If you thought this was about ‘deflategate’ you were wrong! Last week the Peoples Bank of China deflated the Renminbi (Ұ) twice. The cuts could leave a lasting impression on trade balance. It could also influence Federal Reserve Board (FRB) action.
China
Last week the Peoples Bank of China (PBOC) devalued Ұ twice. Both times the action was met by a pessimistic US investors who sold off equities. The currency is staunchly controlled by the PBOC and this action was a step to make their exports more competitive. In recent months an economic slowdown has gripped China and they have been attempting several things to turn the tide.
Trade Balance Implication
By devaluing the Ұ, China effectively made their goods cheaper, which will likely decrease their imports and increase their exports, effectively improving GDP. Conversely this will make US goods in China look more expensive, decreasing our exports while increasing imports from China, effectively decreasing our GDP. Ultimately this creates an additional headwind for the improvement of the US economy.
Federal Reserve
This could potentially impact the timing and schedule of increases that the FRB may make. They have repeatedly stated that their action will be based on the continued strength of economic data. If the devaluation of the Ұ has the intended effect, inflation in the US will become less likely and economic data should soften.
US Economic Data
This past week did bring promising data for the US economy. Nonfarm productivity was up 1.3% and unit labor costs increased 0.5% for the 2nd quarter. Job openings fell by 51,000 from last month, export prices fell 0.2%, and retail sales increased 0.6% for July. Industrial production expanded in July by 0.6% as well. Activity data was very positive last week. Sentiment, however showed the wear and tear of the European debt crisis and general malaise regarding the global economy. Consumer expectations fell to 83.8 from 84.1, while consumer sentiment reduced from 93.1 to 92.9 in July[1].
International News
Eurozone GDP for the 2nd quarter grew at an annualized pace of 1.2%, slightly below expectation. While consumer Prices (CPI) increased 0.2% year over year, marked heavily by falling fuel prices. When fuel and food are excluded (Core CPI) prices increased 1.0% year over year through July[2]. This is encouraging as it wasn’t long ago the Eurozone CPI was actually negative.
Greek parliament cleared the bail out on Wednesday which helped the markets rebound from currency deflation out of China. The passage of the proposed bail out is a major win for stability across the region.
In all, the week didn’t bring great news for the global economy. However, the US consumer has remained resilient. This fact has kept buyers on the market as sellers have increased due to global market concerns. This resilience will be tested, but not from lost wages, but rather cheap goods out of China that may take consumers away from American companies.
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[1] www.investing.com – economic calendar
[2] www.investing.com – economic calendar