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S&P Global — 28 June 2024

Daily Update: June 28, 2024

Weighing Up the Effect of High Rates

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy

Step right up! In managing monetary policy, the US Federal Reserve is performing a daring high-wire act. 

If the central bank tightens interest rates too much, the economy could cool to the point of recession, putting households and businesses in freefall. If it loosens interest rates too much, the economy could overheat and stoke runaway inflation.

While inflation has come down from its mid-2022 high, the Consumer Price Index has remained persistently above the Fed’s 2% target. The Fed raised interest rates 11 times between March 2022 and July 2023, and it has since maintained its target rate at 5.25%-5.50%.

So far, GDP growth and the labor market are proving resilient despite higher-for-longer rates. That’s led some market observers, such as US Treasury Secretary Janet Yellen, to raise hopes of a soft landing, in which inflation gently reduces as economic growth and employment stay strong. S&P Global Market Intelligence economists expect US GDP to grow 2.49% in 2024, slightly under the 2.54% expansion of 2023.

Different sectors are being affected by higher rates in a variety of ways. In the financial sector, banks are feeling the heat of higher funding costs, which are pressuring their net interest margins. Normally, the pressure on banks would be offset to some degree by the higher interest rates earned through loan portfolios. However, this effect has been limited by hedging activity and seasonal shifts in demand.

Many US banks have said their net interest income has bottomed out, or will do so in the near future. Yet, even if the Fed eases rates, the upside for banks may be delayed as assets are likely to reprice faster than customer deposits, according to BofA Global Research.

In the technology sector, interest rates and inflation have combined with enthusiasm about AI to generate wild swings in investor appetite. Investor sentiment toward tech companies turned sharply negative in January but recovered one month later to reach the highest level since November 2021, according to the S&P Global Investment Manager Index. Research and development budgets and venture capital investment in the tech sector tend to be curbed by higher rates, which have led to a fall in dealmaking since the second half of 2022. 

Regardless, all the buzz around AI is still attracting plenty of attention. In the first quarter, the top 35 venture capital firms in the sector announced 51 AI funding rounds, up from 31 a year earlier, S&P Global Market Intelligence reported. 

In the traditionally capital-hungry metals and mining sector, the higher rate environment in the US has drawn unfavorable comparisons with China, which has kept interest rates below 4% since the end of the COVID-19 pandemic to stimulate its economy.

In the US, higher-for-longer rates have increased mining companies’ interest expenses and made the prospect of building new mines, or expanding existing ones, less appealing. In contrast, Chinese miners’ lower financing costs have helped them expand and tighten their hold on the critical minerals supply chain.

Consumers are also being affected by elevated rates. The wealth gap between the richest 1% and poorest 50% of Americans reached a record $40.917 trillion at the end of 2023, according to Fed data. This reflects the fact that wealthy consumers benefited from rallies in asset prices, while poorer consumers faced higher borrowing costs and relatively steeper increases for items such as food, gasoline and rent.

“[Poorer] households don’t have any excess savings left and they haven't benefited from the massive run-up in stock prices and home values,” Oren Klachkin, a financial market economist at Nationwide, told S&P Global Market Intelligence. “This is a reminder of the fissures beneath what looks like a strong economy at the headline level.”

Rising incomes in lower-paying industries have offered some respite. For example, average wages for leisure and hospitality workers were up 33.1% in April compared with the same month in 2019, above inflation of 22.7%, according to the US Bureau of Labor Statistics.

All eyes are on the Fed’s next move in its delicate balancing act.

Today is Friday, June 28, 2024, and here is today’s essential intelligence.

China Has Big Plans For Its Emissions Reduction Incentive Programs Called Tanpuhui

The Chinese government has been working to integrate several state-backed and private emissions reduction schemes called Tanpuhui into its broader carbon ecosystem and even plug them into existing carbon market frameworks. Tanpuhui, which translates into Carbon Inclusion, started off as incentive schemes that awarded consumers points for adopting eco-friendly habits that help reduce carbon emissions. These points can then be redeemed for a range of perks and discounts on government services or products.

—Read the article from S&P Global Commodity Insights

Economic Outlook Emerging Markets Q3 2024: Growth On Track, Policy Risks Rising

S&P Global Ratings’ baseline macroeconomic forecast for emerging markets remains broadly unchanged relative to the second quarter. It continues to expect 2024 to show significant growth divergence across emerging markets (EMs). Growth outperformers in 2023 (such as Brazil, Mexico and India) will experience moderate deceleration in growth rates in 2024, although their growth will remain relatively strong. Conversely, last year's growth underperformers (among them Chile, Colombia, Peru, Thailand, Hungary, Poland and South Africa) will experience modest acceleration in growth in 2024.

—Read the article from S&P Global Ratings

Listen: Private Markets 360° | Episode 14: Exploring the Versatility of Private Credit

Robert Stark, CEO of Nomura Capital Management, joins the hosts to talk about how banks are generating revenue from their private credit relationships and share insights into the growing private debt business within Nomura.

—Listen and subscribe to the podcast from S&P Global Market Intelligence

Oil Product Stocks Hold Near Three-Month Low As Exports Climb

Stockpiles of oil products at the UAE's Port of Fujairah were little changed near a three-month low as of June 24, as exports from the world's third-biggest bunkering hub headed for a second consecutive monthly gain, according to Fujairah Oil Industry Zone and ship-tracking data. Total inventories at the port increased 1% to 17.812 million barrels over the week to June 24, rebounding from a three-month low a week earlier, the FOIZ data published June 26 showed. That put stockpiles up 2.7% since the end of 2023.

—Read the article from S&P Global Commodity Insights

Unlocking The Value Of Flared Gas In Kazakhstan's Upstream Oil And Gas Sector

The civil unrest in Kazakhstan in January 2022, triggered by increased liquefied petroleum gas (LPG) prices, highlighted the importance of energy security and affordable energy for the country's population. The Kazakhstan government, in its “comprehensive plan for the development of the gas industry of the Republic of Kazakhstan for 2022-2026,” projected a gas deficit by 2025 due to the growth in domestic gas consumption.

—Read the article from S&P Global Commodity Insights

AI In Healthcare: A Path To Long-Term Immunity?

Generative artificial intelligence (AI) will accelerate the transformation of the healthcare industry by reducing medical errors, improving drug development, enhancing patient access and care and decreasing overall system costs. Its deployment, however, bears regulatory challenges, ethical questions and social and environmental risks.

—Read the article from S&P Global Ratings

2024 Global Emerging Markets Virtual Conference: Is Emerging Asia Picking Up Steam? (July 3, 2024)

Join us for an engaging exploration of the latest trends and opportunities in emerging markets across Asia. This virtual event will feature a dynamic mix of industry professionals and S&P Global Ratings speakers who will share their insights and perspectives on the evolving landscape of emerging Asia.

—Register for the virtual event from S&P Global Ratings


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