It’s not just U.S. recession risks that investors care about anymore, but whether China and Europe could drag the world’s largest economy into a downturn.
That was the case on Monday following disappointing second-quarter growth data from China which overshadowed comments from Treasury Secretary Janet Yellen, who said she sees no U.S. recession. European equities were mostly lower, while all three major U.S. stock indexes
DJIA,
SPX,
COMP,
attempted to push higher following a mixed open. China’s data also weighed on commodities, prompting gold to pull back from its best week since April and sending oil prices into retreat.
The focus on China that permeated global markets on Monday underscores the latest shift in narrative that investors and traders are considering. For months, they had been mostly consumed with the idea of whether the U.S. economy would experience a hard, soft or no landing. What’s been less talked about is whether a strong U.S. economy can withstand a global economic downturn.
The eurozone fell into a technical recession earlier this year amid a cost-of-living crisis. Meanwhile, China’s reopening trade following a self-imposed Covid lockdown is fizzling out and deflation pressures have been building.
Monday’s data showed China’s economy grew only 0.8% in the second quarter, down from 2.2% in the first quarter, and by 6.3% from a year earlier. The greenback, which trades relative to how investors see the U.S. doing relative to the rest of the world, swung between gains and losses on Monday, based on the ICE U.S. Dollar Index
DXY,
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“There’s recently been a bifurcation between us and the rest of the world, including China and Europe — the biggest players in the global macro environment — with all of us growing at different paces, inflation pressures being dissimilar, and the different timing of efforts to move out of the pandemic,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments in Atlanta, which oversees about $2.5 billion.
“With Europe facing its battles with more persistent inflation, the question on the other side of the token is, ‘does China need more stimulus? ‘” Buchanan said via phone on Monday. “It’s an entirely different fight than we and Europe have. So the natural question is, ‘can all three continue down their paths without affecting the other? ‘ The market has been pricing in the U.S. coming toward the end of its tightening cycle and optimism about a soft landing, but can that landing be soft given what’s affecting the rest of the world? Only time will tell. The bigger question, at this point, is if there is enough willingness to reignite and reengage China’s economy with stimulus, before we can consider whether we can keep our own economy out of a recession.”
Monday’s soft data from China outweighed the impact of remarks made by Yellen, who told Bloomberg Television that she doesn’t expect a U.S. economic downturn even though China’s slowdown could cause ripple effects around the world.
The shifting tone within markets could represent a turnabout from last week, when June data on U.S. consumer prices and producer prices gave investors optimism that inflation could continue to ease on its own without significantly damaging the labor market —- leading to weekly gains in stocks.
“China’s economy grew by a less-than-expected 6.3% year-on-year in the second quarter of 2023, missing forecasts of 7.3% and raising concerns not only about a deepening slowdown, but also about the lack of a robust policy response by authorities,” said Raffi Boyadjian, lead investment analyst for XM.
Considering the Asian country’s economy was in a “far weaker position” on a year-over-year basis than previously anticipated and the absence of substantial stimulus measures, “there is a growing sense of frustration as well as anxiety about China’s dwindling economic prospects,” the analyst wrote in a note.
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