😴 Wakey-wakey, China

What’s going on here?

The European Central Bank (ECB) nudged interest rates up again on Thursday in a bid to stick a sharp pin in the region’s rising prices.

What does this mean?

The Federal Reserve (the Fed) might’ve stepped away from the big red interest-rate-hike button, but the ECB just gave its own version a little push, raising its main rate by a quarter of a percent to 3.5%. That leaves Europe’s rate a fair distance from where the Fed decided to come up for air, even though recent data showed prices in the region are still rising faster than in the US. Still, while the Fed has to look after employment and inflation, the ECB just has one official goal: keep prices in check. So even though it recently pulled its economic outlook downward, it’s unlikely to box off that rate-bulking button anytime soon.

Why should I care?

For markets: Limber up.

The ECB has a lot of countries to keep track of – and boy, they sure flip-flop. Just three months ago, Germany was tipped to have dodged a recession, but now Europe’s biggest economy is on the slide. And those topsy-turvy trends extend outside of the eurozone too. Inflation in the UK is far from the 2% the Bank of England expected to see by now, but the country’s economy – once “the sick man of Europe” – has suddenly got its strength back. Investors, heed the warning: stay flexible with your own forecasts.

Zooming out: An endless summer.

Europeans praise warmer weather every year, but there’s more than sunny skies to celebrate this time. The war-induced energy shortage meant household bills had bite during the winter, but now Europe’s boasting a half-full gas reserve – well above the 34% five-year average. What’s more, it’s on track to meet its 90% goal before next winter, which should mean today’s lower gas prices – a chunky component of inflation data – might stay tame.

What’s going on here?

China’s central bank cut a major interest rate on Thursday, an effort to pull its worn-out economy out from under the covers.

What does this mean?

China’s economy has been hitting the snooze button this year, refusing to seize the day and produce the 5% pick-up the government’s been hoping for. Just look at the latest data: retail sales and industrial production were too sluggish to meet expectations in May, with the latter creeping up just 3.5% on last year’s locked-down economy. Frustrated, the central bank’s been cutting rates to get spending up and going, this time chopping its main medium-term interest rate from 2.75% to 2.65%. And while that might not sound like much, three rate cuts in a week are the equivalent of splashing cold water on the face of a stubborn sleeper.

Why should I care?

Zooming out: We used to hang out.

The world’s biggest economies were buddies for decades after China entered the World Trade Organization, with the clique’s fortunes moving pretty much in sync. But then the pandemic’s lockdowns, backed-up supply chains, and political tensions reminded them that you can’t rely on anyone, and countries like the US, UK, and China became increasingly focused on themselves. That’s not the worst deal for active investors: it means individual economies perform more independently, and for every floundering economy, there’s usually one flourishing.

For markets: Decent exposure.

Plenty of colossal US firms make a lot of money from their Chinese businesses – well, at least they used to. Now that China’s sagging economy is weighing on the likes of Nike and Estée Lauder, their share prices are reflecting that extra burden. But China’s government isn’t known for half measures, so these policy moves are likely just the warm-up. So if and when the country whips out its big bazooka (oo-er) and fires out cash, even US companies should catch some notes.