A Large Variable in the Inflation Equation
The Chinese economy is booming... A familiar reopening story, but in Asia... A large variable in the inflation equation... A return to normal, with a caveat... This will be a big story... Don't miss Dan's new event...
Oh, and about China...
This week, we've talked about how inflation appears "sticky" in the U.S. and in Europe. The takeaway: Even if the pace of inflation is slowing, it will likely be a bumpy road and not a straight path to palatable levels for the world's central banks.
Today, I (Corey McLaughlin) want to talk about another big part of the global inflation equation: China...
The world's second-largest economy is showing major signs of growth after the Chinese government relaxed its "zero-COVID" policy toward the end of 2022... We're already seeing a rebound in China.
Today, Chinese officials reported the country's manufacturing activity just grew at its fastest rate in more than a decade...
China's manufacturing purchasing managers' index ("PMI"), a widely followed measure of factory activity, came in at 52.6 in February. That's up from 50.1 in January and higher than analyst expectations.
These figures are based on a monthly survey of 700 Chinese manufacturing businesses. This is a big move for this index, and it's the highest reading since April 2012.
Other data showed construction and services sectors growing substantially, too.
In other words, it looks like the Chinese economy boomed last month.
This is a good sign for the Chinese. And stock markets across Asia have been responding in kind to the country's reopening, with China's benchmark index up 6% year to date.
But it's not all good news...
For the global inflation story, it's a mixed bag leaning toward bad, if anything.
It's sort of like what happened in the U.S. – but two years later...
Think back to 2021 for a moment... COVID-19 vaccines had just begun hitting people's arms, and folks started getting out more. Meanwhile, stimulus checks and near-zero interest rates continued to juice the economy.
People had money to spend, but lockdowns all over the world had hobbled global supply chains. Inflation grew quickly, and the Federal Reserve refused to do anything about it – or even admit it was happening – until later in the year.
The result: 40-year-high inflation...
China's economy getting back on its feet has many impacts...
Of course, China's economy is a bit different from the U.S...
Primarily, the Chinese make a lot of the stuff Americans buy, such as electronics and apparel. I mentioned this last month when parsing the latest U.S. inflation data in January's consumer price index ("CPI") report. Even the start of China's reopening began to show up in American inflation.
From the February 14 Digest...
Americans paid nearly 1% more for apparel in January, an unusually high increase and higher than it had been in at least six months.
Can you guess who supplies most of the apparel bought in the U.S.? China, whose economy is "reopening" after a bout with COVID-19. This dynamic could possibly stoke worldwide inflation... It's something to keep a close eye on.
In a way, if China can once again flood the global economy with products on shipping containers moving as they always did, maybe we won't hear of supply-chain crises for a while.
It's a return to 'normal,' with an inflationary caveat...
No matter what you think of the Chinese government and how it operates (like, ahem, the spy balloons), functioning Chinese businesses provide some stability in the global economy.
A Chinese reopening will help meet demand for various products globally, which would help bring down prices. But – and this is probably the larger inflationary "but" – it will also likely stoke demand within its borders for things like energy and food... two of the largest drivers of worldwide inflation.
China is the world's largest consumer of many commodities, including approximately 60% of the world's soybeans. And the U.S. imported $135 billion of electronics and electrical equipment from China in 2021, along with $40 billion of toys and sporting goods. That's even coming from a period when the Chinese economy was below its peak strength due to COVID-19 lockdowns.
On one hand, a greater supply of Chinese goods on the global market (given similar demand) could help ease some inflation. But on the other hand, demand from the Chinese for other goods and services could contribute to higher inflation all over the world.
If this dynamic contributes enough to global inflation rates, it could mean another reason for the world's central banks to raise interest rates.
The Fed's preferred inflation measure remains above 5%. If inflation remains above the Fed's (arbitrary) 2% long-term goal, a cascade of events beginning in China might spark the worst result of central banks' inflation fights: an economic recession.
And even if this does nothing to change the Fed's plans, a rebounding Chinese economy will have an effect on the U.S. and other countries one way or another.
This is the trouble with trying to manipulate a $26 trillion economy...
That's just the size of the U.S. economy.
In practice, there are too many moving parts. That's why you hear Fed officials like Jerome Powell always say monetary policy is a "blunt" tool... If you've ever used one of those in real life, you know it often makes a mess.
One way or another, the shifting winds in the global economy will show up in the financials of businesses... It's sort of like when retailers stockpiled anything they could get from China when supply chains were an issue, then sold off some of the backlog at a discount.
Now, it might be the opposite...
With China's reopening in particular, I'd also keep an eye on its potential longer-term influence on energy and other commodity prices, too... Copper futures, for instance, were up roughly 1.5% today... So was corn... And oil prices were up about half a percent.
The U.S. benchmark S&P 500 Index was down slightly today and is trading just above its 200-day moving average like on Friday... but the energy sector was up 2% and materials up almost 1%.
This China story is going to be a big one that plays out in the markets, whether anyone knows about it today or not... Does it mean the pace of inflation will increase? Not necessarily. But does it mean prices of certain items might stay higher for longer than others? I think so.
It's actually why – without giving too much away – our colleague Dan Ferris will discuss this same China topic in his brand-new video event tomorrow...
So, if you want to hear more about what China's reopening might mean for the markets, stocks, bonds, and more... be sure to tune in to that free event. Dan will get into more detail, and he'll offer up investing ideas you can put to work right now in your own portfolio.
It's all because of a rare but predictable "market event" that has been about 50 years in the making, which Dan says he sees playing out soon. And you'll want to hear why... The last time we saw a setup like this, you could have made 1,000 times your money in the right investments.
Click here to sign up for this free event right now.
This Is the End of the Experiment
"I think there's going to be a crisis this year," warns Lynette Zang, chief market analyst for ITM Trading. "I don't think there's going to be a soft landing. I don't think there is a disinflation. I think there's going to be a hard landing."
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In today's mailbag, thoughts on the Federal Reserve and a few kind words... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
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All the best,
Corey McLaughlin
Baltimore, Maryland
March 1, 2023