👀 China's dubious "win"

What’s going on here?

China’s economy might’ve found a sprinkling of baking soda, but economists’ response was still flat as a pancake.

What does this mean?

China managed to pull its economy up 5.2% last year, beating the official target and the 3% uptick from the year before. But economists aren’t counting it as a redemption yet. China’s economy was 5% bigger than in 2022, sure, but that’s actually a fairly small increase from a year plagued by Covid lockdowns. In fact, it’s estimated that the country would have fared some 2% worse if 2022 had been a more regular year. Remember, too, that the struggling real estate industry is defying the government’s best supportive efforts. And with folk cutting back as their biggest assets lose value, the country’s witnessing its longest streak of deflation since 1999. To top it off, China has racked up debt worth 280% of its economy, an all-time high.

Why should I care?

The bigger picture: China needs an anti-aging serum.

China’s population fell by around two million over the last year, a drop double the size as the one the year before. What’s worse, “small and mighty” doesn’t apply here: a third of the population is expected to be in the senior category within a decade, setting the country up for a smaller workforce, strained pension systems, and limited demand for houses fit to rear a family.

For markets: Investing is a waiting game.

Optimistic investors parked some cash in China during 2023, but nearly nine-tenths of it has already been pulled out. That said, Wall Street seems to be willing to wait it out: JPMorgan has forecast that the MSCI China index will have risen 18% by this December from the last, and Goldman Sachs’ targets look similar. So if you see potential in China’s more hardy sectors, like automation, robotics, and green technology, then you could see this slump as a January sale.

What’s going on here?

The European Central Bank (ECB) stressed that summertime interest rate cuts are likely, but far from guaranteed.

What does this mean?

The ECB’s thick-and-fast rate hikes successfully made it more expensive for folk and companies to borrow money, making them more likely to save cash than spend it. The pro: with retailers making less cash from sales, they’ve been pushed to lower their prices, bringing down inflation. The con: those squashed sales mean European economies have suffered. So with inflation finally taking a breather, investors have been betting that the ECB will cut rates six whole times this year. That would bring them closer to their starting point and hopefully spark enough spending to spur on major economies. But on Wednesday, the ECB said that approach would be hasty: inflation gauges aren’t all in the sweet spot yet, making the results of any drastic moves too unpredictable to risk.

Why should I care?

For markets: Careful what you wish for.

Ironically, though, investors’ expectations tend to be self-defeating. Interest rates and bond prices have an inverse relationship, with one rising when the other falls. So when investors start to bake their rate-cut predictions into their trades, bond prices rise. That lowers the interest rate attached to government bonds, the ones that set the price for major loans like mortgages. So suddenly, it’s cheaper for folk to borrow – and therefore, spend – money, all because of expectations, which makes actual central bank cuts less likely.

The bigger picture: A broken clock is right twice a day.

Mind you, big-picture predictions have a history of inaccuracy. For years, investors were predicting near-zero interest rates to be pulled up, only to be continually proven wrong. Then when rate hikes did happen, they played out a lot faster than self-proclaimed market psychics expected. So while they might be right about looming rate cuts, don’t count on anyone to nail the precise details.