Is China’s slowdown easing?
Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company – Vail Valley
China’s latest move to halt its economic slowdown, letting the value of the renminbi tumble against the dollar, had investors around the world in a tizzy for three straight days last week before calming words from one of that nation’s central bank officials put an end to the slide.
Even so, the move stirred talk of “currency manipulation,” not to mention a “currency war” should other nations respond by adjusting the values of their currencies to keep up with the lower cost of Chinese exports.
With the apparent goals of boosting exports and creating jobs, China’s central bank presided as the renminbi fell 4.4 percent against the dollar in three days, its biggest dip since China set up its current exchange rate system in 1994. Stocks only rebounded after Zhang Xiaohui, a deputy governor of China’s central bank, said there was “no basis for the continued devaluation of the renminbi.”
Still, the move, which the Chinese government described as a one-time event, is bound to be on an already fraught agenda when President Xi Jinping visits Washington, D.C. next month as American politicians have long accused Beijing of currency manipulation. The International Monetary Fund (IMF), meanwhile, has been debating whether or not to add the renminbi to its list of elite currencies alongside the dollar, euro and yen. If the IMF needed any proof as to how impactful the renminbi is, it only had to watch the reaction that began on Tuesday when the unexpected adjustment took a toll on stocks, oil prices and currencies across the globe.
The go-ahead for Greece
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After six months of frayed nerves, Greece and its creditors signed off on the terms of the new €86 billion ($95 billion) bailout package last week. On Friday, the package was approved by Greece’s parliament, and then, in a hastily called meeting, by the eurozone’s finance ministers. But, not surprisingly given the ongoing drama, that doesn’t mean that everything went without a hitch. For starters, the terms, which include higher taxes and reduced spending, do little to promote economic growth. Worse still, in pushing the package through parliament, Prime Minister Alexis Tsipras exposed deep rifts within his own Syriza party, and he may call for a vote of confidence, which could impact how Greece follows through on its pledges. As for Greece’s staggering debt load, Christine Lagarde of the IMF said after the vote that Greece would still need “significant debt relief, well beyond what has been considered so far.” As a result, the IMF will not (as of now) contribute to the latest bailout.
Greece’s GDP grows, Russia’s falters
Greece’s economy — not expected to expand until 2017 — grew more than twice as fast as that of the eurozone in the second quarter, partly because Greeks used what money they could lay their hands on to buy big-ticket items in case their banks went under. The eurozone’s GDP grew at an annual rate of 1.3 percent with growth in some of the major economies such as France and Italy sluggish, while Greece’s economy expanded 3.1 percent. The combination of sanctions and tumbling oil prices continued to take a toll on Russia’s economy, which contracted 4.6 percent in the second quarter from a year earlier, the biggest drop since 2009. The Ministry of Economy, which had forecast that output would shrink 4.4 percent, called it the “lowest point” for Russia.
A deficit blip
The U.S. government had a higher deficit than forecast in July at $149.2 billion, but it remains on track for the smallest annual deficit in eight years. The drop came mainly because Aug. 1 fell on a Saturday, which meant that some $42 billion in benefits was paid out in July. Through the first 10 months of the fiscal year, the deficit was $465.5 billion, up 1.1 percent from last year, but the CBO still forecasts a deficit of $425 billion, which would be the lowest since 2007.
Buffett’s latest acquisition
Stocks got off to a strong start last Monday, partly because Warren Buffett’s Berkshire Hathaway announced that it would pay $37.2 billion to buy Precision Castparts, which makes industrial components for airplanes, among other industries. This was just the latest in a series of major deals so far this year, with $2.7 trillion in mergers and acquisitions having been announced.
Retail sales rebound
The government said that retail sales totaled $446.5 billion in July, an increase of 0.6 percent from the previous month, and were up 2.4 percent from a year ago. In other economic news, nonfarm productivity rose at an annual pace of 1.3 percent in the second quarter, but gained only 0.3 percent from a year earlier. Industrial output increased 0.6 percent in July, the fastest pace in six months, and manufacturing output climbed 0.8 percent as auto and auto-parts production soared 10.6 percent; without that segment, output rose just 0.1 percent. Capacity utilization was up 0.3 percent to 78 percent. Business inventories rose 0.8 percent in June, the biggest increase since January 2013, which means that the government will probably up its original estimate of second-quarter growth, which came in at 2.3 percent. Wholesale inventories improved 0.9 percent in June. The Labor Department said that hiring in June was up 2.3 percent to 5.18 million, the highest total in six months, and, in another positive sign for job growth, the four-week moving average for first-time jobless claims fell 1,750 to 266,250, its lowest level since April 2000. Finally, with reports from 465 of the S&P 500 companies in, earnings are down 0.7 percent from a year earlier compared to a forecast of a 4.5 percent decline.
A look ahead
This week’s releases will include the latest on housing starts and building permits, existing home sales, the Consumer Price Index, and Markit’s Manufacturing PMI, as well as the minutes of the Fed’s meeting of July 28 and 29.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
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