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5 Things We Watch: China, burdens & beyond

What’s up in energy markets, will European inflation be below 2% before year-end, should we expect trouble to hit US real estate and how about the Yuan and its implications for global markets? Our two cents here.
2023-08-23

Happy Wednesday folks and welcome to this week’s edition of our ‘5 Things’!

These past weeks have been all about China, but we intend to keep a wider scope in this fast-moving world of global macro. Read along for a brief on the 5 things grasping our attention this week.  

 

The topics of particular interest this week:

  1. The burden of higher rates 
  2. Increased fragility in energy markets
  3. Why European inflation will be below 2% before New Year’s  
  4. The current situation and outlook for US real estate
  5. A weaker Yuan, its effect on Chinese imports and implications for global markets

 

1) Burden of higher interest rates (in full here)

The weakest are the most vulnerable: The Matthew principle is in full effect both among companies and consumers in this cycle. An overarching theme throughout this cycle has been the notable disparity between “the haves” and “the have-nots.”. 

We discussed this theme in the context of businesses and macro during the early spring (see here). This divergence dynamic also extends to consumers: Individuals who possess assets, particularly RE, serving as collateral, might find themselves benefiting from being locked in low-interest rates and prices still at elevated levels. No enforced foreclosures here. We call this the golden handcuff syndrome.

Meanwhile, the weakest banks are crumbling beneath the heavy burden imposed by the record-high interest rate levels and the smallest banks seem to be doing the bulk of the heavy lifting. The policy transmission mechanism is alive and kicking in the US, but mostly/solely for the “have nots”.

Chart 1: Credit card delinquencies and average credit card plan rate

What’s up in energy markets, will European inflation be below 2% before year-end, should we expect trouble to hit US real estate and how about the Yuan and its implications for global markets? Our two cents here.
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