Friday’s rebound in payrolls and Mr Macron’s strong showing on Sunday could help propel US equities and other markets to new highs. By contrast, Chinese regulators are tightening the screws. In the past, a Chinese slowdown has been negative for risk assets globally. This time may be different: investors might see that tighter lending controls in China could help sustain the transition towards a high-tech services economy. The sharp rally in South Korean equities also suggests that China’s credit ‘squeeze’ may not be a global risk. In the past, lower oil prices have been viewed as a negative for the global economy: this relationship could be ‘breaking down’ as well.
Lower oil prices could pose a conundrum for the Fed. The downward pressure on metal prices as China continues its clampdown on shadow lenders will heighten the dilemma. A sharp fall in oil prices and other raw material prices could push inflation expectations down to new lows over the summer months.
Japan provides a classic illustration of how low unemployment does not necessarily translate into wage inflation. The jobless rate has tumbled to 2.8%. Despite multiple reports of labour shortages, Japanese companies are innovating to keep costs down. The US may be no different. Indeed, technology partly explains why service sector job creation has slowed this year.
Summary
- Growth will rebound, pushing equities higher
- But low hourly earnings a reminder of intense cost cutting
- Rise in rates will be capped by low inflation, with oil likely to tumble
