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Published: June 1, 2023
Updated: June 1, 2023

Global Markets in Flux: Debt Deal Progress and Concerns Over China's Slowdown

Global markets experienced significant volatility on Wednesday, with Europe, the US, Asia, and even Gulf markets plunging into the red. While progress was made on the US debt deal, other pressing issues continue to haunt the markets. This article explores the recent developments and their potential impact on the global economy.

Progress on US Debt Deal:

After intensive negotiations, President Biden and Speaker McCarthy reached a crucial breakthrough, clearing a major hurdle in the House. The House voted 241-187 to proceed with the necessary procedural steps to consider the measure. The proposals are now in the hands of the Senate, where they are expected to be passed by the weekend.

Concerns over China's Slowdown:

While the US debt deal progresses, the focus has shifted to the slowdown in China, posing challenges to global markets. China's manufacturing Purchasing Managers' Index (PMI) unexpectedly fell to 48.8 in May, down from 49.2 the previous month and below the consensus estimate of 49.4. The country's steel industry contracted at a faster pace during the same period, exacerbating worries about China's economic revival.

Double Dip Risk for Chinese Economy:

Insufficient demand has emerged as a major concern for the Chinese economy, raising the risk of a double-dip recession. Deflationary pressures are weighing on profitability, and slowing demand has negatively affected crude oil prices. In May alone, Brent crude fell by 10%, primarily driven by reduced demand from China, the largest crude oil importer.

US Job Market Strength:

In contrast to China's economic challenges, the United States continues to display a robust job market. Strong job data indicates that rate hikes will likely continue. In April, the number of job vacancies unexpectedly rose by 358,000, reaching a total of 10.10 million. This rebound from the previous month's near two-year low of 9.745 million surpassed market expectations of 9.375 million. Job growth was particularly notable in retail trade, health care and social assistance, transportation, warehousing, and utilities sectors.

Potential Rate Hikes:

The positive job market data has implications for the Federal Reserve's interest rate policy. Fed Governor John emphasised that a pause in rate hikes does not imply that rates have reached their peak. Cleveland Fed President Mester also expressed her belief that there is no compelling case to delay the next rate hike. These statements indicate a potential path for future monetary policy decisions.

New challenges pose threats to ongoing rally in global markets

Global markets experienced a turbulent day, marked by progress in the US debt deal negotiations and concerns over China's economic slowdown. While the US job market continues to thrive, the risk of a double-dip recession in China raises alarm bells. Investors will closely monitor these developments as they navigate the evolving global economic landscape.