Fresh insights on the US and China economies

Is the US Economy getting back on track?

US industrial production also rose 0.6% in June vs. 0.2% increase expected which showed that manufacturing activity hit its strongest level in almost a year. The increase in fuels and rent prices in June also suggested that inflation is picking up and rising prices indicated signs to a stronger economy.

Impacts on markets

The equity markets hit all-time highs last week with S&P 500 closing at 2163.75 and an improving economy might be the main reason why. There are lots of factors that affect stock prices so it’s difficult to pinpoint any single contributing factor. But investors’ views of the economy have improved meaningfully in recent weeks and fears of a contracting economy seem to be diminishing and that’s quite possibly been the main factor pushing stock prices higher. All this good news could lead to an interest rate hike and the appreciation of the US dollar.

China’s government taking matters into hands, and is it really working?

China reported that its economy grew 6.7% last quarter, which is slightly more than economists expected. This growth was very much supported by government initiatives.

China’s economy is undergoing a transition from a manufacturing to a service-oriented economy. This transition has not been a smooth ride for China and has caused economic growth to slow down. Earlier this year, the Chinese government took action to provide a boost to the economy by doing things like encouraging state-owned banks to lend more money to companies. That mainly boosted the manufacturing and investment economy, which contributed to the growth figures and slightly, exceeded expectations.

Impacts on markets

Decisions by the Chinese on their economic priorities have a huge impact on many established companies. One of the biggest impacts is definitely in the price of industrial commodities such as copper. For example, earlier this year prices jumped significantly as a result of the Chinese government’s stimulus as this benefitted mining industry greatly. There is also a host of western companies, from Apple to Yum Brands, which are hoping to benefit from an anticipated big increase in Chinese consumer spending.

Looking at the bigger picture, China’s huge debt is a consequence of its stimulus attempts. Six weeks ago, famed investor George Soros returned to active trading and was betting on China’s economy to crash as a result of its huge debt burden. The debt within China has been accumulated partly because of government-led stimulus. Companies are often encouraged to borrow and spend more and more money and it’s not clear if they will be able to afford to pay it all back. Soros may or may not turn out to be correct but on-going stimulus has almost certainly made China’s economy more vulnerable.