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This has been a busy week, with a number of developments that, at first glance, seem concerning. But how worried should we be? Let's get right to what mattered.
China's Economy Slowing
The first was China, where economic growth has slowed dramatically, and its markets are sliding as a result. You can tell this slowdown matters by what the Chinese government has been doing, such as stopping reports on youth unemployment and supposedly telling investors not to sell stocks.
While things aren’t likely as bad as some of the more alarmist reporting suggests, it seems clear that growth is a lot lower than expected. And with an economy of China’s size, that matters for the world as a whole.
Interest Rates Climbing Higher
The second thing that matters is here in the U.S., where longer-term interest rates are moving toward the highest levels in the past several years. Apart from a spike last October, the yield on 10-year U.S. Treasuries has been below 4 percent since around 2008—and the recent move above that level is a big shift. The real question is whether rates will keep moving higher, and markets seem increasingly convinced it is a real possibility.
Markets Pulling Back
This brings me to the last point of the week, which is the market pullback we have seen. Markets around the world are down between 2 percent and 3 percent this week, with worries about global growth—led by China concerns—and higher interest rates rattling investors. In one sense, this is neither a surprise nor something to worry about, as August tends to be a weak month. But when you look at the news, it suggests we need to pay attention.
Strong Fundamentals Beat Expectations
Despite the worries, the fundamentals remain solid, as retail sales and industrial production in the U.S. came in strong and much better than expectations. The strong fundamentals here should help to cushion any shocks we get.
And that’s not a bad way to start my vacation. I will not be posting next week unless something comes up, so here’s hoping we all have a good week, and you don’t have to hear from me.
Have a great weekend!
