China and Europe Vie to Impact U.S. Economy

There has been a general consensus for some time now that China will lead the global economic recovery. According to CNN Money this week "China's National Bureau of Statistics reported Tuesday that overall prices were up 2.8% from a year ago, and that food prices rose 5.9%. The producer price index, a measure of wholesale prices, rose even more, up 6.8%." Adding to this picture, Trading Economics reports China's growth rate at 11.9%, jobless rate at 4.2% and states that "Real-estate prices in China's 70 biggest cities rose 12.8% in April from a year earlier, accelerating from an 11.7% rise in March." The potential impact on the U.S. economy, combined with turmoil in Europe, is complicated.

CNN Money further claims "Some fear that a pullback in China's overheated economy could hurt markets here, by cutting Chinese investment in U.S. stocks and Treasurys. And the higher inflation reading, coupled with 12% annual economic growth rate in the first quarter, is setting off alarm bells around the world." If The People's Bank of China allows the yuan to rise in value in response to rapid growth and inflation, since "The yuan is essentially pegged to the dollar ... letting it rise would mean that the Chinese central bank would not need to buy as many U.S. Treasurys and dollars to maintain that peg, leading to a rising yield" according to CNN. Kevin Giddis, managing director of fixed income at Morgan Keegan, is quoted saying "uncertainty over the European debt crisis, which sent investors fleeing for the safety of U.S. debt, could soften the impact of a Chinese flight from Treasurys ... But if the crisis in Europe is settled at the same time that China pulls back on its purchases of U.S. Treasurys, it could cause yields on those bonds to rise by 1 to 1.5 percentage points."

To make matters even more complicated, this morning's WSJ quotes Ted Wieseman, an analyst at Morgan Stanley Research who claims "if the European crisis prompts the Federal Reserve to keep interest rates lower for a longer period of time, it could spur growth in the U.S." Meanwhile, The Journal also reports "U.S. trade deficits last month widened with trading partners including Mexico, Japan, China and the euro area. The deficit with Canada narrowed." So if there's still anyone out there who doesn't believe that all the continents of the world play a major role in local and global economies, wake up and smell the trade flows.

William Busch

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