This week’s wobble in financial markets stemmed from concern over Chinese economic growth after investor confidence was already knocked down by the surprise depreciation in the Chinese currency last week. More than $3.3 trillion has been erased from the value of global equities since China’s decision to devalue its currency spurred a wave of selling across emerging markets already under pressure from falling commodity prices and expectations for U.S. interest-rate increases. A weak Chinese manufacturing indicator reading, which fell to a 6 ½ year low, exacerbated the bearish mood in financial markets. Stocks went tumbling and commodity prices, except that of gold, plummeted.
Inconclusive minutes from the last Fed meeting didn’t help, as it left uncertainty over when US interest rates will be hiked for the first time. US data also painted a mixed picture. Housing data improved and job data remained firm, but manufacturing indicators deteriorated. The big question, however, is whether the Chinese economy is heading for a hard landing, or whether investors are merely underappreciating the transition of the Chinese economy from one that is based on investment and exports to one that is driven by the services sector and domestic consumer demand?
Local consumer price inflation for July edged up from 4.7% the previous month to 5.0%. Core inflation came in slightly lower at 5.4%. Inflation data held no surprises, but opposing forces of weak demand and low oil prices versus foreign exchange pass through effects will make the future inflation path unclear and the Reserve Bank’s job that more difficult.
In addition, the worst drought in many years will cause local maize prices to increase with subsequent spill over effect to the food price inflation basket.
Similar to China, Greece is in no hurry to leave the limelight. Prime Minister Tsipiras announced that he will step down and that he will call snap elections in a bid to secure a stronger coalition and mandate from which to manage the country. He called it his “moral obligation”.