Is This the Great Decoupling?

CEO and Co-Founder Ivan Zhang tackles the top market observations for the week. Follow us on Twitter and Instagram to stay up to date in real time.

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TLDR:

1. NFP numbers came in just about as expected, with a surprise pop in labor force participation and unemployment rate.
2. ‍Euro area inflation rose to 9.1%, higher than expected, mainly due to elevated food and energy costs. This is marginally better than UK’s 10.1% for the month ended July.
3. China’s real estate is in meltdown. The largest developer warns of further pain.

There was talk about a decade ago that China would decouple from the major western economies and continue to grow as the US and Europe struggled with the debt overhang from the great financial crisis.

Fast forward a few years, and we are seeing another decoupling as the US and Europe struggle with high levels of inflation and debt, compounded by instability in the energy markets. In contrast, China struggles with an economic slowdown due to its zero-COVID policies and the real estate market deflating.

How are these significant economies decoupling? 

Let’s find out, starting with the good news.

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Strong Non-Farm Payrolls

The unemployment rate rose to 3.7%, which was unexpected but in a "good" way since labor force participation rose from 0.3% to 62.4%, meaning more people are looking for work that weren't looking before (and thus the bump in the unemployment rate).

From a market psychology standpoint, we are in the "good/bad news is good news" mode: good numbers -> better economy -> risk on, whereas bad numbers -> worse economy -> lower inflation pressures -> less Fed hikes -> risk on. So far, markets seem to agree with a decent pop this morning.

As we look forward to the next few weeks before the FOMC, any signs of a significant slowdown in inflation would probably boost markets, especially if any price indices come in with negative MoM changes, which is a possibility given that energy prices have steadily been trending down (not counting today's impressive rally). However…

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Euro Area Inflation Surprises to the Upside

Needless to say, combined with strong numbers out of the US, the euro came under pressure and dropped below parity against the US dollar following the news. In response, Germany is trying to mitigate the impacts of the energy crisis by delaying the shutdown of nuclear reactors, while France is trying to restart all of its nuclear power plants. Will this be too little too late? Winter energy costs across Europe look abysmal

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China Country Garden Profit Drops 96%

If there was ever a signal that China’s real estate sector is in trouble, this is it. Country Garden is China’s largest developer and its focus on the lower end of the real estate market makes for a better barometer of the general market. This seems to be China’s equivalent to the US’s 2008 Financial Crisis unfolding due to the overheated real estate boom. Two forces are at play here that are meaningfully different from the US:

1. China’s financial regulators have much more direct control over banks and financial companies than the US, allowing them to provide liquidity to support a broader range of impacted firms.
2. However, this is offset by the massive concentration of resources (30% of GDP) that China has been dedicating to the real estate sector, along with it being the biggest store of household wealth (70%).

An unstoppable force meets an immovable object, which of these forces will win out? 

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Who Wins?

We are hoping for the best, but this is a tremendous problem that could have huge implications beyond China’s borders. It may marginally help the US and Europe as the Chinese Yuan faces massive pressure to devalue, thereby allowing China to export some deflation elsewhere. 

Keep reading next week as we follow the biggest global macroeconomic events!