Despite some encouraging signs, the economy is still not humming. The unemployment rate remains close to a 50-year low, but the Treasury yield curve is inverted and Federal Reserve officials are talking up the need to move above a neutral fed funds rate to weaken demand. Initial jobless claims have inflected and are starting to trend higher. The Bank of England is forecasting a recession in the UK starting in the fourth quarter and lasting for five quarters. The geopolitical tension between the U.S. and China is as thick as ever. Purchasing power has weakened with the high inflation rate.
It’s clear that there are still some major headwinds facing the economy. It remains to be seen how long this current period of relative calm will last.
Leading indicators that are portending a more challenging economic road ahead:
- The Treasury yield curve is inverted.
- Federal Reserve officials are talking up the need to move above a neutral fed funds rate to weaken demand.
- Initial jobless claims have inflected and are starting to trend higher.
- The Bank of England is forecasting a recession in the UK starting in the fourth quarter and lasting for five quarters.
- The geopolitical tension between the U.S. and China is as thick as ever.
- Purchasing power has weakened with the high inflation rate.
- The eurozone faces an ongoing energy crisis as Russia’s war on Ukraine rages on.
- Leading companies are announcing plans to freeze or slow the pace of their hiring activity.
- The housing market is rolling over with rising mortgage rates and high home prices creating stiff affordability pressures for homebuyers.
- Consumer and business confidence is at, or near, record lows.
- While a plus for inflation trends, commodity prices are slumping on weaker demand.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
The June CPI report showed that prices are still increasing, with the core CPI rising 0.7%. The year-over-year increase for total CPI was 9.1%, while core CPI rose 5.9%. These numbers underscore the continuing inflationary pressure on the economy. The Fed has said that it is monitoring inflation closely, and if it accelerates, the central bank will take steps to slow it down. The worry is that higher interest rates will put a damper on the economic recovery. So far, though, the economy has been able to handle higher rates without too much difficulty. The big question now is whether the Fed will continue to raise rates at its current pace or whether it will slow down the process.
CPI numbers for July come out on Tuesday.
Global Spotlight
On Aug. 7, Gustavo Petro will be sworn in as Colombia’s new president, marking a significant shift to the country’s left after years of conservative rule. Petro, who ran on a platform of increased social spending and rejections of new oil and gas concessions, has said he plans to raise taxes on the wealthy to fund his initiatives. This could prove difficult, given that Colombia is one of the most unequal countries in the world, with a GINI coefficient of 0.55. Additionally, Petro will have to navigate a complex political landscape, with many factions within his own party and a number of right-wing opposition parties. Nonetheless, his election represents a significant change in direction for Colombia.
Beijing is likely to continue rolling out new methods of economic coercion against U.S. and Taiwanese companies in the coming week as China’s military drills surrounding Taiwan aimed at expressing Beijing’s anger at U.S. House Speaker Nancy Pelosi’s visit to Taipei on Aug. 2-3. So far, such Chinese coercive measures have included import and export bans on trade with Taiwan, customs scrutiny of Western manufacturing inputs coming from Taiwan, refusals to do business with politically active Taiwanese companies, and sanctions on Pelosi and her staff. China may also take more aggressive actions, such as suspension of high-level military-to-military talks or civil aviation agreements if it feels further provoked. While U.S. companies are not the primary targets of Beijing’s anger, they will likely feel the brunt of Chinese economic coercion as China seeks to pressure the United States to curtail its support for Taiwan. This dynamic was on display in early 2018 when Beijing targeted U.S. companies doing business with China after the U.S. Congress approved the Taiwan Travel Act, which encouraged high-level visits between U.S. and Taiwanese officials. Beijing may also seek to penalize U.S. companies seen as supportive of Taiwan’s independence, such as those that have provided equipment for Taiwan’s military or have taken steps to increase their business presence on the island. As China steps up its economic coercion, U.S. companies doing business in China or with Taiwanese suppliers should brace for increased scrutiny and red tape. They should also review their supply chains to identify vulnerabilities and build up alternate sources of supply outside of China as a buffer against potential disruption. Given the high degree of interconnectedness between the U.S. and Chinese economies, any significant escalation in economic coercion by Beijing could have far-reaching consequences for American businesses.
The Kenyan general elections are just around the corner, and candidates William Ruto and Raila Odinga are neck-and-neck in the polls. With an estimated 8% of voters still undecided, this is shaping up to be the closest election in recent history.
Both Ruto and Odinga have strong support bases, but it is the undecided voters who will ultimately decide the outcome of this race. Whichever candidate can sway them in their favor is likely to come out on top on election day.
The Kenyan general elections are sure to be a close and hotly contested race. With so much at stake, all eyes will be on Ruto and Odinga to see who comes out on top.
The United States is committed to working with our partners in Africa to promote peace, security, and prosperity. We will continue to support African countries as they work to build strong institutions and good governance. And we will work together to create opportunities for all Africans to succeed.
In his speech, Secretary Blinken will reaffirm the United States’ commitment to a comprehensive and durable partnership with Africa that advances our shared interests and values. He will discuss the Biden administration’s diplomatic priorities in Africa, including promoting peace and security, advancing democratic governance and human rights, growing economies, and expanding opportunity.
The Secretary will also highlight the importance of U.S.-Africa cooperation on global challenges like climate change and pandemic response. And he will underscore the United States support for African countries as they work to build more prosperous and resilient societies.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Earnings
Earnings season is in full swing and according to recent estimates, things are looking good. Companies in the S&P 500 have reported earnings above analyst estimates for the past three quarters and it looks like that trend will continue. Over 77% of companies have reported earnings above expectations so far and 23 more companies are scheduled to report this week. While there are some concerns about the energy sector, overall earnings growth is expected to be 9.2%. Excluding the energy sector, earnings growth is still negative but much less so at -1.5%. This earnings season is definitely one to watch.
Source I/B/E/S data from Refinitiv
