Weekly Good Reads: 5-1-1
Economics Nobel Prize, Fed's Outlook, China Growth, TIPS, Chai
Welcome to Weekly Good Reads 5-1-1 by Marianne O, an investment practitioner and author of
about investing, economy and wellness ideas. Every week I include 5 links to relevant economic and investment, finance and wellness/idea pursuit as well as 1 important chart and 1 term to know. All the Weeklies are here and here is the index of charts and terms. You can easily subscribe to my newsletter by clicking below.Thank you so much for reading and supporting my work 🙏.
Market and Data Comments
The message from US Fed chairman Powell this week in his Economic Policy Outlook and other major central banks is clear: “proceeding carefully”. The IMF October 2023 World Economic Outlook shows uneven economic growth in 2023E and 2024E — the U.S. has kept up its growth pace, while the Eurozone growth dropped precipitously in 2023, China and India declined slightly, and Japan accelerated in 2023.
“The mix of uneven growth performance, tightening of financial conditions through rising bond yields, progress on but still-unfinished disinflation, uncertain wage developments and energy price risks associated with heightened geopolitical tensions” (Barclays) will keep central bankers cautious.
The Fed, like other Economists (see Bloomberg Economics estimates below), is inclined to believe the rising long bond yields are tightening financial conditions and could represent some tightening via the Fed Funds Rate at the margin. Around the world, the 10-year government bond yields rose 8bp (Japan) to 22bp (US), pressuring world stock prices to drop (~-3.3%), especially the cyclical and growth sectors, under the backdrop of rising oil prices (WTI +7% this week).
Interestingly, both gold and oil prices are rising despite rising U.S. real government bond yields (see TIPs in One Term to Know below). Gold price tends to drop when real yield rises because gold, unlike bonds, does not carry an interest rate coupon. However, geopolitical tensions (like war), the prospect of peak interest rates, and the central bank buying gold, all push gold prices higher while real yield continues to rise, which is due to the expansion of the bond’s “Term Premium”.
The world’s attention turned to China on three fronts this week: (1) The Belt and Road Forum celebrating its 10-year initiative, (2) Chinese GDP growth rebounded to 4.9% year-on-year in Q3, led by consumption growth, which rose faster than investment while exports contracted (see chart above). The property sector declined by 2.7% year-on-year Q3; this year would be the second year falling, and (3) the US fine-tuned regulations for AI chips exports to Beijing (see article in Economy and Investments); however, China’s Huawei unveiled its new phone with an advanced processor, “demonstrating manufacturing capabilities well beyond where the US had sought to stop its advance” (Bloomberg).
Next week we will monitor US Q3 GDP and September personal spending and core PCE inflation on Thursday and Friday and the ECB rate decision and press conference on Thursday.
Bloomberg Economics estimates the increase since the Sept. 19-20 FOMC meeting, if sustained, should have the equivalent impact of about 50 basis points of Fed tightening. Whether that rate substitution will manifest as a lower peak rate, or in a “higher-for-shorter” rate path, depends on the degree of confidence policymakers have that the increase in long-term yields will be sustained.
~Anna Wong, Bloomberg
Economy and Investments (Links):
Nobel Winner Claudia Goldin Says Economics Is for Everyone (Bloomberg)
Powell Signals Fed to Stay on Hold and Keep Future Hike on Table (Bloomberg or click here)
New US Curbs on Chip Exports to China Set to Escalate Battle for Tech Supremacy (SCMP)
+ Hong Kong’s tiny subdivided flats a big problem that needs urgent attention, but can city leader John Lee’s policy address come up with solutions? (SCMP)
Whenever I see the tiny home picture in the media, it reminds me of how people adapt and work with the best of what they have. I am not proud of my home city's housing policy but of the people living in it!
Finance/Wealth (Link):
How to Invest During Times of War (Of Dollars And Data)
Wellness/Idea (Link):
New Research Reveals 5 Secrets That Will Make You Persuasive (Barking up the Wrong Tree)
Research shows changing verbs to nouns makes a big difference. So on your resume, say you’re “a hard worker”, not you’re “hard working.”
You can also use this to persuade others. Giving people a chance to confirm desired identities makes them more like to comply with requests. Asking people to “be a voter” vs “to vote” increased turnout by 15%. Telling students “don’t be a cheater” instead of “don’t cheat” more than halved the amount of cheating. You can powerfully influence people’s behavior and it doesn’t have to be as impossible as trying to cancel a subscription online.
+
asked us not to confuse Chai Latte with Chai and explained how she served Chai.
Where I come from, the flavours that are important to me, the intention I’m putting into our relationship. Are you a friend for whom a tea-bag tea will do? Should I impress you by going out into my windy backyard and plucking out some mint? Or, do I love you enough to brew your chai from scratch in my aluminium chai kettle?
~Beyond Butter Chicken
One Chart You Should Not Miss: Rise in China’s GDP per Capita
Inspired by
‘s post on How to Understand Our World in Ten Charts, I picked this one to illustrate the dramatic rise in China’s GDP per Capita since the early 1990’s.This is from the World Bank graph plot (a useful tool for analysts), and GDP per capita is the sum of gross value added by all resident producers in the economy plus any product taxes (less subsidies) not included in the valuation of output, divided by mid-year population. World Bank calculates growth from constant price GDP data in local currency.
In 1990, the world GDP per capita was $4,319 while China’s was $318. By 2022, the world GDP per capita reached $12,703 but China EXCEEDED that at $12,720. For China that was a jump of 39-fold compared to that of the world of about 3.
One Term To Know: TIPS (Treasury Inflation-Protected Securities)
TIPS are a type of bond issued by the U.S. government with the underlying principal amount of the bond adjusted according to the inflation rate. It has 5, 10, and 30 years of maturity. TIPS have a fixed coupon rate. However, as the inflation rate changes the principal value at the end of the year, the interest payment also adjusts because the fixed coupon is applied to a varied principal amount each year depending on the inflation rate.
The principal amount (and therefore interest amount) can be adjusted up or down each year. At maturity of the bond, the investor will always receive the higher of the original principal they paid or the adjusted principal value.
TIPS protect investors against inflation. For regular bonds which are issued at a fixed rate, when inflation rises, the fixed interest rate may not catch up with the inflation, and hence the bond loses real value.
TIPS have a lower yield than government bonds, and when there is no inflation or deflation, TIPs have little value compared to regular bonds. So TIPS are most useful when the cost of living is consistently rising.
Recently, as seen in the picture below, TIPS’ yield, a proxy of real yield, has risen to the highest level since 2007, reflecting investors are demanding higher yields for bonds, whether nominal or real yield.
Please do not hesitate to get in touch if you have any questions! If you like this weekly, please share it with your friends or subscribe to my newsletter.
Thank you for the Chai share!
My takeaway from Powell’s speech this week is that the economy is still resilient and that we might need higher rates for longer. I’m not sure that’s proceeding carefully — but it’s probably the only viable option at the moment.