The market, ever predisposed to look through the present into the future, has an eye on when the Federal Reserve may pivot off this interest rate hiking cycle. This could perhaps be as soon as the start of 2023, since the rising cost of living (as consumers become more reluctant to spend) and the strength of the US dollar are already contractionary for the global economy, with speculation about the first interest rate cut arriving in early 2024.
This narrative is appealing, as it suggests a mild slowdown that doesn’t last too long before a new rate cutting cycle begins and risk assets can be off to the races again. Yet interest rate cycles are not like Marvel movies, with a schedule plotted out with precision and announced years in advance, so such a view of the monetary policy outlook might be based more in hope than reality. Nevertheless, this does speak to the perceived risk that the major developed market central banks might, in their fervour to be seen to be acting on inflation, risk tightening interest rates into an economic slowdown.
In contrast to this, China – the world’s second-largest economy – is in a very different situation and is actually loosening monetary and fiscal policy at a time when much of the rest of the world is tightening. China is facing an economic slowdown too, but the difference is that the slowdown is caused directly by its own policy choices to pursue a ‘zero Covid’ strategy and to put the brakes on its property sector.
The combined impact on these policies meant that China’s economy barely grew in the first half of the year, and so the government are keen to stimulate growth in the second half of the year. Whether that’s realistic or not when tight Covid lockdowns are still commonplace is open to question, but President Xi has invested so much of his political capital to ‘zero Covid’ that it’s hard to see China reversing course entirely (instead there have been only small incremental easing of Covid restrictions). A key point, though, is that compared to most other countries China has more control over its levers of growth.
The value of active minds: independent thinking
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