China is in an economic air pocket with the associated turbulence. The property market, which makes up over 60% of the wealth of the Chinese consumer, is in a deflationary spiral. Property prices in key markets have been dropping. 1
Wages have flattened, with income increases matching income decreases. 2
Inflation in China is non-existent and in fact they are flirting with some deflationary pressures on a headline basis. However, most of the deflation is from food prices, specifically pork prices, which have been on a decline. 2
While interest rates have been cut to support lending and consumption, consumer confidence is low and that is creating a troubling soft spot in their economy. 3
We have been migrating and trimming our China exposure to focus on key areas of special support from the government. However, without a strong China, global equity markets will experience equal turbulence. In fact, last week was one of the worst for global equites since March. 4
If a second order impact from the geopolitical competition with China is rising rates for U.S. treasuries, a lot will change in our posturing soon.
We expect China to provide more stimulus to support confidence and a recovery in the quarters ahead. They cannot allow for an economic air pocket to spill over into social unrest from a weakening economy.
While the challenging news might be the air pocket in China right now, the Fed will factor that into their rate decisions. Perhaps we will hear a softer speaking Fed on Friday when Chair Powell speaks at the Jackson Hole conference. 9
U.S. equities tend to rally at the end of rate cycles. That might be the cure for some overseas turbulence.
Tim Phillips, CEO, Phillips & Company