Daily Comment (March 1, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with some positive economic news out of China, where manufacturing and services both appear to be recovering from the recent COVID-19 infection wave.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including a warning from the Bank of England‘s Governor Bailey that investors shouldn’t necessarily think his central bank will hike interest rates much further.

China:  The official purchasing managers’ index for manufacturing jumped to 52.6 in February, bursting past expectations and coming in well above the reading of 50.1 in January.  In fact, the February reading was the highest since April 2012.  Meanwhile, the February PMI for nonmanufacturing rose to 56.3, also exceeding expectations and marking an improvement from its January reading of 54.4.  As with most major PMIs, readings over 50 indicate expanding activity.  Taken together, the figures for January and February suggest China’s recovery from its pandemic shutdowns is now gathering pace, although it’s important to remember that Chinese data in those months could be distorted by the shifting Lunar New Year holiday.

China-Belgium:  The Belgian government’s Center for Cybersecurity said a Chinese state entity was most likely responsible for the January 2021 spearfishing attack on Belgian parliament member Samuel Cogolati.  The attack was launched shortly after Cogolati wrote a parliamentary resolution warning of “crimes against humanity” against the Uyghur Muslims in China.

  • Coupled with European officials’ recent willingness to warn China against supplying weapons to Russia for its war in Ukraine, the Belgian government’s willingness to call out China’s aggression against Cogolati suggests officials on the Continent are now coming around to a U.S.-style, hardline stance against Beijing.
  • If that trend continues, it would help solidify the evolving U.S.-led geopolitical and economic bloc, while also likely intensifying the West’s tensions with China and creating new risks for investors.

United States-China:  Yesterday, the new House Select Committee on the Chinese Communist Party held its initial meeting, with Republican Chair Mike Gallagher vowing that the panel will “investigate and expose the ideological, technological, and military threats posed by the Chinese Communist party.”  The initial meeting included testimony from four witnesses who called out a range of threats from China, along with statements castigating China from both Republicans and Democrats.  We suspect the committee will further fuel U.S. voters’ concerns about China and energize support for military, industrial, and political initiatives against Beijing.

Iran:  The International Atomic Energy Agency confirmed that it discovered a small amount of uranium purified to a near-weapons grade level of 84% at a spot inspection in Iran last month. Iran has reportedly told the agency that it inadvertently enriched the uranium to that level, but the IAEA’s confirmation of the finding is likely to further heighten tensions between the West and Iran. The news could also bring forward a potential Israeli attack on the country.

Israel:  Besides the unsettling news from Iran, the Israeli government is also struggling with growing violence between Jewish settlers and Palestinians in the West Bank.  In recent days, fighting erupted after a Palestinian gunman shot two Jewish settlers dead in Huwara, a Palestinian town south of Nablus, where the Israeli army killed 11 Palestinians and injured 100 more last week in its deadliest raid on the West Bank since 2005.

Nigeria:  Ruling party candidate Bola Tinubu has now been declared the winner of Saturday’s presidential election after final results showed him with 8.8 million votes.  Atiku Abubakar of the opposition People’s Democratic Party came in second with 7.0 million votes, and Peter Obi, the Labor party contender whose youth-focused campaign turned the usual two-party race into a competitive three-man battle, came in third with 6.1 million votes.  Because of the fractured vote and Tinubu’s advanced age coupled with his reputation for corruption, it would not be surprising if political tensions and instability remain in Nigeria for some time.

United Kingdom:  Bank of England Governor Bailey warned that investors shouldn’t necessarily believe that the central bank will need to impose many additional interest-rate hikes to cool the economy and bring down inflation.  According to Bailey, his policymakers still have no presumption that they would need to raise interest rates further from the current 4.00% level.

  • While financial markets now expect rates to rise to 4.75% by the end of 2023, up from an expectation of a peak of 4.25% at the start of February, Bailey said he had not seen anything in the data to justify the change in outlook.
  • Despite Bailey’s comments signaling a potential for lower-than-anticipated interest rates, the GBP is trading only slightly weaker today at about $1.2014.

U.S. Labor Market:  Two large on-line recruiting companies said they are seeing the number of job openings fall faster than indicated by the government’s monthly JOLTS report.  The data suggests that the U.S. labor market may be cooling faster than indicated by the top-line official reports.  If so, it could mean that the anticipated recession is taking hold and inflation pressures could soon start to moderate despite the exceedingly strong economic activity in January.

U.S. Student Loans:  The Supreme Court held oral arguments yesterday on the validity of President Biden’s pandemic-driven program providing student loan relief.  By all accounts, the conservative majority expressed skepticism that the administration could order such a broad-ranging policy change without the consent of Congress, even though it relied on a law giving it some power to modify such a program.  Since the court’s final decision may not come until summer, millions of people with student loans will now spend months in a state of uncertainty regarding their debt obligations.

U.S. Cryptocurrency Regulation:  After New York officials halted new issues of the BUSD stablecoin last month because of regulatory questions, new reports say investors have pulled about $6 billion from the product, reducing the amount in circulation by one-third.  The figures illustrate the cryptocurrency regulatory risks that we have long warned about.

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