Global Markets Shift as U.S. Economy Shows Signs of Weakening, Chinese Equities Correct

Over the past two weeks, global equity markets have shifted from a "sell America, buy the world" strategy to a more synchronized global adjustment. The question now is why this adjustment is happening, how long it will last, and what the outlook is for the future.

From an economic fundamentals perspective, recent data suggests that the U.S. economy is not in a recession. February's non-farm payrolls added 150,000 jobs, and the ISM services and manufacturing PMIs both stood above 50. Even the inflation data, which had been a concern, showed a 0.23% month-over-month increase in the core CPI, falling within a normal range.

Another key economic indicator, February's personal consumption expenditures, was also released. After a weak January, a continued decline could have further indicated an economic slowdown. However, February's data showed a slight recovery in consumer spending. Income sources remained stable, with resident compensation income growing steadily. February saw a year-on-year net increase of $195 billion in resident income, largely due to a $970 billion increase in transfer payments from the government. This is typical for January and February, as these months often see unusual fluctuations.

Resident savings also increased, reaching a 4.6% savings rate in February. This means that for every $100 of taxable income earned, $4.60 is saved or invested. While this is still relatively low compared to pre-pandemic levels, it is high for the past three years. Consumer spending, adjusted for inflation, increased by 0.1% month-over-month, a slight improvement from January's 0.6% decline. Service consumption saw a rare 0.15% decrease, but durable goods consumption grew by nearly 1%, and non-durable goods consumption increased by 0.5%.

The structure of consumer spending has returned to pre-pandemic levels, with services and goods consumption balancing out. However, if real estate transactions do not pick up, consumer electronics and automobiles may continue to drive growth, potentially boosted by AI-driven upgrades. Overall, there are signs of weakening consumer spending, which, combined with rising prices, could indicate a period of stagflation.

Consumer confidence, as measured by the University of Michigan, has also declined. While consumer sentiment is a subjective indicator, it can become a self-fulfilling prophecy in extreme cases. However, similar declines in sentiment in June 2022 did not prevent the economy from stabilizing. The hard economic indicators, while still relatively stable, show signs of weakening consumer spending and potential stagflation.

Meanwhile, Chinese equities have also experienced a correction. This is due to a combination of factors, including lackluster earnings reports from major tech companies and the announcement of new tariffs by the Trump administration. The new tariffs, which target 15 countries, including China, have increased uncertainty in global markets. While China may not be as severely impacted due to its lower value-added tax rates and previous tariff adjustments, the overall effect on global economic growth is concerning.

U.S. Treasury Secretary Janet Yellen has indicated that some tariffs may be avoided if countries engage in negotiations. This suggests that the tariffs may be more of a negotiating tactic than an immediate policy change. The uncertainty surrounding the U.S. economy has put downward pressure on global stock markets, including Chinese equities. However, once the immediate impact of the tariffs subsides, Chinese equities may focus on domestic factors such as advancements in AI technology and government policies aimed at boosting domestic consumption.

In summary, the recent market adjustments are driven by a combination of economic data, geopolitical uncertainty, and policy changes. While the U.S. economy shows signs of weakness, it is not yet in a recession. Chinese equities, while facing short-term headwinds, have the potential for long-term growth driven by domestic factors. Investors should remain cautious but also look for opportunities in the current market environment.