Week ending 2nd June 2023.

This week has seen an important development in China’s economic recovery in the form of a basket of new measures to boost the country’s economic growth. Beijing is set to extend EV tax breaks and possibly ease property rules going forwards, suggesting that potential interest rate cuts are off the table for now. The announcement comes as a welcome calm to investor sentiment, having seen China face a recent property sector downturn and consequences from president Xi Jinping’s zero-Covid policies, which has since dampened the region’s economic growth. China’s stimulus packages will target specific sectors of the economy such as manufacturing and property in order to boost consumption and promote consumer confidence.

Investors also rejoiced this week as President Biden signed a bill that suspended the US $31.4 trillion debt ceiling and prevented what would otherwise have been a default on US’ debts, with only two days to spare. Both President Biden and House of Representatives Speaker, Kevin McCarthy, were able to reach an agreement this week that was characterised by Biden as ‘not what everyone wanted, but what the American people needed’ after months of tense negotiations.

The debt ceiling deal suspends the US borrowing limit until 2025, after the next election. It includes such measures as a rescindment of unobligated funds from the Covid-19 relief packages passed by Congress during the pandemic, and limits military spending. Ultimately, the deal can only be viewed as positive for investors concerned about the negative global economic impact if Biden and McCarthy had stayed at an impasse.

Data released this week relating to the US labour market for May came in higher than forecast, as it revealed that 339,000 new jobs were added. This number was significantly above economists’ expectations and was heralded by President Biden as one of the great successes of his time in office.  Whilst an increase in job openings is good for economic growth, it also shows that the demand for labour is still running hot, which is something the Fed has been monitoring closely in order to inform future possible rate hikes.

On the other hand, and somewhat counterintuitively, the US unemployment rate grew in May from 3.4% to 3.7%, the highest jump since pre-pandemic levels. The reality is that it is not unheard of for both the unemployment rate and number of jobs to increase simultaneously, however, taken together, the data is perhaps an indication that that the tightness of labour market is beginning to ease, although not as quickly as the Fed has hoped, fuelling speculation of another said interest rate hike this month.

Looking to the week ahead we have Eurozone PMI and retail sales, US PMI and initial jobless claims and Chinese CPI data.

Nicola Tune, Portfolio Specialist