US Economy Resilience After Fed Tightening

Despite the Federal Reserve’s significant interest rate hikes, the US economy remains resilient due to factors such as improved household financial stability, cautious lending practices, fixed-rate mortgages, and businesses holding cash. This has allowed consumer spending and business investment to continue growing. However, there is a possibility that Fed tightening might affect borrowing and debt servicing costs in the future, potentially posing downside risks to the economy.

US Bond Yields Rising

US government bond yields have increased recently, signaling investor expectations of sustained economic growth and high short-term interest rates. Investors anticipate a soft landing rather than a recession despite the inversion of the yield curve. This suggests a return to economic conditions seen in the late 20th century or early 21st century, where bond yields were higher.

US Households and Excess Savings

US households, despite facing challenges like falling real incomes, have been able to maintain consumer spending partly by tapping into excess savings accumulated during the pandemic. However, debates exist about the remaining amount of excess savings, with different estimates leading to varying expectations for future spending. Strong household balance sheets, low debt levels, and rising wages offer reasons for optimism regarding continued spending.

Oil Prices

Global crude oil prices have risen notably since July, driven by stronger-than-expected global economic performance, declining inflation in the US leading to expectations of no further interest rate hikes, and supply constraints driven by OPEC+ production restrictions and geopolitical factors.

German Industrial Production Decline

German industrial production has experienced a notable decline, with July output down, particularly in capital goods and automobiles. High energy costs, interest rates, and weak Chinese imports have contributed to this industrial weakness, posing challenges to Germany’s economic growth.

Decline in US Direct Investment into India

Despite India’s strong economic growth and geopolitical shifts, inbound foreign direct investment (FDI) into India decreased by 16.3% in the fiscal year ending in March 2023. Net FDI, including repatriation of profits, fell by 27%. Many Western companies reduced their investments in India, while countries in Asia and the Middle East increased theirs. Factors such as high tariffs, regulatory challenges, and infrastructure issues may have deterred Western investment in India.

Global Economic Weakness Indicators

Purchasing managers’ indices (PMIs) for major economies suggest a deceleration in economic activity, likely due to monetary policy tightening in Europe and North America. Global manufacturing PMIs improved modestly in August, while services PMIs indicated slower growth. The US and Eurozone have experienced varying levels of economic challenges, while China’s manufacturing PMI improved, but services PMI indicated slow growth.

US Dollar Dominance

Despite global efforts to reduce the US dollar’s dominance, it is likely to remain the dominant currency due to the size of US sovereign debt and the flexibility and global acceptance of the dollar. Potential factors that could undermine the dollar’s role include China eliminating capital controls and the US altering its international alliances or using sanctions excessively.

US Job Market Strength

Despite a rise in the US unemployment rate, job growth remains robust, with an increase in labor force participation contributing to the higher unemployment rate. Wage growth is stable, and the overall job market continues to be strong, even though it might be cooling slightly.

US Consumer Spending and Income Growth

Real consumer spending in the US has grown strongly, driven by reduced savings rather than increased income. Despite a decline in real disposable personal income, consumer demand remains strong, with a notable increase in spending on durable goods.

Eurozone Inflation and ECB Policy

Eurozone inflation has stabilized at a high level, leading to uncertainties about the European Central Bank’s policy. While core inflation has declined slightly, inflation remains a concern, and the ECB must decide whether to continue raising interest rates or pause.

German Wage Growth and Inflation

Germany is experiencing high wage growth, which could pose challenges for inflation. Strong wage gains could lead to higher consumer prices, potentially prompting further monetary tightening by the ECB.

ECB and Declining Money Supply

The European Central Bank’s tightening monetary policy has led to a decline in the broad money supply (M3) in the Eurozone. The decline in M3, along with slowing credit growth, may influence the ECB’s decision on future interest rate increases. The Eurozone’s economic trajectory and inflation outlook will play a significant role in the ECB’s policy decisions.