest reading since late 2020. “This is very significant, as the country’s composite PMI has been below 50 for the past three months, due to the impacts of COVID-19 lockdowns,” she stated. The jump in the PMI reading for June really signals renewed growth in China’s private sector, Bezrokov said, with increased output amid the lifting of COVID-19 restrictions.
“Overall, we’re seeing some divergence between China and Europe, with Chinese growth starting to accelerate while European growth decelerates a bit,” she remarked.
Is additional stimulus on the way in China?
Focusing in more on China, Bezrokov noted that additional signs of potential government stimulus have emerged in recent days, with a July 7 report from Bloomberg indicating that China’s Ministry of Finance is considering allowing unprecedented bond sales of $220 billion.
“In China, local governments have a quota of bonds that they can issue each year—and this specific measure would bring forward some of the 2023 quotas to the second half of this year,” she explained. This would be a very big deal, Bezrokov said, because the bond sales would primarily be used to pay for infrastructure spending among local governments.
She explained that China has the ability to enact stimulus like this because inflation in the country has remained subdued, affording government officials more tools to stimulate and support growth amid challenges in its property market and consumer-spending sector. “In the wake of the large improvement in the country’s PMI numbers, this latest action suggests that stimulus measures may be starting to have a tangible impact—and that they’re likely to continue,” Bezrokov said, noting that with the National Party Congress looming later this year, the state of the Chinese economy has become a key focus for the government.
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