US Rates Pointing Upwards, Or Maybe Not

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Peter Lundgreen is the Founding CEO of Lundgreen’s Capital

Tuesday this week, the US Treasury Secretary Janet Yellen sent Wall Street in a dive, primarily the tech stocks. In a comment on a podcast interview at a web-conference organised by the Atlantic Magazine, Yellen aired the thought that the interest rates might move higher due to the upcoming strong economic recovery. Later, Yellen then downplayed her own comments, but Wall Street has already sent the stocks lower.

One could say that since mid-February, the risk of higher interest rates has been a top theme on Wall Street and sent tech stocks into heavy losses during these periods. Regardless of prior moves and comments, I argue that Janet Yellen would like to push the US central bank, the Federal Reserve Bank (Fed), to prepare a rate hike earlier than the Fed has laid out in its guidelines. I allow myself to take the thinking a step further – I argue that the move in interest rates that Janet Yellen is trying to provoke simply signifies that the American economic growth is very rapidly coming back on track. Again, that analysis is not new either, that’s correct, but I give Yellen’s comment much more weight than many others in the financial market as it confirms how strong the economic move is in the US.

The Kingdom in the Middle, China, has since last year, shown surprisingly high growth rates. The forward move happens across the economy and even moving more into the private sector, and I regard the growth as becoming more healthy in China and sustainable when assessing the outlook towards end of 2022.

In the second largest economic super power, there is also a slight tendency towards a credit or monetary tightening. The official lending rate in China has remained unchanged for a year, but the banking system is easier to control for the central bank than in most Western countries. It is my judgement that the “total social financing” actively is managed lower, as the year-on-year growth slowed to 12 pct. in March. The total social financing is the best proxy for the total credit growth in the economy and is closely watched by the central bank.

I consider the Chinese economy as somewhat further towards full economic recovery after the Covid-19 pandemic. This should not be underestimated, as I expect the monetary tightening to continue in China and could even be intensified – should the world care? Yes, the Chinese demand means more for the export in many countries than people in general expect. If the Chinese officials continue to follow the tightening track, then I argue that it will clearly dampen the global growth and demand. The Chinese economy will do fine and will continue its growing domestic orientation, and the surging American economy will more than outweigh the cooler Chinese demand, at least for a while.

The American rate hike risk discussion or scenario will revert again and again as the US economic recovery gains pace, and it will finally happen, most likely before it is currently priced in the market. There is no reason at all to fear such a move, it will just be healthy as both growth and inflation justify a somewhat higher interest rate than the current level.

Combined, the result is that the two largest economies in the world will have recovered largely around mid-2022 and are even in a much more balanced monetary policy situation than almost rest of the world.

Compared to the two global economic super powers, the Eurozone is losing out in the competition each day, though the described intensified development will really leave the Eurozone behind in just a five-year horizon.

Last year, I expected even the Eurozone to explore a kind of mini-economic boom due to the growth package. Though with ongoing lockdowns across the Eurozone, delayed vaccinations, etc., the growth package cannot even be deployed to generate an economic upturn. My long-term projection before the Covid-19 was that in the early 2030s, USA, China and the ASEAN countries will represent more than 50 pct. of the global economy, and the Eurozone around 12 pct. It underlines how the economic super powers advance away from the European continent, probably so fast, that the 50 pct. mark is reached already before 2030.  

Well, maybe Janet Yellen’s comment was just a brief thought, and I might have offered too much attention to the thinking…

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