by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with projections that global exports and imports are set to grow faster again in 2024 and 2025. We next review several other international and US developments with the potential to affect the financial markets today, including a readout on Chinese General Secretary Xi’s visit to Paris, weak factory orders in Germany, and the latest financial projections for the US social security system.

Global Trade: The International Monetary Fund, the World Trade Organization, and the Organization for Economic Cooperation and Development are all predicting that growth in international trade will accelerate in 2024 and 2025. Overall, the organizations are calling for trade growth to accelerate from about 1% in 2023 to almost 3% in 2024 and even more in 2025.

• The expected acceleration in trade largely reflects the booming US economy, which is benefiting from higher wage growth, increased productivity, reindustrialization, and fiscal stimulus.
• Higher US demand is likely to draw in increased imports, which will likely help stimulate many foreign economies and give a boost to their financial markets.

European Union-China: In his visit to Paris yesterday, Chinese General Secretary Xi called for a global ceasefire during this summer’s Olympic Games and offered a few minor concessions on China-EU trade. Nevertheless, European Commission President von der Leyen and French President Macron warned Xi that the EU would defend its domestic industries if China keeps dumping excess production on the Continent at unfairly low prices. The warnings suggest trade tensions between the two economies will continue to worsen, perhaps eventually to a trade war.

Eurozone:  As Europeans mull how to fund stronger armed forces to deter Russian aggression, top eurozone leaders have proposed re-purposing the European Stability Mechanism (ESM) to make low-interest defense loans to member countries. The ESM was established in 2012 to help struggling countries that had lost access to global debt markets, such as Greece. The fund now has about 422 billion euros ($454 billion) and no new economic need, so some officials think it could be a relatively painless way for eurozone nations to hike their defense spending.

• Nevertheless, re-purposing the ESM for defense loans would likely require a major political and bureaucratic effort.
• The fact that officials are considering such a move serves as more evidence that the Europeans are genuinely worried about possible Russian aggression against them.

Germany: March factory orders fell by a seasonally adjusted 0.4%, far weaker than expected. In addition, February orders were revised down to show a fall of 0.8%. Orders over the three months ended in March were down a whopping 4.3%, largely reflecting weaker demand for aircraft, ships, and train cars. The figures underscore that German economic growth remains quite tepid, which is likely to pull down activity and profits throughout the EU.

Australia: The Reserve Bank of Australia today held its benchmark short-term interest rate unchanged at 4.35%. The policymakers noted that consumer price inflation continues to moderate, but much slower than previously anticipated. They also raised their inflation forecasts and warned that interest rates may not change until mid-2025. That adds to the evidence that major developed-country central banks are increasingly likely to hold interest rates “higher for longer,” dashing investor hopes for rate cuts that would boost stock and bond prices.

Israel-Hamas Conflict: As it had warned, Israel last night began striking Hamas targets in the southern Gaza city of Rafah, shortly after the Israelis said a truce deal accepted by Hamas was insufficient. The Israelis have sent tanks into the area this morning and seized a key border crossing into Egypt. As we noted in our Comment yesterday, the new Israeli attacks will likely rekindle worries that the conflict could broaden and further isolate Israel politically.

Russia: After winning re-election in March, President Putin today was inaugurated for yet another six-year term. In his inaugural address, Putin signaled he will double down on his effort to maintain close ties with China and help it build a “multi-polar” world that would no longer be dominated by the US.

Russia-United States: Russian police in the far eastern city of Vladivostok have arrested a visiting US Army soldier on charges of stealing from a local woman. The arrest of the soldier, who had just finished a tour of duty at a US military base in South Korea, gives the Kremlin another prisoner that it will likely try to use as leverage against the US in various bilateral disputes.

US Social Security System:  The trustees of the Social Security system yesterday said the fund for retirees should be able to pay all scheduled benefits until 2033, unchanged from last year’s projection. Due to the increasing number of retirees and slower growth in the cohort of younger workers paying into the system, benefits would then have to be cut some 17% unless Congress took steps to transfer general tax revenues into the system.

US Artificial Intelligence Industry: The Wall Street Journal today carries an article saying Apple has been working to develop a specialized processing chip for running AI programs in the company’s data center servers. The chip would not be used for training AI models, but for implementing AI applications that Apple will offer its customers. The project illustrates the evolving division of labor among different firms looking for a competitive advantage in the evolving AI industry.

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